Volatility ripped through the financial markets in the last 2 hours of NY trade. The Dow, which was up more than 250 points turned negative and ended the day down 168 points as ten year Treasury yields shot to a high of 2.95%. The dollar soared in response, driving EUR/USD below 1.23 and USD/CAD to 1.27. Although the FOMC minutes were optimistic, the level of anxiety in the market is rising as yields near 3%. According to the Fed minutes, a majority of U.S. policymakers felt that stronger growth increased the chance of future rate hikes. Since December a number of Fed officials also raised their growth forecasts with many seeing upside risks from the tax cut that warranted the addition of the word “further” to their assessment of stronger growth. Initially, these positive comments extended the gains for stocks and risk currencies but risk aversion took over, driving everything lower. The more than 450 point intraday reversal in the Dow could lead to further weakness in Asia and Europe, which would probably hit the yen crosses the hardest.
For the third consecutive trading day, GBP/USD failed to sustain a move above 1.40. Right before the London open sterling tested this level but the gains faded quickly as the pair u-turned. It came close to revisiting this level when Bank of England Governor Mark Carney and his colleagues talked about the economy and monetary policy. In their testimony before Parliament, Carney, Haldane and Broadbent noted the reduction in spare capacity, the firming of inflationary pressures, positive global momentum and the tight labor market. Carney left most of the positive assessments to his colleagues, but there’s no doubt that while Brexit is a risk, U.K. policymakers are more hawkish than dovish. Although sterling failed to hold onto its gains, rate hike expectations ticked up slightly to 71% from 67% chance of a hike in June following the testimony. GBP/USD fell on the back of the U.K. labor market report even though the data wasn’t all that bad – average weekly earnings growth held steady at 2.5% and excluding bonuses ticked up to the same level. Claimant count also fell for the first time in 5 months but rather than appreciate, sterling traders drove the currency lower on the “excuse” that the unemployment rate increased for the first time in 6 months. At 4.4%, the jobless rate is still hovering near a 30 year low so the bigger story should be the impact that stronger wage pressures has on monetary policy. As GBP/USD is driven lower by U.S. dollar strength, we prefer to buy sterling vs. euro, Japanese Yen and Canadian dollars. No revisions are expected to tomorrow’s Q4 GDP report.
After peaking above 1.25, EUR/USD broke 1.23 today on the back of broad based U.S. dollar gains. Like the ZEW survey, the latest PMIs fell short of expectations with manufacturing and service sector activity slowing in the month of February. While it contributed to the downside pressure on the euro, its important to realize that this was the first decline in 3 months and comes off the heels of the strongest Eurozone PMI reading since 2006. The EUR/USD did not break 1.23 until the end of the NY trading day. The data shows that the Eurozone economy is still strong and activity is simply easing from sky high levels. Tomorrow’s German IFO report is likely to show a similar retracement and after the strong run, EUR/USD traders took these reports as an excuse to take profits on long positions. Looking ahead, if EUR/USD recaptures 1.23 after IFO, it would be the perfect place to begin a recovery.
The Canadian dollar is in focus tomorrow with retail sales scheduled for release. USD/CAD has been trending higher for the past few days, hitting 1.2700 in the process. Although it failed to extend its gains beyond this key level resistance could be breached if retail sales turn negative. Economists are looking for zero growth but according to the wholesale sales, demand weakened significantly towards the end of the year. Like the Eurozone, Canada’s economy isn’t doing terrible but the strength that we saw for most of 2017 began to fade towards the end of the year. Softer retail sales would take USD/CAD to its next resistance level of 1.2725 (the 200-day SMA). Of the commodity currencies, the Australian dollar was the worst performer while the New Zealand dollar was the best. Lower leading indicators in Australia were offset by stronger wage data but on a technical basis, the losses added up quickly after AUD/USD broke its 4 day low. NZD/USD on the other hand remains surprisingly resilient with.7300 serving as support. Credit card spending numbers are scheduled for release tonight – they are not extremely market moving but could set the stage for the Q4 retail sales report tomorrow. Incoming RBNZ Governor Orr also spoke and the only thing he said was a promise to maintain clear and transparent communication.