Forex »

Daily Commentary | 08/04/15

Share on StockTwits
Published on

• NFP? What NFP? The effect of the much worse-than-expected nonfarm payrolls on the dollar is now almost totally gone, at least with regards to the G10 currencies. USD is now higher than it was at the Friday opening in Europe against NOK, CHF, JPY, EUR and SEK, while lower vs only AUD, CAD and NZD. AUD is due largely to the RBA and CAD is due to the oil price, so neither have anything to do with Fed policy. Fed funds rate expectations are now down only 3 or 4 bps from the pre-NFP levels, while 10-year yields are down 3 bps. It’s almost as if the NFP never happened. Apparently, investors listened to what the FOMC members said (except for Mr. Kocherlakota – see below) and are expecting the Fed to look through this period of weakness and begin tightening rates around mid-year anyway. That means the dollar rally can continue.

• JOLTS report shows labor market improving The Job Opening and Labor Turnover Survey (JOLTS) showed job openings rising to a 14-year high. But the pace of hiring remained steady, which implies that employers are having a hard time finding workers. The hiring rate was unchanged and the quit rate fell 10 bps. These are key indicators of labor market conditions for Fed Chair Janet Yellen as they are closely correlated with employment costs, and she wants to see workers benefitting from the upturn before she starts hiking rates. These details should have depressed Fed funds rate expectations slightly but didn’t. Apparently the markets were more encouraged by the good headline figure on job openings, plus the solid rise in consumer credit in February and the improvement in IBD/TIPP economic optimism. This is further evidence of the turnaround from Friday’s employment shock and demonstrates why USD can keep rising.

• Kocherlakota still the uber-dove Minneapolis Fed President Narayana Kocherlakota maintained his position as the most dovish person on the FOMC. Contrary to what we’ve heard from all the other FOMC members who’ve spoken recently, he said he thought the Fed shouldn’t start raising rates “until the second half of 2016.” That’s 2016, not 2015. Kocherlakota does not vote on the FOMC this year and will retire when his term ends in February next year, so his comments are of interest only insofar as they represent one extreme of the debate.

• Bank of Japan stands pat The Bank of Japan kept its monetary policy stance unchanged, as was unanimously expected. Similar to the previous meeting, there were few changes to the statement and the Board members simply repeated that they will continue their easing program, aiming to achieve the 2% inflation target. About the only change was that they lowered their estimate of inflation to “about 0 percent” from “in the range of 0.0-0.5 percent.” They still see inflation at around 0 percent “for the time being” but as usual add that “inflation expectations appear to be rising on the whole from a somewhat longer-term perspective.” Perhaps they are referring to firms’ forecasts in the tankan, where the latest forecast for inflation in five years edged up by 10 bps to 2.2%. However, the forecasts in the tankan for inflation in one year fell. Market forecasts for near-term inflation are declining as well, as the graph shows. That makes it more likely that they will eventually have to do yet another increase in their QQE program, which should be the occasion for another leg up in USD/JPY, in my view. FX market participants are waiting for the April 30th meeting, when the BoJ will release its semi-annual Outlook for Economic Activity and Prices. If the inflation forecast is revised sharply downward or fears are expressed about overseas economies, Gov. Kuroda could propose further easing measures then.

• Oil prices pare gains Lots of debate around tonight’s US Energy Information Agency (EIA) oil inventory data. Monday there was talk that it would show a decline in inventories, but the American Petroleum Institute data out Tuesday reportedly showed a big increase, which brought the price down somewhat.

• Today’s highlights: During the European day, Eurozone retail sales for February are the only indicator remaining. German factory orders for February fell 0.9% mom, a far cry from the 1.5% rise that was expected. This is an unusually weak number for Germany, where the economic data has been surprising on the upside recently. EURUSD edged down around 10 pips on the news.

• Greece will auction off EUR 875mn in six-month T-bills. The money is needed to refinance a EUR 1.4bn issue that matures next Tuesday, Apr. 14th, not to mention a EUR 194mn bond coupon payment and EUR 1bn T-bill maturity on Friday, April 17th. This is besides the EUR 450mn due to the IMF on Thursday that Greece has to pay. Greece is rapidly running out of money and therefore running out of time to reach some agreement with its creditors. The problem seems to be with the left wing of the SYRIZA coalition, which resists going back on its campaign promise to renegotiate the terms of the bailout. On the contrary, it is now arguing that Germany owes it an incredible EUR 278.7bn in war reparations, a tactic that is not likely to win Greece any support from the voting public in Germany. The country basically has until April 24th, when the Eurozone finance ministers meet, to come up with a proposal that they will accept. Otherwise a default seems inevitable.

• In the US, the minutes of the March FOMC meeting are to be released, when officials removed “patient” phrase from their statement. This suggested that the period of zero interest rate is coming to an end. But the mostly dovish statement overshadowed the removal of the word as it stated specifically that an increase in the range for the Fed funds rate remains unlikely at the April FOMC meeting. In other words, the Committee removed its forward guidance that depends on the date and replaced it with guidance that depends on the data. At the same time, they lowered their economic forecasts significantly, including the forecasts for the Fed funds rate. It will be interesting to see the discussions that led to these significant revisions. We believe that September seems the most likely date for the Fed to start raising rates and the US dollar is expected to regain its strength, especially as the alternatives within the G10 become less attractive with their easing biases.

• We have two Fed speakers on Wednesday’s agenda: New York Fed President William C. Dudley (again – he spoke on Monday) and Fed Governor Jerome Powell both speak on monetary policy.

• US earnings season starts today with Alcoa announcing after the NY close, as usual. We are likely to get a number of comments about how the strength of the dollar is impacting earnings. Nonetheless, remember that the US economy relies very little on exports. Exports of goods and services account for only 13.5% of GDP, the lowest of any of the G10 countries and in fact one of the lowest ratios in the world (the IMF database gives only nine countries with lower ratios, including Afghanistan, Burundi and Sudan). The problem for the major companies is probably the value of their overseas earnings translated back into USD, which may affect dividends but does not directly affect US jobs.

Share on StockTwits

Iron FX 1.11156/1.11128 2.8
XM Markets 1.09948/1.09928 2
FxPro 1.10184/1.10171 1.3
FXCM 1.13943/1.13912 3.1