By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
Volatility ripped through the financial markets in the last 2 hours of NY trade on Wednesday. The , which was up more than 250 points turned negative and ended the day down 168 points as Treasury yields shot to a high of 2.95%. The soared in response, driving EUR/USD below 1.23 and to 1.27. Although the were optimistic, the level of anxiety in the market is rising as yields near 3%. According to the Fed minutes, a majority of U.S. policymakers felt that stronger growth increased the chance of future . Since December, a number of Fed officials also raised their growth forecasts with many seeing upside risks from the tax cut that warranted the addition of the word “further” to their assessment of stronger growth. Initially, these positive comments extended the gains for stocks and risk currencies but risk aversion took over, driving everything lower. The-more-than 450 point intraday reversal in the Dow could lead to further weakness in Asia and Europe, which would probably hit crosses the hardest.
For the third consecutive trading day, failed to sustain a move above 1.40. Right before the London open, sterling tested this level but the gains faded quickly as the pair u-turned. It came close to revisiting the level when Bank of England Governor Mark and his colleagues talked about the economy and monetary policy. In their testimony before Parliament, Carney, and noted the reduction in spare capacity, the firming of inflationary pressures, positive global momentum and the tight labor market. Carney left most of the positive assessments to his colleagues, but there’s no doubt that while Brexit is a risk, U.K. policymakers are more hawkish than dovish. Although sterling failed to hold onto its gains, rate hike expectations ticked up slightly to 71% from 67% chance of a in June following the testimony. GBP/USD fell on the back of the U.K. labor market report even though the data wasn’t all that bad – growth held steady at 2.5% and , ticked up to the same level. also fell for the first time in 5 months but rather than appreciate, sterling traders drove the currency lower on the “excuse” that the increased for the first time in 6 months. At 4.4%, the jobless rate is still hovering near a 30-year low so the bigger story should be the impact that stronger wage pressure has on monetary policy. As GBP/USD is driven lower by strength, we prefer to buy sterling vs. , and . No revisions are expected to Thursday’s .
After peaking above 1.25, broke 1.23 Wednesday on the back of broad-based gains. Like the , the latest PMIs fell short of expectations with and activity slowing in the month of February. While it contributed to the downside pressure on the euro, it’s important to realize that this was the first decline in 3 months and comes on the heels of the strongest Eurozone PMI reading since 2006. The EUR/USD did not break 1.23 until the end of the NY trading day. The data shows that the Eurozone economy is still strong and activity is simply easing from sky high levels. Thursday’s report is likely to show a similar retracement and after the strong run, EUR/USD traders took these reports as an excuse to take profits on long positions. Looking ahead, if EUR/USD recaptures 1.23 after IFO, it would be the perfect place to begin a recovery.
The is in focus on Thursday with scheduled for release. USD/CAD has been trending higher for the past few days, hitting 1.2700 in the process. Although it failed to extend its gains beyond this key level, resistance could be breached if retail sales turn negative. Economists are looking for zero growth but according to the , demand weakened significantly toward the end of the year. Like the Eurozone, Canada’s economy isn’t doing terrible but the strength that we saw for most of 2017 began to fade toward the end of the year. Softer retail sales would take USD/CAD to its next resistance level of 1.2725 (the 200-day SMA). Of the commodity currencies, the was the worst performer while the was the best. Lower leading indicators in Australia were offset by stronger yet on a technical basis, the losses added up quickly after AUD/USD broke its 4-day low. NZD/USD, on the other hand, remains surprisingly resilient with .7300 serving as support. were due Wednesday night est and while they’re not extremely market moving, they could set the stage for the on Thursday. Incoming RBNZ Governor Orr also spoke and the only thing he said was a promise to maintain clear and transparent communication.