DERBYSHIRE UK, Feb 12, 2024, Week 7. Welcome to Friday. This week brings mixed signals on US economic strength leading to uncertainty around Fed policy. Meanwhile, inflation shows signs of cooling in Europe though policy makers remain cautious on rate cuts. In Asia, Japan faces headwinds from an economic contraction while Australia grapples with rising unemployment. New Zealand’s central bank strikes a dovish tone but economic resilience offers support.
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USD - Mixed Signals on Economic Strength and Policy Outlook
The US dollar retreated from a two-month high against major currencies as investors assessed conflicting signals on economic strength and the Federal Reserve's rate hike path. Retail sales unexpectedly contracted in January while jobless claims fell, spurring increased bets on a Fed rate cut by May. Stocks extend gains as lower Treasury yields boosted sentiment.
On the data front, a surprise 0.8% monthly drop in retail sales and an 11-week high in jobless claims muddied views on consumer resilience. Markets are now pricing in a 45% chance of a rate cut in May, though hawkish Fed rhetoric persists. Meanwhile, stocks rallied as lower yields boosted risk appetite - the S&P 500 rose 0.6% while banks and energy shares led gains.
Geopolitically, tensions between the US and Mexico resurfaced over alleged cartel financing for Mexico's president. The US also conducted airstrikes against Iran-backed militias in Iraq and Syria. In the Pacific, New Zealand inches towards joining AUKUS in a move that could raise China's ire.
Key data releases:
Feb 20, Wednesday - FOMC Minutes
Feb 22, Thursday - Jobless Claims
Feb 23, Friday - Services PMI
Feb 24, Saturday - New Home Sales
CAD - Resilient Despite Headwinds
The Canadian dollar weakened past 1.35 against the USD as stubborn US inflation delayed expectations of a Fed rate cut, lifting the greenback. However, strong domestic labour data last week with nearly 40,000 jobs added in January pushed back against growing pessimism about the economy. The unemployment rate fell for the first time in over a year to 5.7% while inflation rose to 3.4% in December, near the BoC's target. GDP contracted 0.3% in Q3 2023, the first decline since Q2 2021, showing restrictive policy is slowing growth. Still, the BoC may sustain high rates longer to combat resilient inflation. Equities rose with the TSX index up 1.6%, led by mining and energy shares as lower US retail sales boosted Treasuries and oil rebounded over $77.5/bbl despite downward demand revisions. The 10-year bond yield extended gains to 3.66% on hawkish policy expectations. While geopolitics present opportunities in Egypt and obstacles in Afghanistan, fundamentals seem sufficient to drive a resilient loonie.
Key events:
Feb 20 - Inflation Rate
Feb 22 - Retail Sales
Feb 23 - Manufacturing PMI
EUR - Cautious Optimism Amid Gradual Inflation Easing
The EUR held steady above $1.07 as investors weighed cautious remarks from ECB officials against unexpectedly weak US retail sales. Eurozone inflation continued its downward trajectory, declining to 2.8% in January, its lowest level since March 2022. However, core inflation remained elevated at 3.3%. ECB President Lagarde emphasised that while data suggests inflation is returning to target as expected, further evidence is needed before rate cuts can be considered.
The Eurozone economy showed meagre 0.1% annual growth in Q4 2023, stagnating from the previous quarter amid high inflation, borrowing costs, and weak demand. Retail sales declined 1.1% month-over-month in December, marking the fastest fall in a year. The jobless rate held at 6.4% in December, remaining near historic lows.
European equities approached multi-decade highs, led by strong earnings from Stellantis and Safran. The EU50 rose 4.9% year-to-date while the Stoxx 600 hit a record high. Bond yields edged lower as inflation data tempered rate cut hopes.
Upcoming key economic events:
Feb 20 - Germany ZEW Economic Sentiment (Feb)
Feb 21 - Eurozone Consumer Confidence Flash (Feb)
Feb 22 - Eurozone Retail Sales MoM (Jan)
Feb 23 - Eurozone Consumer Confidence Final (Feb)
Feb 24 - Germany Ifo Business Climate (Feb)
GBP - Recession Concerns Weigh On Sterling
The British pound edged lower against the US dollar this week as the UK economy slipped into a technical recession in the fourth quarter. Preliminary GDP figures showed a larger than expected 0.3% contraction, marking two consecutive quarters of negative growth. This has raised expectations that the Bank of England may cut interest rates to support the economy, weighing on sterling.
However, inflation remains sticky at 4% in January, double the BoE's 2% target. Policymakers have indicated rates may need to remain restrictive for some time to bring inflation back to target. There are also some early signs of economic recovery emerging. Manufacturing output rose in December and the unemployment rate fell to its lowest level since early 2023.
On geopolitics, New Zealand and Australia pledged to strengthen defence ties at a recent meeting between foreign and defence ministers. There was discussion around New Zealand potentially joining the AUKUS security pact.
In equities, the FTSE 100 index gained 0.5% on Thursday but remains down 1.75% year-to-date. The rise came as recession fears increased bets on BoE rate cuts. Government bond yields also declined, with the 10-year yield dipping below 4% as the growth outlook deteriorated.
Overall, recession worries sparked by the dismal GDP print are weighing on sterling in the near term. But sticky inflation and hawkish BoE rhetoric point to upside risks. Traders will closely monitor upcoming economic releases and central bank communications for further clues on policy direction.
Key Events:
16 Feb, Fri - UK Retail Sales MoM
20 Feb, Tue - UK Unemployment Rate
21 Feb, Wed - UK Inflation Rate
28 Feb, Wed - UK Monthly GDP
SWISS FRANC faces downside pressure as dovish policy bets build
The Swiss franc has weakened to two-month lows against the dollar, falling below 0.88, on growing expectations that the Swiss National Bank could cut interest rates as early as March. January inflation of 1.3% came in well under forecasts and the lowest in over two years, strengthening the case for monetary easing. The benign reading gives the SNB room to diverge from global tightening trends as it keeps policy aligned with muted price pressures.
The franc also faces headwinds from a rebound in SNB foreign exchange reserves over the last two months. After declining for two straight years to 7-year lows, the pickup in reserves signals reduced intervention to weaken the currency. Still, inflation is seen picking up from higher electricity costs and value-added tax changes.
Economic growth slowed in the second and third quarters of 2023. With the SNB forecasting full-year growth around 1% and between 0.5-1% next year, prospects for the economy remain subdued.
Upcoming data:
February 16, Thursday: SNB Quarterly Bulletin
February 20, Monday: Producer & Import Prices
February 22, Wednesday: Credit Suisse Investor Sentiment
February 23, Thursday: Trade Balance
Japanese Yen Faces Headwinds Amid Economic Contraction
The Japanese yen depreciated to its lowest level against the US dollar in three months after higher-than-expected US inflation data dampened hopes for an imminent pivot by the Federal Reserve. The weaker yen prompted warnings from Japanese officials about excessive volatility. Meanwhile, Japan's economy unexpectedly contracted 0.1% quarter-over-quarter in Q4 2023, falling into its first technical recession in five years. The surprise contraction dented expectations that the Bank of Japan could soon end its negative interest rate policy.
Equity markets were buoyed by the economic data, with the Nikkei 225 rallying 1.2% to a 34-year high. The gains were led by technology stocks as investors focused on strong corporate earnings and outlooks. Long-term bond yields retreated from two-month highs following the weak GDP print, dropping back below 0.75%.
Gold prices rose to $2,000/oz, supported by a weaker dollar and lower yields. Investors are awaiting further Fed guidance on the timing of rate cuts. Gold remains down 2.8% year-to-date amid Fed tightening.
On the geopolitical front, Japan is providing military assistance to maritime ASEAN nations under a 10-year plan. Tokyo is also undertaking efforts to hold a summit with North Korean leader Kim Jong Un. Meanwhile, Thailand launched a peace initiative for Myanmar.
Upcoming Key Events:
Feb 19, Tue - JP Trade Balance
Feb 21, Thu - JP National Inflation
Feb 26, Tue - JP Retail Sales
Australian Dollar - Cautiously Optimistic Outlook
The Australian dollar held steady below $0.65 as weak January jobs data bolstered expectations that the RBA will start cutting interest rates this year to support the economy. However, Governor Bullock warned that further rate hikes remain possible amid high inflation. Externally, the aussie faces headwinds from a strong US dollar.
Domestically, Australia's unemployment rate rose to 4.1% in January, a 2-year high, while only 500 jobs were added versus forecasts for a 30,000 increase. This supports market expectations that the RBA will cut rates, starting in August, to boost growth as inflationary pressures ease. However, Governor Bullock stated it's not imperative for inflation to hit 2.5% before cuts, though further hikes are still possible.
The stock market rose 0.77% as earnings optimism outweighed economic uncertainty. Bond yields fell below 4.2% on rate cut hopes. Meanwhile, Australia aims to push China to lift trade barriers on key exports at an upcoming WTO meeting.
In geopolitics, domestic opposition is rising against joining AUKUS's defence pact. Japan plans a 10-year $1B railway upgrade in ASEAN states. The EU proposed sanctions on Chinese firms accused of supporting Russia's war.
Key events:
Feb 20 - RBA Meeting Minutes
Feb 21 - Wage Price Index
Feb 22 - Consumer Price Index
Feb 27 - Building Approvals
NZD: Kiwi Caught Between Dovish RBNZ and Resilient Economy
The New Zealand dollar has seen volatile trading recently, pulled between a more dovish Reserve Bank of New Zealand (RBNZ) outlook and signs of ongoing economic resilience. The kiwi fell to an almost two-month low against the US dollar this week, dropping below $0.62 amid caution ahead of RBNZ Governor Adrian Orr's speech on Friday. However, the currency pared some losses on positive domestic data including a rise in tourist arrivals and credit card spending.
The RBNZ left interest rates unchanged at 5.5% in November but signalled rates would need to stay elevated for some time to bring inflation back to the 1-3% target range. Forecasts point to a peak rate of 5.7%, limiting room for further hikes. This relatively dovish guidance has weighed on the kiwi, although Orr also noted monetary policy was helping stabilise the housing market. The RBNZ faces a tricky balancing act trying to tame inflation without causing too sharp an economic slowdown.
Meanwhile, recent data suggests New Zealand's economy retains momentum despite global headwinds. Unemployment ticked up slightly to 4% but remains near multi-year lows. The underutilization rate of 10.7% shows there is still labour market slack to absorb before wage pressures intensify. Annual inflation dropped to 4.7% in Q4, offering some relief. Importantly, domestic demand appears robust with retail spending and manufacturing activity holding up well.
The resilient economy lends support to the kiwi, limiting the downside. However, further RBNZ policy easing cannot be ruled out if conditions deteriorate. The central bank also emphasised interest rates need to stay elevated for a prolonged period to ensure inflation expectations remain anchored.
Overall the kiwi looks caught in limbo here around the $0.62 level. The currency may weaken further if the RBNZ strikes a decidedly dovish tone at upcoming meetings or downgrades growth forecasts. But continued economic outperformance would boost the NZD. The currency could strengthen back above $0.65 later this year if inflation keeps slowing, allowing the RBNZ to soften its tightening bias.
Economic Snapshot
Interest Rate: 5.5% (on hold in November)
GDP Growth: -0.3% (Q3 2023)
Inflation: 4.7% (Q4 2023)
Unemployment: 4%
Key Events Next 7 Days
Fri 17 Feb: Business NZ Manufacturing PMI (Jan)
Mon 20 Feb: NZ Credit Card Spending (Jan)
Tue 21 Feb: GDT Price Index
Wed 22 Feb: RBNZ Interest Rate Decision
Gavin Pearson
Retail trader since 2008
Specialises in forex
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Returned 27% in 2022 and -2.7% in 2023
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