Welcome to another edition of Forex Friday, a weekly report in which we discuss selected currency themes mainly from a macro viewpoint, but we also throw in a pinch of technical analysis here and there.
In this week’s edition, we discuss the dollar, pound, yen, gold, and look forward to the key events coming up.
Risk off: The currency markets have been showing affection to the dollar and distain to emerging market currencies so far in the session. This comes as US index futures have tumbled with Nasdaq 100 futures off by about 1.3% by mid-morning European session, with the sector recently providing poor earnings results and laying off workers in a stark reversal from the boom during and immediately after the pandemic. European shares also sold off. Sentiment has been hurt by realisation that the Fed might go further in hiking interest rates than previously expected, after last Friday’s jobs report was accompanied by hawkish commentary from several Fed officials. In addition, it is also possible that investors are concerned about valuations again after the sizeable recovery from the October lows. The UK’s FTSE has even gone on to hit a record high, despite concerns about the economy. Speaking of which…
GBP/USD briefly broke the 1.21 handle after the latest growth data out of UK data disappointed expectations. Monthly GDP shows a fall of 0.5% when -0.3% was expected, while quarter-on-quarter GDP was flat in Q4 with output in Q3 being revised lower to -0.3% from -0.2% reported previously. The flat growth reading means the UK technically avoided a recession. But let’s face it, it feels like we have been in a recession for a while now. The GBP/USD could drop towards 1.20 again if today’s US data beats expectations.
Looking ahead, we have the closely-watched US sentiment surveys from the University of Michigan at 15:500 GMT, followed by CPI in the week ahead. The UoM’s consumer sentiment and inflation expectations surveys have been closely monitored in recent months, as investors have tried to front-run the Fed in anticipating policy changes. The data should move the dollar, gold and stock markets sharply if we see significant deviation from expectations. US consumer inflation data will be published on Tuesday of next week. Inflation has been falling and the Fed has responded by slowing the pace of its rate hikes to 25 basis points. It looked like the Fed would hike rates one more time, in March, before pausing. But after a much stronger jobs report, the probability of two more hikes has shot higher. If CPI comes in hotter, then this could further boost those expectations.
Bank of Japan: Kazuo Ueda is set to take over as the next BOJ Governor. There’s not much known about his policy leanings, but FX traders bought the yen on the back of the news, presumably because the market sees him as being more hawkish than the man who was reportedly the favourite: Masayoshi Amamiya. The latter had drafted many of the BOJ’s monetary easing tools. So, if he were to succeed the outgoing Kuroda as next central bank governor, the assumption was that monetary policy would remain very loose in Japan. However, that thinking has now changed. Interestingly, Kazuo Ueda, in 2016, had criticised Abenomics and the BoJ’s bond purchases. Obviously, that was a long time ago, but markets are betting he won’t be anything like Kuroda.
Precious metals remained out of favour with gold hovering around $1860 and silver just above $22.00 as bond yields pushed higher and the dollar remained supported. In recent days, the dollar has come back to life, and has been supported on the dips, in response to the Fed’s hawkish comments and mixed data.
Crude oil bucked the general bearish trend, as WTI rallied +3% after Russia said it wants to voluntarily cut oil production by 500K barrels per day in March. The rallying price of oil helped to keep the Norwegian Krona and Canadian dollar mildly supported.