Commodity Currencies Crash As U.S. Dollar Soars

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

For the fourth day this week, has been unable to muster a meaningful rally. The markets shrugged off President Trump’s nomination of Larry Kudlow as Chief Economic Advisor and Director of the National Economic Council. Kudlow is a popular financial media personality and while his appointment brought some relief to equities by preventing another day of weakness, the impact on USD/JPY was limited to maintaining the pair’s 105.50 support level. This morning’s U.S. economic reports were mostly better than expected with ticking lower and the jumping to to its strongest level in 5 months. Although slowed, the pullback was only slightly worse than anticipated. With the Federal Reserve gearing up to raise next week, USD/JPY’s weakness could be limited despite the Bank of Japan’s positive outlook. According to Bank of Japan Governor who spoke last night, Japan is basically at full employment with inflation rising steadily over the past 2 years. Friday’s U.S. , and index are not expected to have a significant impact on the as investors shift their focus to 3 central bank rate decisions.

The commodity currencies were on the move today with bursting above 1.30 to trade at its highest level since July 2017. Another decline in Canadian existing home sales reinforced Bank of Canada Govenor ’s dovish views while President ’s comment about trade with Canada revived NAFTA concerns. Stops were also triggered once USD/CAD breached 1.30 with the pair extending its gains above 1.3060. On a technical basis, if these gains are sustained, USD/CAD could climb as high as 1.32. The traded lower for the second day in a row on the back of softer-than-expected . Economists hoped that stronger and would lift growth in the fourth quarter but instead, the economy expanded by 0.6%, the same pace as Q3. With that in mind, NZD was still the strongest commodity currency ahead of Thursday evening’s numbers. The rivaled the Canadian dollar in its weakness Thursday but unlike the loonie, there was no specific catalyst outside of lower , and prices. is trading at its lowest level in 4 days and appears poised for a move below 78 cents.

Meanwhile the European Central Bank’s cautious outlook continues to weigh on the euro, causing the single currency to underperform the , and . No Eurozone economic reports were released today and while lower highs and lower lows tracing back to the February 16 peak signal continued weakness, the EUR/USD has quite a bit of support between 1.2275 and 1.2300. The uptrend will only be broken after a sustained moved below 1.2270. Like the euro, the traded lower today following the central bank’s .

In contrast, held steady today. There was no U.K. data and the only updates on Brexit were the ones about Unilever (LON:) leaving the U.K. (although they denied that it was Brexit related). Brexit Secretary David Davis also talked about their willingness to live with a shorter transition period. Davis is headed to Brussels this weekend and investors are hoping this means negotiators are close to a deal as he has avoided the trip in recent months. He will be meeting with EU negotiator Barnier on Monday.

The Swiss National Bank left unchanged but reiterated their negative rate and intervention pledge. While they believe that the economic situation is significantly better now than early last year, the “big risk” of a trade war and “highly valued” exchange rate leaves them committed to dovish policy. The SNB will most likely be one of the last central banks to raise interest rates but on a day-to-day basis, the performance of the Franc is rarely driven by SNB policy.