Why the Dollar has been so strong
US Dollar
In two days, the EUR/USD erased nearly all of the past month’s gains. With
expectations continuing to build up for an extremely strong non-farm payrolls
report, traders are either squaring Euro shorts or buying up dollars in
anticipation of a good number. The latest rally was triggered by comments
from Federal Reserve President Poole who argued that if economic data is
consistently strong over the next few months, then the Fed may have to increase
rates more aggressively. On the housing market, he felt that even though
housing may be flat to slightly down, he doesn’t feel that it puts the economy
in “danger of stalling.†The strong move is particularly questionable given
that Poole is a non-voter.
Judging from the market’s price action, it is quite
clear that traders were looking for a reason to front-run the payrolls report.
We mentioned yesterday that the whisper number is as high as 300k, and if the
number proves to be that strong, the market will quickly be discounting the
possibility of 5.25 percent rates. However aside from jobless claims being
strong, other US data has not been as rosy as we would have liked. Yesterday,
productivity growth was revised from -0.6 percent to -0.5 percent. Even though
the revision was an improvement, it was far weaker than the market’s -0.1
percent forecast. Consumer credit was also up a mere $3.94 billion in January
compared to the market’s $5.0 billion forecast. This follows the weaker home
sales figures that we saw last week as well as disappointing consumer
confidence, personal spending and personal consumption figures.
With little on
the US calendar today, the dollar bullishness in the market is not likely to
dissipate. Fed Chairman Bernanke is scheduled to speak, but the topic is on
community banking and not the economy or monetary policy. Therefore any hope
for a shift in trend will have to be deferred to Thursday, when the trade
balance is due for release. Meanwhile the Bank of Canada increased interest
rates by a quarter of a point to 3.75 percent. However the CAD weakened despite
the move because the Bank of Canada toned down its statement. Citing surprise
that the CAD has strengthened to a 14 year high recently, the BoC said that
“some modest further increase†in interest rates “may be required.†This
compares to their previous statement, which took a harsher stance, saying that
further moderate increases “would be required.†The subtle shift from “would†to
“may†cemented a near term bottom in USD/CAD.
Euro
The Euro saw its value erode as the US dollar strengthened across the board.
German factory orders increased strongly in January, rising by 1.4 percent with
a non-seasonally adjusted year over year growth of 14.3 percent. Exports have
been growing steadily thanks to the weakness of the Euro. This has allowed the
ECB to remain confidently hawkish as the latest move in the Euro suggests that
their most recent interest rate hike has done little to dent economic growth.
ECB council member Garganas was the latest central banker to back up Trichet’s
view that interest rates remain very low and accommodative. It is clear that
for the most part, there is solidarity within the central bank and we are nearly
certain that we will see another interest rate hike next month. Like the US,
the Eurozone economic calendar is very light today. In fact, nothing is due
for release except for comments by ECB member Mersch. This makes it even more
likely that dollar sentiment will continue to sway markets.
British Pound
Positive economic data has helped the British pound hold onto more of its gains
on a percentage basis than the Euro. BRC retail sales rose 0.6 percent in
February compared to 0.2 percent growth the previous month. Although the
improvement is marginal, it is certainly encouraging.
Over the past two weeks,
we have seen mixed to positive data, which leans the Bank of England closer to
neutral than dovish. For the time being, the BoE is not expected to make any
changes to their monetary policy. Their on-hold stance means just one thing
for the EUR/GBP and GBP/USD, which is that the interest rate spread between the
two currencies will be moving further away from the pound’s favor.
Japanese Yen
The dollar continued its aggressive climb against the Japanese Yen. In 3 days,
the Yen has lost nearly all of its past month’s gains. We are seeing a bit of a
decoupling though as the Yen extended its losses against the dollar, but
actually recuperated most of yesterday’s losses against all of the other
currency pairs.
The Bank of Japan is due to announce their monetary policy
decision on Thursday, which means that we have one more night to wait. Although
most analysts expect the BoJ to postpone ending quantitative easing to April,
traders are still holding their breath in anticipation of any surprise moves.
There are a handful of Japanese economic releases due out tonight and like last
night’s machinery orders report, more improvements are expected.
Kathy Lien is the Chief Currency Strategist at
Forex Capital Markets. Kathy is responsible for providing research and analysis
for DailyFX, including technical and fundamental research reports, market
commentaries and trading strategies. A seasoned FX analyst and trader, prior to
joining FXCM, Kathy was an Associate at JPMorgan Chase where she worked in Cross
Markets and Foreign Exchange Trading.