Currency Update 11th of April

Jarratt Davis

Special Consultant to the FPA
There is no trade call for the session. As always on Mondays I prepared the currency update so you can familiarize with the situation in the markets.

Currency Update

USD: Employment figures for March were solid with 215,000 jobs added, a rise of 0.3% in Average Hourly Earnings, and an increase in Participation Rate to 63.0%. Yellen’s speech on March 29 was dovish; she stressed caution in raising rates in the context of global risks and lower inflation expectations, this followed a dovish FOMC Statement the week prior. Core PCE remained at 1.7% y/y for February. Final GDP for Q4 beat estimates at 1.4% vs 1.0% expected.

EUR: A bearish currency fundamentally, however currently trading neutral following upside from Draghi’s comments at the March meeting. CPI Flash Estimate for March came in as expected for the headline at -0.1% y/y, but beat estimates for the core figure at 1.0% vs expectations of 0.9% and prior of 0.8%. On March 10, the ECB cut the Deposit Rate by from -0.3% to -0.4%, the Main Refinancing Rate from 0.05% to 0.00%, and the Marginal Lending Facility from 0.30% to 0.25%. They also announced a new series of 4 TLTRO’s, and an increase of €20bn per month to the asset purchase programme, now at €80bn per month.

GBP: Fundamentally a slightly bullish currency, however Brexit concerns continued to provide negative sentiment. Manufacturing Production missed estimates at -1.1% for February, the lowest reading since 2014. UK GDP beat estimates at 0.6% for Q4 vs estimates of 0.5%, and 2.1% for 2015, above 1.9% expected. UK Current Account deficit widened to -32b, the largest deficit since records began. CPI for February came in as expected for the Core y/y at 1.2%, but missed for the m/m at 0.4%. Headline inflation also missed at 0.3% y/y vs expectations of 0.4%. March 17 MPC communication saw the vote remain at 0-0-9, reiterating that “it is more likely than not that the bank rate increases over the forecast period”, this saw strength in cable. Jobless Claims beat estimates at -18K vs expectations of -9K, Average Weekly Earnings also came out better than expected, printing at 2.2% vs expected 2.1% and prior 2.0%.

AUD: The RBA statement released April 5 did not add much new information to the AUD story; the currency remains neutral as the RBA remains on hold and are prepared to ease further if necessary. The higher AUD exchange is on the RBA’s radar. A neutral currency fundamentally, however currently seeing bullish sentiment on risk appetite, moves higher in commodities, USD weakness and solid growth in 2015. Employment for February saw only 300 jobs added, below estimates, however 15,900 full time jobs were added and the jobless rate dropped to 5.8%. Q4 GDP was much better than expected at 0.6% q/q vs 0.4% expected, and 3.0% y/y vs 2.5% expected. This positive reading brings into doubt the chances of any RBA cuts during 2016. The March 1 RBA statement was largely a reiteration of the prior statement; low inflation would provide room for easing; reasonable prospects for growth in the economy and low rates are supporting demand; will make a decision on whether market turmoil portends weaker demand. CPI for the fourth quarter beat expectations overall with Trimmed Mean y/y remaining at 2.1%, which is within the Banks’s target of 2-3%.

NZD: Fundamentally a weak currency given the RBNZ’s easing bias, however currently seeing upside for the same reasons as the AUD. GDP for Q4 beat estimates at 0.9% q/q and 2.3% y/y. RBNZ cut rates to 2.25% at the February 10 meeting and maintain a dovish bias. RBNZ Inflation Expectations for Q4 2015 came in at a 22-year low at 1.6%. CPI for Q4 was poor showing deflation of -0.5% for the 3-month period and a rise of only 0.1% throughout all of 2015. This increases chances of further RBNZ cuts. On February 3, the Quarterly Employment Change printed at 0.9% versus the 0.8% consensus, while the Unemployment Rate tumbled to 5.3% smashing expectations of a 0.1% rise to 6.1%, and the lowest since the first quarter of 2009.

CAD: A neutral currency with sentiment in lock-step with WTI. March Unemployment fell to 7.1% from February’s 7.3%. February CPI was at 1.4% y/y and 1.9% for the Core – both lower than expectations. However, for the month, Core CPI rose half a percent. Canada’s economy expanded at an annualised rate of 0.8% in Q4, beating estimates; GDP for 2015 was at 1.2%. January employment declined 5,700 – its second decrease in the last three months, and missing consensus of a 6,000 gain. The jobless rate ticked up to 7.2%, on par with its highest mark since March 2013.

JPY: Fundamentally a weak currency with chances of further easing. Tokyo CPI Ex-Food & Energy for March was at 0.6% y/y, above expectations of 0.5%. The monthly rise was 0.5%. Nationwide CPI Ex-Food & Energy for February rose 0.8% y/y, above expectations of 0.6%. The BoJ measure remained steady at 1.1% y/y. Daily sentiment largely a function of risk sentiment. The BoJ left policy on hold at the March 15 meeting, as expected. Final GDP for Q4 confirms a contraction of -1.1%. The Bank of Japan announced negative interest rates of -0.10% on January 29 but left the QQE program unchanged. The inflation target was pushed back to end 2017 and the Bank remains prepared to ease further if necessary. The BOJ are watching CPI excluding food & energy to gauge underlying inflation trend.

CHF: Fundamentally a weak currency, highly correlated with moves in EUR. CPI beat estimates at 0.2% m/m vs -0.1% expected. Q4 GDP beat estimates at 0.4%. The franc is fundamentally a weak currency given the SNB’s negative interest rates, however it can suddenly rally on safe-haven flows. The SNB regularly recite that the franc is overvalued and they are prepared to intervene to weaken the currency. The franc’s direction is difficult to predict due to regular intervention by the SNB.

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