For the past few weeks, our daily notes have focused on the U.S. dollar because the market’s appetite for greenbacks dictated how all other currencies moved. This remains true Thursday as the dollar extended its gains against all of the major currencies. Yet it is also worth noting that the run-up in the dollar has taken EUR/USD below 1.05 and AUD/USD below 76 cents. If EUR/USD drops below 1.0490, the currency pair would be trading at its weakest level in 6 weeks, opening the door for a move down to 15-year lows. Eurozone data hasn’t been terrible and German yields have actually moved higher in lockstep with U.S. rates, but dollar bulls are driving EUR/USD’s direction. With that in mind, the Eurozone’s CPI estimate for February increased to 2% from 1.8% while the unemployment rate held steady at 9.6%. German and Eurozone retail sales are scheduled for release on Friday along with revisions to service-sector PMIs. Consumer spending is expected to rebound after contracting in January but a clean break of 1.05 should be determined by Fed speak -- not Eurozone data.
The Australian dollar fell hard on Thursday, easily earning the title of the day’s worst-performing currency. After consolidating for weeks, AUD/USD finally broke down. Although recent economic reports have been fairly good, Wednesday night’s significantly worse-than-expected trade balance was a sharp reminder of the damage that a strong currency can do to an export-dependent economy. Economists were looking for the trade surplus to increase to 3.8B but instead it shrank to 1.3B, less than a third of forecasted levels. The problem was exports, which fell 3% in January. If Thursday night’s services PMI report surprises to the upside, it could spark a relief rally but the uptrend has been broken and the next stop for AUD/USD should be 75 cents. The New Zealand dollar also sold off sharply in sympathy with the Australian dollar. Having broken below multiple moving averages, NZD/USD appears poised for a test of 70 cents. New Zealand fundamentals are worse than Australia’s but the downtrend in NZD started at the beginning of the month whereas AUD only broke down on Thursday, explaining the pressure on AUD/NZD. Despite healthy GDP growth in the fourth quarter, the Canadian dollar lost value as oil prices fell and the U.S. dollar weakened. Canada’s economy expanded 0.3% in December, pushing the annualized pace of growth to 2%. While the monthly number was in line with expectations, the year-over-year growth rate and the quarterly growth rate beat forecasts. Fourth-quarter GDP growth eased to 2.6% instead of the estimate of 2% with Q3 growth revised up to 3.8% from 3.5%. Nonetheless, USD/CAD extended its gains for the fourth day in a row, racing from a low of 1.3050 to a high just shy of 1.34.
But the main story is still the U.S. dollar. The bulls remain in control and show no signs of letting up ahead of Friday’s busy Fed speak calendar. Ten-year bond yields closed in on 2.5% Thursday as March rate-hike expectations rose to 90%. Jobless claims fell to its lowest level in 44 years, a sign of continued strength in the labor market. The less volatile 4-week moving average also dropped to its lowest level since April 1973. The healthy labor market is one of the main reasons why the Fed is pushing for a rate hike and Thursday’s report reinforces its positive outlook. Fed President Yellen is speaking Friday along with Vice Chair Fischer and FOMC voters Evans and Powell. We already know where Powell stands because he said on Thursday morning that “3 rate increases still feels right this year.” Even uber dove and FOMC voter Brainard admitted Wednesday night that a “rate hike will likely be appropriate soon.” Yellen, Fischer and everyone else speaking on Friday will most likely reiterate these views and that could be just what USD/JPY needs to make a run for 115. Aside from Fed speak, the ISM non-manufacturing index is also scheduled for release and the correlation between it report and nonfarm payrolls means we could see a decent reaction in the currency.
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The currency that held up best versus the U.S. dollar was sterling. The only piece of data from the UK was the construction PMI, which came in at 52.5 vs. 52.2 expected. Brexit headlines seemed to be the cause of the struggle for the pound today as a spokesperson for PM May came out and said that the prime minister remains steadfast in her desire to have Article 50 pass without amendments. The continued uncertainty regarding the bill and its current timetable due to the ping-ponging between the House of Lords and the Lower House has led many investors to ongoing uncertainty. Still, we should see some direction in Friday's pound with service-sector PMI report scheduled for release. Unfortunately, the drop in consumer confidence and decline in the manufacturing PMI index favors a softer report.