By Kathy Lien, Managing Director of FX Strategy for BK Asset Management
- Buying Dollars is Still the Best Bet in Global Currency War
- The Only Reason EURO Recovered
- AUD Hit Hard by Rate Cut Talk
- USD/CAD Hits New Highs on Lower Oil
- NZD Extends Losses Post RBNZ
- Sterling Pulls Back on Dollar Demand
Buying Dollars is Still the Best Bet in Global Currency War
If there is one takeaway from the recent price action in the foreign-exchange market, it should be that buying U.S. dollars is still the best bet in the global currency war. The Federal Reserve's short and sweet monetary policy statement on Wednesday contained no changes in forward guidance, leaving the Fed on track to raise interest rates in 2015. Meanwhile the race to ease is heating up with the European Central Bank rolling out Quantitative Easing, the Monetary Authority of Singapore reducing the slope of its policy band and the Reserve Bank of New Zealand dropping its tightening bias. Next week, the Reserve Bank of Australia is expected to fire the next shot by lowering interest rates for the first time since August 2013. It is a slippery slope because countries around the world are easing to reverse the trend of weakening growth but at the same time fighting to remain competitive as other central banks take steps that devalue their currency. The war is far from over -- the problem is that as one country devalues, it forces deflation onto other nations, raising the risk for tit for tat competitive devaluations. Therefore more steps could be taken by emerging market central banks and until the surprises in monetary policies stop coming, the volatility created by these moves will continue to encourage investors to buy dollars. The recovery in the U.S. economy and the prospect of higher interest rates will continue to make the dollar very attractive to foreign investors and we don't expect this trend to change unless the Federal Reserve signals that it doesn't plan to raise interest rates this year. The earliest that this could happen would be in March, when the central bank updates its economic projections and Janet Yellen holds a press conference but from now till then, their perceived commitment to tighten will keep the dollar in demand. Thursday morning's better than expected jobless claims report reinforces the positive outlook for the U.S. economy. While pending home sales declined, the Fed's main focus is on the labor market. For investors, this means that pullbacks in the dollar particularly against currencies of countries that have recently made major policy changes should be bought. More specifically, selling the EUR/USD on bounces continues to be one of our favorite trades. If Friday's fourth quarter GDP numbers surprise to downside, we will look at it as an opportunity to buy dollars at a lower level.
The Only Reason for Euro Recovery
The main reason why the euro rebounded against the U.S. dollar on Thursday is because of EUR/CHF. The more than 2% rise in EUR/CHF suggests that the Swiss National Bank is in the market quietly selling the currency. We have no official confirmation but the size of the move certainly smells like SNB intervention. Earlier this week the Vice President of the central bank warned that even though the peg has been abandoned, they are still prepared to intervene in the FX market. Without demand for EUR/CHF, the euro would have traded lower Thursday like other major currencies. Economic data from the Eurozone was mostly weaker. German unemployment dropped less than the previous month and while the unemployment rate remains unchanged the level of joblessness in December was revised up from 6.5 to 6.6%. In addition consumer prices in Germany dropped 1%, which was more than the markets -0.8% forecast. On an annualized basis this was the first time since 2009 that the inflation rate in Germany turned negative. All of these reports validate the central banks decision to launch quantitative easing last week. German retail sales are scheduled for release on Friday along with Eurozone unemployment and consumer price reports, all of which are expected to be negative putting continued pressure on the euro. In addition the new Greek government has acted swiftly to reverse austerity and is showing no signs of willingness to compromise with their creditors but if they want to receive their next bail out payment a new agreement needs to be made. In the meantime a Grexit and the upcoming Italian elections continue to post a risk to the EZ and the euro.
AUD Hit Hard by Rate Cut Talk
The selling continues with the Australian, New Zealand and Canadian dollars dropping to fresh multi-yeah lows against the greenback Thursday. The climb in commodity prices contributed to the move but the primary catalysts were the recent action by policymakers and weaker economic data. The Reserve Bank of New Zealand's decision to drop it's tightening bias triggered massive losses in the New Zealand dollar that were exacerbated by an unexpected trade deficit. Economist were looking for New Zealand's trade deficit to return to surplus in the month of December and while exports rose strongly, imports also increased leaving the balance in deficit. This disappointment validated the RBNZ's decision and added to the pain for the New Zealand dollar. At this point, there is no major support in NZD/USD until the 2011 low of 0.7118. However the big story and the worst performing currency Thursday was the Australian dollar, which fell more than 1% against the greenback -- its lowest level in 5 years. The recent move by the RBNZ hardened the markets confidence in a rate cut by the RBA next week. Although the Q4 consumer price report beat expectations, last night's softer import and export price reports indicates that inflation is slowing. Look for further losses in AUD/USD. Meanwhile USD/CAD continues to climb as oil prices head toward $40 a barrel. We believe that $40 is the pain threshold for OPEC and we may start to see some OPEC nations grumble about the low price of oil and openly consider production cuts to stabilize prices. Canadian GDP growth is scheduled for release on Friday. A slowdown that would validate the Bank of Canada's decision to ease this month is expected. The next level of resistance for USD/CAD is the January 2004 low of 1.2685.
Sterling Pulls Back on Dollar Demand
Demand for US dollars drove the British pound lower Thursday despite better than expected data. Nationwide house prices rose 0.3%, which was right in line with expectations but on an annualized basis, price growth was 6.8% vs. a 6.6% forecast. According to the Confederation of British Industry, UK retail sales growth slowed less than expected in the month of January, a sign that consumer demand remains firm after the holidays. The director of the CBI states that, "Falling oil prices and low inflation mean consumers have a bit more money in their pockets. We expect to see this translate into strong sales growth in the months ahead." Despite the pullback in GBP/USD, sterling continues to outperform other currencies, rising to its strongest level in 5 years against the Australian dollar.