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The U.S. dollar traded lower against all of the major currencies with the exception of the Australian dollar. This divergence is a sign of risk aversion and not a function of Australia’s economy as there were no major economic reports released this past week.
The RBA minutes were also optimistic. The only other explanation for AUD’s underperformance is the decline in iron ore prices. The best performer was the Japanese yen and the British pound. The former rose on risk aversion while the latter rallied on healthier data. All of these moves are at risk in the coming week with Article 50 expected to be triggered and U.S. fiscal policy in focus.
It was a tough week for the U.S. dollar. A number of Federal Reserve officials were scheduled to speak but none of them said anything to help the greenback, which had been falling since the central bank raised interest rates last week. The calendar was light leaving the U.S. healthcare vote as the main focus. In the eleventh hour, the House pulled the Healthcare vote and according to House Energy and Commerce Chairman Walden, the bill is done, it won’t come up at a later date. President Trump also said the effort on the healthcare bill is over now. Although the dollar jumped on this news, the bill’s failure raises many questions about how the President plans to fund his tax care reform, the centrepiece of the new Administration’s fiscal spending plans. Without the prospect of major tax cuts and the corresponding growth that comes with it, September looks more likely than June for a rate hike now. Even if the House approved the bill, it would have met stiff resistance in the Senate. With the vote cancelled for now, investors will be looking for Trump’s Plan B which means fiscal policy will remain in centre focus and a key driver of U.S. dollar flows.
Meanwhile the dollar received no help from the Federal Reserve officials last week. Investors had been hoping for a less dovish interpretation of this month’s FOMC meeting from Yellen and Dudley but both members of the Fed leadership failed did make any specific mention of monetary policy or the economy. Instead, the loudest comments came from Fed President Kashkari who was the only voting member of the central bank who opted to keep interest rates unchanged at the last meeting. So his dovish views should not be a surprise. He felt that there was not enough improvements in the economy since the last meeting and they “are still coming up short on the inflation target, and the job market continues to strengthen, suggesting that slack remains.” The latest economic reports justified his concern as data was mixed with existing home sales falling more than expected, jobless claims rising and durable goods orders slowing. However new home sales increased and the current account deficit narrowed. In the coming week, revisions to third quarter GDP, the trade balance, pending home sales, personal income, personal spending, Chicago PMI and revisions to the University of Michigan Consumer Sentiment report are scheduled for release. A number of Federal Reserve Presidents are also due to speak so traders need to pay attention to any market moving comments.
Brexit will be the main focus in a week with only mortgage approvals and revisions to Q4 GDP scheduled for release. Sterling had a strong performance last week with the gains were driven by healthy data – consumer prices rose 0.7% in the month of March, beating the market’s 0.5% forecast and recovering all of the past month’s decline. This drove the annualized pace of growth above the central bank’s 2% forecast to 2.3% from 1.8%. Core price growth was just as healthy, rising to 2% from 1.6%. Based on this report alone, Bank of England officials should be thinking about raising interest rates but when combined with a hot retail sales report, we may start to see more policymakers align with Kristen Forbes who voted for an immediate rate hike next month. Economists had been looking for retail sales to rebound but they did not expect spending to jump by 1.3%, far outpacing their 0.3% forecast. This is a good sign for growth in the first quarter.
EUR/USD broke above 1.08 on the back of stronger Eurozone data and a good performance by Emmanuel Macron during the first French Presidential debate. According to Friday’s PMI reports, manufacturing and service sector activity accelerated in the Eurozone, led by gains in Germany and France, the region’s 2 largest economies. The 3 month average PMI composite index rose to its highest level in 6 years as the Eurozone economy recovers on the back of a weak currency and accommodative monetary policy. Two weeks ago, members of the European Central Bank brought up the idea of tightening and while they are in no position to raise interest rates anytime soon, we could start to hear less dovishness from ECB officials. But there is one problem, which is inflation – the euro may be weak but price pressures are not rising as evidenced by the slowdown in producer price growth in the month of February.
This week the German IFO report is scheduled for release along with German consumer prices and unemployment. The IFO, which measures business confidence should rise after the strong PMI reports and the same is true for the Eurozone confidence reports and job growth. According to Germany’s flash PMI, job creation was the strongest since March 2011 and the second highest since the series began in January 1998. Inflation on the other hand should remain low but collectively this week’s reports should help more than hurt the euro.