Is USD Past Its Prime?

Is USD Past Its Prime?

Daily FX Market Roundup February 19, 2019

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

Investors are selling US dollars ahead of Wednesday’s FOMC minutes. This move should not be a surprise to our readers as we talked about how the greenback is past its prime The economy is slowing and two of the most important measures for the Fed (retail sales and CPI) retreated further last week. While equity market traders were happy that another government shutdown was averted, the deal in Washington failed to have any meaningful impact on the dollar. No one expects Wednesday’s Fed minutes to help the dollar because when the central bank last met, they made it very clear that there will be no rate hikes anytime soon. They had been talking about being patient for weeks but made it official last month by removing the reference to further gradual rate increases from their monetary policy statement. This is a big shift for a central bank that just raised interest rates in December. According to the FOMC statement, they said that in light of global economic and financial developments and muted inflation pressures, they would be patient as they determine what future adjustments to interest rates would be appropriate. They also removed the balance-of-risk assessment from the statement. In In response, EUR/USD soared to 1.15 as USD/JPY broke below 109. We can’t expect these same levels to be tested Wednesday but the dollar should fall as the Fed minutes remind us that there is no rate hike in the foreseeable future.

Tuesday’s best-performing currency was sterling, which jumped more than 1% against the greenback ahead of Wednesday’s meeting between May and Juncker. The strength of sterling throughout the Brexit crisis has astounded us and Tuesday was no different. Although the European Commission continues to say they will not accept a time limit to the backstop, investors remain hopeful that a deal will be reached or an extension requested before the March 29 deadline. Juncker expects the talks to be friendly but the EU has been firm on denying changes to the withdrawal agreement and it’s wishful thinking to assume he will budge. The EU’s strategy from day 1 is to run down the clock and force the government to accept the current deal or hold a second referendum. UK data was marginally negatively for the pound, which sold off initially but recovered quickly. Jobless claims increased but less than the previous month and while average weekly earnings held steady instead of rising like economists hoped, excluding bonuses, November wage growth was revised slightly upwards. Fundamentally, the UK economy is weak and Brexit uncertainty persists but technically, GBP/USD is exceptionally strong, especially after Tuesday’s move, which took the pair above all major moving averages. Sentiment is certainly on the side of sterling bulls but if Wednesday’s talks between May and Juncker end with no concessions from the EU, we could see GBP/USD slide back below 1.30 quickly.

Investors also bought euros but the rally was modest compared to the move in GBP. While the Eurozone has been plagued by softer data including Tuesday morning’s German ZEW survey, which fell to its lowest level since December 2014 and the EZ’s current account balance, which was the weakest in 2 years, the expectation component of the German ZEW rebounded for the fourth straight month. As a measure of investor sentiment, these upticks suggest that there could be light at the end of the tunnel. The decline in US 10-year yields is finally outpacing the decline in Germany yields but the two main reasons for the euro’s gains is a weaker dollar and improved risk appetite. US stocks hit a fresh year-to-date high Tuesday lifting all the high-beta currencies. The US Commerce department completed its confidential report on the auto industry over the weekend and no news is good news for now as President Trump hasn’t made any comments on car tariffs.

Last but certainly not least, it is becoming more and more likely that President Trump will extend the March 1 deadline for China trade talks. With the vice premier back in Washington, Trump continues to say the talks are going well. He added Tuesday that March 1 is “not a magical date, a lot of things can happen.” President Trump is clearly open to extending the deadline and he even said last week that the tariffs could be removed if a deal is done. While we are skeptical until an agreement is signed, sealed and delivered, this language is a move in the right direction. AUD and NZD are up on the back of trade-talk optimism and another rise in dairy prices. Unfortunately, New Zealand producer prices were due for release Tuesday afternoon and the risk was to the downside after the softer-than-expected CPI report.