One of the best performing currencies today was the euro, which rose to its strongest level in 5 weeks against the U.S. dollar. There were a number of factors behind the move. To start, U.S. equities rebounded strongly today with the Dow rising 669 points and the improvement in risk appetite was exceptionally positive for the single currency. Secondly, ECB member Weidmann said ECB policy normalization should start soon and expectations for a mid-year rate hike in 2019 is not unrealistic. Third, investors are still weary about buying U.S. dollars and preferred to express their risk tolerance through other currencies. Fourth, French Q4 GDP was revised up to 0.7% and last but certainly not least, on a technical basis, EUR/USD finally broke out of a long consolidation and is eyeing 1.25. We think it will get there even if tomorrow’s
Eurozone confidence numbers fall short of expectations.
For the first time in 3 trading days, the U.S. dollar rebounded against the Japanese Yen. In fact, all of the major currencies traded higher on the back of the strong recovery in U.S. stocks. Investors were relieved that China is eager to negotiate with the U.S., opting first to respond with less aggressive retaliation measures. Some traders may find it tempting to pick a bottom in USD/JPY, particularly with the pair hovering near 105, which is an important level but it is far too early to declare victory as the pair could easily slip to 104. There’s a few reasons why now is not the time to buy USD/JPY. First, we are just a few days away from Japan’s fiscal year end so there could still be last minute repatriation. Second, according to a recent opinion poll about half of Japanese voters believe that Prime Minister Abe should quit over a land sale scandal. This is Abe’s biggest political crisis since taking office again on December 2012 and it remains to be seen whether he can survive this political crisis especially after being snubbed by the U.S. on tariff exemptions. Third, on technical basis, USD/JPY is still in a downtrend and that doesn’t change until we see a move above 106.20. With all of this in mind, USD/JPY could get there if the Dow breaks back above 24,200. The Federal Reserve failed to live up to expectations last week but a number of Federal Reserve officials are speaking this week and investors will be watching their comments carefully to see if the voting members of the FOMC maintain their ultra-hawkish views. Dudley did not touch on monetary policy but Mester and Quarles who speak later today and Bostic on Tuesday could share their views. Keep watching the headlines for any politically charged developments or decisions from Washington.
It was also a good day for sterling, which hit a 7 week high against the U.S. dollar. According to Prime Minister May, Brexit negotiators are working on a new proposal for the Irish border and customs arrangement that could finally address one of their greatest challenges. Both sides agree that there should be no hard border but the EU wants the UK to remain in the customs union or single market as a backstop but the UK wants a different option (which is what they are working on now). This is important because the transition can only begin if a border deal is made.
While all 3 commodity currencies traded higher today, the magnitude of their gains varied. The New Zealand dollar was the best performing currency, fueled by an unexpected rise in trade activity. Economists had been looking for a trade deficit of -100 million but instead, New Zealand reported a trade surplus of 217 million. This was only the second surplus in 7 months but unfortunately it was driven by a sharp fall in car imports. Exports rose 11% year over year with gains seen in diary product exports. While the drop in imports may seen worrisome, it was due to a stink bug infestation that delayed the unloading of 8,000 cars destined for NZ and not an inherent pullback in consumer demand. The Australian dollar also traded higher but trailed behind NZD while the Canadian dollar struggled to participate in today’s risk rally despite NAFTA optimism. The only explanation is lower oil prices but the decline in oil is modest at best.