A surprise dip in the USD/JPY pair may now present a favorable buying opportunity. Meanwhile, the euro’s troubles continue, and upside data surprises boost the British pound and commodity currencies.
The US dollar (USD) traded higher against all major currencies except for the Japanese yen (JPY) in Thursday trading. Somewhat surprisingly, USDJPY led the losses in the FX market, falling more than 1% over the past 24 hours. This weakness, combined with the weakness in the euro, made EURJPY, which was down 1.5%, the worst-performing major currency pair.
This decline can be attributed to a number of factors, but US economic data is certainly not one of them. Most of Thursday's economic reports beat expectations, with weekly jobless claims in the US coming in at 336k compared to 334k the week prior. The Philadelphia Fed survey also rose back to positive territory (2.0 in March versus -12.5 in February), while leading indicators rose 0.5%. The only disappointment was in existing home sales, which grew less than expected, but the upward revision to the prior month's report offset some of the pain. These numbers validate Fed Chairman Ben Bernanke's lack of concern about negative risks posed by the sequester or the banking crisis in Cyprus.
Instead, EURJPY selling, unimpressive comments from new Bank of Japan (BoJ) Governor Haruhiko Kuroda, and lower US bond yields all contributed to the selloff in USDJPY. Now, many traders are wondering if current levels represent a bargain for the pair.
In our opinion, the prospects for additional quantitative easing (QE) in April should limit USDJPY losses to the 93.00 support level, but what really matters is the outlook for US yields. Positive US economic data coupled with Bernanke's optimism should drive yields higher, but that may be difficult until the banking crisis in Cyprus is resolved.
Investors are buying bonds across the globe in fear that the problems in Cyprus could lead to further weakness in equities and currencies. Nonetheless, we still see USDJPY recapturing its highs, but the real test will be in two weeks when the new Bank of Japan Governor holds his first meeting. If Kuroda fails to ease, we could see more profit taking.
Finally, a Euro Catalyst That Trumps Cyprus
With European data disappointing and US economic data surprising to the upside, investors have returned to selling the euro. Not only has tail risk in the Eurozone returned with the European Central Bank (ECB) threatening to pull support from Cyprus if an agreement is not reached by Monday, but the outlook for growth has taken a turn for the worse, further compounding the euro's problems.
Eurozone manufacturing and service sector activity contracted at a faster pace in the month of March with the Eurozone PMI Composite Index dropping to 46.5 from 47.9. While this is not the lowest reading we have seen in the past six months, the cracks in Germany’s economic armor are reappearing. The Eurozone's largest economy is no longer able to provide umbrella support for the rest of the region and is now weakening alongside France, Italy, and Spain.
Friday’s German IFO report will most likely tell the same story of weakness in the Eurozone economy. The deteriorating growth outlook and risks posed by Cyprus and Italy (let’s not forget about the unresolved Italian elections) makes the euro less attractive than the dollar and should continue to put pressure on the currency pair.
Pleasant Surprise from UK Consumer Spending Data
While stronger retail sales numbers drove the British pound (GBP) sharply higher against the euro and US dollar, the 1.52 level is still the height of gains for the GBPUSD. UK consumer spending rose 2.1%, its strongest pace in 11 months, soundly beating the market's 0.4% forecast. After four months of flat or negative sales, the market really needed to see a good number to reduce the chances of a triple-dip recession.
The data for the month of February suggests that consumers are coming back, but some of that was due to improved weather. The UK government is doing what it can to encourage spending, according to the 2013 budget, with Chancellor George Osborne looking to spur spending by eliminating plans to raise the gasoline tax and by reducing the tax on beer. They also plan to increase the tax-free earnings allowance.
If this improvement can be sustained, the risk of a triple-dip recession will recede, leaving the Bank of England (BoE) with the flexibility to focus on the upside risks to inflation. The budget was also very good and featured the UK reporting its smallest deficit in five years.
If the GBPUSD manages to break above 1.52, the shift in economic data and the less-dovish comments from the Bank of England could support a stronger rally towards 1.54, which is the currency pair's next resistance level.
Hot Chinese Data Lights a Fire Under Aussie
The Canadian (CAD), Australian (AUD), and New Zealand (NZD) dollars all soared on the back of better-than-expected economic data. Retail sales in Canada rose 1.0% in the month of January after falling 2.3% the previous month. While the increase in spending can be largely attributed to a recovery in auto sales, spending on items excluding vehicles also rose 0.5%. Since these numbers were only slightly better than expected, the impact on the CAD was nominal because one month of improvements is not enough to reverse the Bank of Canada's (BOC) recent shift towards more cautiousness.
The Australian and New Zealand dollars, on the other hand, broke out of recent consolidations on the heels of stronger Chinese PMI numbers and New Zealand GDP figures. For the Reserve Bank of Australia (RBA), stronger growth in China reduces the need for additional easing.
Fourth-quarter GDP growth in New Zealand was the strongest in three years, so while the Reserve Bank of New Zealand (RBNZ) may be worried about the strength of its currency, they also have very little reason to ease monetary policy. While the earthquake in Christchurch happened two years ago, rebuilding continues to contribute positively to New Zealand's economy.
Australian leading indicators are due for release Thursday evening along with New Zealand job additions. We don't expect these second-tier economic reports to threaten the latest uptrend in the AUD and NZD.
Kuroda Disappoints, but Yen Sure Doesn’t
The best-performing currency on Thursday was the Japanese yen (JPY), which traded more than 1% higher against the US dollar, euro, and Swiss franc (CHF). The recent Japanese trade numbers were better than expected, with the trade deficit shrinking to Y777.5 billion from Y1630.9 billion. Unfortunately, Japan is still running a deficit, with shipments to China falling 15.8% during the Lunar New Year holiday.
So far, we have seen only limited benefit from yen weakness. Comments from the new Bank of Japan (Boj) Governor Haruhiko Kuroda also failed to help to USDJPY. Instead of providing more clarity on monetary policy during his inaugural press conference, Kuroda nodded vigorously, leaving all options open and saying simply that "We have to implement more effective monetary easing, but we'll think about what at the policy board meeting."
While he said it is not impossible for the Bank of Japan to hold an emergency meeting before the April 4 meeting, he sounded unconvincing. Overall, the new BoJ Governor went out of his way to avoid dropping any hints about future monetary policy, suggesting instead that he may not be overly eager to ease at the Bank’s first monetary policy meeting, which is only two weeks away.
Governor Kuroda may want to take his time to truly understand the monetary policy options before taking action. Also, the decision is not his alone. He will need to meet with the rest of the monetary policy committee, and the real test will be on April 4, when Kuroda leads his first monetary policy meeting as BoJ Governor.
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