- Mixed, Fed says discount rate hike not a policy change, CPI rose less than expected
- Lower, Nikkei declines in reaction to surprise Fed rate hike
- Higher, manufacturing PMI continues to expand, services PMI growth slows
- Lower, Telegraph warns UK vulnerable to worse deficit crisis than Greece, retail sales decline
- AUD & CAD higher, hawkish RBA, Canada's retail sales beat expectation
Overview
The USD traded at a nine-month high in reaction to the Fed's surprise decision to hike the discount rate 25bps late Thursday afternoon. USD gains were limited by a statement from the Fed that the discount rate hike was mainly technical and did not signal tightening of monetary policy. The Fed's Lockhart said that markets belief in a high probability of a rate hike this year is overblown. Fed Governor Duke said the rate hike is not a signal of a policy change. GBP continued to underperform pressured by concern about UK deficits and in reaction to report of weaker than expected retail sales. EU economic data was mixed with manufacturing PMI showing continued expansion and service PMI growth slowing. AUD traded higher supported by hawkish comments from the RBA Governor Stevens. Stevens said that rates are still 50 to 100bps below average. CAD edged higher supported by report of better than expected Canadian LEI. The Fed's Dudley says US economic outlook is improving and capital markets are generally open for business, he expects the recovery to continue but at a slower rate than the second half of 2009. Dudley went on to say it's too early to pop the champagne corks on the economy. US CPI came in slightly below expectations with core CPI declining by 0.1%. Subdued US inflation reduces the risk of an imminent tightening of policy by the Fed. The USD drifted lower after the CPI release.
Today's US data:
February CPI rose by 0.2%, a reading it 0.3% was expected, core CPI declined by -0.1%.
Upcoming US data:
Next week's US economic calendar includes the February 23rd release of December Case Shiller Home Price Index expected at -3.8% compared to -5.3% last month. February consumer confidence will also be released on February 23rd expected at 56 compared to 55.9 last month. On February 24th January new home sales will be released expected at 360k compared to 342k last month. On February 25th January durable goods will be released expected at 1.5% compared to 1% last month along with initial jobless claims for the week ending 02/20 expected at 460k compared to 473k last week. On February 26th Q4 preliminary GDP will be released expected at 5.5% compared to 5.7% in the original report. February Chicago PMI and final Michigan sentiment will also be released on February 26th. The PMI is expected at 60 compared to 61.5 last month and Michigan consumer sentiment is expected at 74 compared to 73.7 last month. Finally on February 26th, January existing home sales will be released expected at 550k compared to 545k last month.
JPY
JPY traded lower pressured by the Fed's surprise 25bps discount rate hike late Thursday and in response to spike in risk aversion as the Nikkei closed 212 points lower. JPY downside was limited by a statement from the Fed that the discount rate hike was directed at normalization of monetary policy and does not signal an imminent tightening of policy is coming. Japan's finance minister said that the US discount rate hike was not a negative for Japan's economy because the JPY weakened in reaction to the rate hike. The BOJ elected to hold monetary policy steady and not expand quantitative ease at Wednesday's policy meeting. The BOJ governor specifically called on the Japanese government to respect the BOJ's independence. This pushback by the BOJ sparked demand for the JPY. In its policy statement the BOJ said that the economy is improving but domestic demand lacks momentum. The BOJ expects the pace of the Japanese recovery to remain moderate and pledged to keep monetary conditions accommodative. JPY price direction will continue to track risk sentiment and news in regard to the EU debt crisis.
Next week's Japanese economic calendar includes the February 24th release of the January trade balance expected at ¥545bln compared to ¥-40bln last month. On February 26th January CPI will be released expected at -0.2% compared to -0.5% last month along with January industrial output, retail sales, housing starts and construction orders. Industrial output is expected at 2.2% compared to 0.7% last month. Retail sales are expected to fall by 1.2% compared to 0.2% Last month. Housing starts are expected to rise by 3.3% compared to 2.5% last month and construction spending is expected to rise by 0.6% compared to 24.5% last month.
Key technical levels to watch in USD/JPY include support at 90.14 the February 17th low with resistance at 92.95.
EUR
EUR traded at a nine-month low versus the USD initially pressured by Thursday's surprise Fed discount rate hike. EUR downside was limited by a statement from the Fed that the discount rate hike was not an indication of policy direction. Fed officials indicate that a tightening of monetary policy is still a long way off. EUR downside was also limited by report that EU manufacturing PMI continues to expand. EU February manufacturing PMI rose to 54.1 from 52.4. Manufacturing PMI in Germany grew at its fastest pace since June 2007. The expansion of EU manufacturing was partly offset by report that EU services PMI growth slowed. EU February services PMI dropped to 52 from 52.5 last month. The EU reported that its current account balance improved to 1.9bln from -0.5bln last month. EUR was also supported by gains in cross trade to be GBP with GBP pressured by report of much weaker than expected UK retail sales and ongoing concern about the UK debt crisis.
Next week's EU economic calendar includes the February 23rd release of German IFO expected at 92 compared to 91.2 last month. On February 25th EU business climate will be released expected at 98 compared to 97.1 last month. On February 26th EU January CPI will be released expected at 1.2% compared to 1.1% last month.
The technical outlook for the EUR is negative but the EUR is ripe for a short covering rebound due to oversold technical conditions. Expect EUR support at 1.3454 the February 19th low with resistance at 1.3620.
GBP
GBP traded lower pressured by concern about the UK budget deficit and in reaction to the report of weaker than expected UK retail sales. The UK Telegraph reported Friday that the UK is vulnerable to a worse deficit crisis to increase. Thursday the UK reported that the government posted its first budget deficit for January since 1993 with January public-sector borrowing reported at 4.3bln. The Telegraph report and the January deficit revive concern about funding of the UK deficit and the risk that if the UK does not take action to reduce the deficit the UK's AAA debt rating may be cut. UK January retail sales posted an unexpected 1.8% decline, 0.3% rise was expected. The decline in the UK retail sales generates concern about the strength of the UK recovery and the report may increase pressure on the BOE to take further action to boost the economy and expand quantitative ease. GBP was also pressured by report that the BOE's Barker plans to step down at the end of her term on May 31st. Barker's departure from the BOE will leave a temporary vacancy on the policy board and investors will be closely monitoring whether Barker is replaced by a hawk or dove. GBP remains vulnerable to concern about UK debt, economic outlook and possibility of an expansion of the BOE's quantitative ease.
Next week's UK economic calendar includes the February 26th release of Q4 GDP expected at 0.2% compared to 0.1% in the prior report.
The technical outlook for GBP is negative as GBP trades below 1.5500. Expect near-term support at 1.5345 the February 19th low with resistance at 1.5683 the February 18th high.
CAD
CAD traded mixed initially pressured by a spike in risk aversion as equities and commodities decline in reaction to the Fed's surprise discount rate hike late Thursday. The Fed said that the discount rate hike was not a signal of a tightening of monetary policy and commodity prices and stocks rebounded boosting demand for the CAD. Canada's January LEI came in slightly weaker than expected at 0.9%, a 1% rise was expected. Retail sales came in higher than expected reported to have risen by 0.4% the trade was looking for a 0.3% rise. CAD traded higher after the release of Canada's LEI. CAD traded higher Thursday supported by report of higher than expected Canadian CPI. Canada's January CPI rose by 0.3% with the annual inflation rate at 1.9%. The annual inflation rate jumped close to the 2% BOC inflation target. Although one month's data is unlikely to change the outlook for steady BOC the BOC has tied its pledge to maintain low yields through June 2010 long as inflation remains in check. The CPI report in today's better than expected retail sales are positive for the CAD. CAD will continue to track risk sentiment and the direction of crude.
No major economic data is due for release next week from Canada.
The technical outlook for CAD is mixed to positive as USD/CAD trades below 1.0500. Look for near-term support at 1.0380 with resistance at 1.0580 the February 12th high.
AUD
AUD traded higher supported by hawkish rhetoric from RBA Governor Stevens and in reaction to the Fed statement that Thursday's discount rate hike does not signal a policy change. Governor Stevens said that interest rates are still 50 to 100bps below average and that future policy changes will be made if the economy improves as expected. Stevens went on to say that the strength of AUD helps to curb inflation and he sees risk of overheating in India and China. Thursday, RBA Deputy Governor Lowe said that the outlook for the Australian economy is positive and he expects interest rates return to more normal levels. Lowes' comments follow Tuesday's release of the RBA minutes which suggest that the RBA is considering future rate hikes. RBA watcher McCrann said that he expects the RBA to hike interest rates 200 basis points this year with a 25 bps rate hike expected in March. AUD should remain well supported on breaks by RBA rate hike speculation and improving outlook for the global recovery.
Next week's Australian economic calendar includes February 22nd release of January new car sales expected at 4% compared to 3.3% last month. On February 24th Q4 labor costs will be released expected unchanged at 0.7%. On February 25 of Q4 capital expenditures will be released expected at -3.9% compared to 5% last month. On February 26th January private sector credit will be released expected unchanged at 0.3%.
The technical outlook for the AUD is mixed as the AUD trades below 9000. Expect AUD support at 8848 the February 15th low with resistance at 9093 the January 22nd high.
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