FX Commentary - April 16, 2018
Over the course of a week markets had allayed concerns on trade tensions with China, only to see geopolitical tensions arise in the Middle East and once again simmer. In both cases, the bark had proven louder than the bite, a seemingly recurring theme with the Trump administration. While trade tensions have yet to be resolved and political conflicts yet to be contained, markets are eager to look past the doomsday scenarios and focus on economic fundamentals and corporate earnings this week.
Encouraged by solid earnings and fading geopolitical tensions, U.S. stocks opened the week to a booming start, pushing the S&P 500 back into positive territory for the year. The same could not be said for the U.S. dollar however, which slipped to its lowest level in three weeks following accusations from President Trump that China and Russia have been practicing currency devaluation, contradicting a recent report from the Treasury Department. Although Trump has proven inconsistent in his remarks surrounding the dollar, markets have taken remarks, such as these, as signals of the administration’s desire for a weaker dollar.
With early data in the week showing strong signs however, the dollar may have a chance to brush off its decline. Retail sales turned positive in March, and industrial production in the same month increased by a greater than expected 0.5%. Housing starts and buildings permits were also encouraging in March, beating estimates. With remarks due from several Federal Reserve members this week, the dollar could see some additional encouragement as well. San Francisco Fed President, John Williams, and Chicago Fed President, Charles Evans, have so far offered confident views on the inflationary outlook.
The Eurozone maintains a light data calendar this week, highlighted by Wednesday’s core inflation reading for the euro area. The Eurozone has experienced a moderation in data surprises recently, evidenced by this Tuesday’s weak ZEW survey which showed economic sentiment at its lowest in 5 years. This may pressure the European Central Bank to err on side of caution during its meeting next week, possibly resulting in a reiteration of data dependency, or even a modification to growth forecasts.
The Bank of Canada maintained its target interest rates as expected this week, communicating a gradual, if not cautious, data dependent tone. In its monetary policy report, the Bank made slightly higher revisions to its 2018 inflation forecasts and expects economic activity to rebound following a slower first quarter. In addition, the Bank noted that “escalating geopolitical and trade conflicts risk undermining the global expansion”. Should these global risks continue materializing and Canada’s economy fail to rebound as expected, markets may consider adjusting interest rate expectations for the year ahead. For now, markets look forward to Canada’s CPI reading for March, which is expected to increase on a yearly basis to 2.4%
This week, the UK sees crucial releases on employment, inflation, and consumption. As political uncertainty has subsided in the UK, the pound should see data playing a more important role in its relative performance. Tuesday’s labour market report was mixed, showing unemployment drop to 4.2%, but average earnings steady at 2.8% and claimant counts jump to 11,600. Consumer prices also came in below expectations, rising only 0.1% in March and reducing the yearly inflation rate to 2.5%--its second successive decline. This annualized inflation reading was the lowest in over 12 months and has led market participants to suggest that the recent Bank of England rate hike may be the sole one for 2018.
China’s first quarter GDP recorded 6.8% growth, in line with market expectations, and above the Chinese government’s target for the year. Resilient growth in China has boded well for its trading partners and can be seen as indicative of continuing momentum in the global economy. Meanwhile, Japan releases its own trade figures this week, along with inflationary readings for March. However, markets may be paying greater attention to a meeting this week between Japanese Prime Minister, Shinzo Abe, and President Trump, in Florida for clues on U.S.-Japanese trade relations and developments on North Korea.
Sources: Bloomberg, Wall Street Journal, Reuters, Barclays, Bank of America, Econoday, 4cast
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