Commodity Currencies Crash As U.S. Dollar Soars

For the fourth day this week, USD/JPY has been unable to muster a meaningful rally. The markets shrugged off President Trump’s nomination of Larry Kudlow as Chief Economic Advisor and Director of the National Economic Council. Kudlow is a popular financial media personality and while his appointment brought some relief to equities by preventing another day of weakness, the impact on USD/JPY was limited to maintaining the pair’s 105.50 support level. This morning’s U.S. economic reports were mostly better than expected with jobless claims ticking lower and the Empire state manufacturing index jumping to to its strongest level in 5 months. Although manufacturing activity in the Philadelphia region slowed, the pullback was only slightly worse than anticipated. With the Federal Reserve gearing up to raise interest rates next week, USD/JPY’s weakness could be limited despite the Bank of Japan’s positive outlook. According to Bank of Japan Governor Kuroda who spoke last night, Japan is basically at full employment with inflation rising steadily over the past 2 years. Tomorrow’s U.S. housing starts, building permits and University of Michigan Consumer sentiment index are not expected to have a significant impact on the dollar as investors shift their focus to 3 central bank rate decisions.

The commodity currencies were on the move today with USD/CAD bursting above 1.30 to trade at its highest level since July 2017. Another decline in Canadian existing home sales reinforced Bank of Canada Govenor Poloz’s dovish views while President Trump’s comment about trade with Canada revived NAFTA concerns. Stops were also triggered once USD/CAD breached 1.30 with the pair extending its gains above 1.3060. On a technical basis, if these gains are sustained, USD/CAD could climb as high as 1.32. The New Zealand dollar traded lower for the second day in a row on the back of softer than expected GDP growth. Economists hoped that stronger retail sales and trade would lift growth in the fourth quarter but instead, the economy expanded by 0.6%, the same pace as Q3. With that in mind, NZD is still the strongest commodity currency and has manufacturing PMI numbers scheduled for release this evening. The Australian dollar rivaled the Canadian dollar in its weakness today but unlike the loonie, there was no specific catalyst outside of lower gold, iron ore and copper prices. AUD/USD is trading at its lowest level in 4 days and appears poised for a move below 78 cents.

Meanwhile the European Central Bank’s cautious outlook continues to weigh on the euro, causing the single currency to underperform the dollar, sterling and Japanese Yen. No Eurozone economic reports were released today and while lower highs and lower lows tracing back to the February 16th peak signal continued weakness, the EUR/USD has quite a bit of support between 1.2275 and 1.2300. The uptrend will only be broken after a sustained moved below 1.2270. Like the euro, the Swiss franc traded lower today following the central bank’s monetary policy announcement.

In contrast, sterling held steady today. There was no U.K. data and the only updates on Brexit were the ones about Unilever leaving the U.K. (although they denied that it was Brexit related). Brexit Secretary David Davis also talked about their willingness to live with a shorter transition period. Davis is headed to Brussels this weekend and investors are hoping this means negotiators are close to a deal as he has avoided the trip in recent months. He will be meeting with EU negotiator Barnier on Monday.

The Swiss National Bank left interest rates unchanged but reiterated their negative rate and intervention pledge. While they believe that the economic situation is significantly better now than early last year, the “big risk” of a trade war and “highly valued” exchange rate leaves them committed to dovish policy. The SNB will most likely be one of the last central banks to raise interest rates but on a day to day basis, the performance of the Franc is rarely driven by SNB policy.