Treasury yields rebounded for the first time in 3 trading days, squeezing USD/JPY higher in the process. US economic reports were stronger than expected but producer prices and jobless claims rarely have a lasting impact on currencies. Nonetheless, PPI rose 0.6% against a 0.3% forecast while jobless claims fell to a 40 year low. Like CPI, the increase in PPI was largely driven by food and energy costs. The fourth consecutive weekly decline in jobless claims is a sign that the labor market remains tight and companies are finding it more difficult to attract workers. More than 190K jobs were created last month and USD/JPY’s strength reflects the market’s hope that job growth will exceed 200K in April.
Central bankers aren’t as optimistic as contradictory views dominate today’s Fed speak. Fed Vice Chair Clarida says the labor market is healthy and the economy is in a good place – a view shared by Fed President Williams. Fed President Bullard on the other thinks the March hike marked the end of policy normalization and favors removing the word “patient” from the policy statement because it suggests a tightening bias. Looking ahead, Friday’s University of Michigan Consumer Sentiment index should help the dollar as the rise in stocks bolsters confidence. Technically, the 200-day SMA at 111.50 is an important resistance level for USD/JPY. If there’s a strong break, the pair should be looking to challenge the 2019 high at 112.13. However if it fails at 111.50, then a move back below 111 is likely.
The biggest story today in the FX market was the European Union’s decision to extend Britain’s exit from the European Union to October 31. This was longer than the Prime Minister requested and shorter than the 1 year option some EU members preferred. There will be a formal review in June and if the UK wanted to leave sooner, it could. As a result the UK will be participating in the European Parliamentary elections unless it reaches an agreement internally to leave the EU before June 1st. The good news is that this extension averts a no deal Brexit on Friday that would have shook the financial markets. The bad news is that investors are not impressed. The EU refuses to renegotiate the Withdrawal Agreement and the fear is that Prime Minister May still won’t receive the support she needs to pass the current Withdrawal Agreement in 6 months time. Instead this gives her opposition more time to push for a general election, her resignation or a second referendum. Instead of rallying in relief, sterling ended the day unchanged versus the US dollar.
After shrugging off the European Central Bank’s warnings about downside risks and ongoing uncertainty on Wednesday, the euro is finally trading in line with fundamentals. At their latest monetary policy meeting, ECB President Mario Draghi expressed concerns about the slowdown in the economy and teased investors about the possibility of more stimulus. He said TLTRO 3 was their first defense to slowing growth and if the weakness deepens, he said they have “plenty of instruments” at their disposal. In June, they’ll also decide if negative interest rates need mitigating but for now, Draghi made it clear that many things keep them up at night from tariffs to Brexit, protectionism, low inflation and the possibility of recession in Italy. So not only do they feel that rate hikes are unnecessary this year but they could delay them further if needed. In June, they’ll announce the details of TLTRO and the program could be more extensive if the slowdown deepens. The euro is lower because the concerns of the ECB are a stark contrast to today’s strong US jobless claims report. As a result, we’re still looking for a move to 1.10.
The Australian, New Zealand and Canadian dollars were hit hard today by the rising US dollar. The sell-off in oil prices contributed to the CAD’s weakness while A$ traders sold the currency on the back of lower consumer inflation expectations and a snap election. Prime Minister Morrison said the country’s 45th election will be on May 18th. Party infighting forced early elections – political uncertainty is rarely good for a country’s currency and hence the decline in A$. New Zealand’s manufacturing PMI report is scheduled for release this evening and given the Reserve Bank’s dovishness, the risk is to the downside.