The late-Friday speech from Yellen was notable because she shifted the focus back to jobs and away from wage inflation. The best performers last week were JPY and CHF while AUD lagged. We also look at the weekend news and note that CFTC positioning shows euro shorts at a record.
Yellen delivered a speech late on Friday and the unusual time left less time (and perhaps energy) for market participants to analyse the text. The main headlines were that a rate rise may well be warranted later this year but the bulk of the speech was a call for waiting for more data.
Specifically, Yellen continues to be focused on jobs even though market participants are keyed in on inflation and wage growth. “An important factor working to increase my confidence in the inflation outlook will be continued improvement in the labor market,” she said.
Yellen followed that up by saying a significant pickup in readings on core inflation is not a precondition for an initial hike and that wage inflation is often skewed. The US dollar hardly reacted to the speech and early-week moves are nil.
The main weekend event was the Swiss summit on Iran's nuclear program. The self-imposed deadline for a deal isn't until Tuesday but negotiators appear to be making progress and Russia said there was a much better than 50% chance of a deal. Oil and CAD will certainly be affected by the outcome.
Comments from PBOC leader Zhou could be good news for commodity currencies and risk assets. He said China needs to be more vigilant about deflation and that inflation is slowing a “little too quick.” That could be setting the stage for more hikes but the signals are mixed. Just a week earlier Zhou warned that excessively loose monetary policy could but structural reforms at risk.
Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +. EUR -221K vs -194K prior JPY -46K vs -48K prior GBP -39K vs -38K prior AUD -28K vs -29K prior CAD -33K vs -33K prior CHF -4K vs +2K prior
Ashraf wrote about the extreme in euro shorts on Friday. It's often a contrarian indicator but we note that euro shorts rose after the euro bounced to 1.10. That may show a high level of confidence and aggression from shorts that's usually not evident at a turning point.
|Fed's Stanley Fischer speech|
|Mar 30 23:15|
Excessive speculative longs and shorts are often used by traders as contrarian sign, but deciding upon what determines “excessive” is debatable. Full charts & analysis.
The US dollar stormed back on Thursday minutes after the euro hit a three week high. The dollar was easily the best performer in US trading but CAD and JPY were tops on the day. Japanese CPI, employment and retail sales are due later. A new set of Premium trades will be issued tomorrow morning ahead of the US GDP revision and Yellen's speech after today's wild-fluctuations day, which looked rather similar to last Thursday in terms of FX swings.
The US dollar rally wasn't driven by a single clear factor but a few elements along with a dose of quarter-end led to a sharp rally.
- Initial jobless claims at 282K compared to 290K exp - The Markit March services PMI at 58.6 vs 57.0 exp - The Fed's Lockhart continuing to talk about hikes in June, July or September - A second consecutive soft Treasury auction
Alone, none of those factors should have given the dollar a big lift but as it got some momentum the dollar gains accelerated. EUR/USD touched as high as 1.1052, narrowly breaking the recent highs, and then tumbling as low as 1.0855.
The dollar made similar gains against the pound and also posted a solid rally against JPY and the commodity currencies in New York trading. The dollar rebound after a few days of declines underscores the power of a long-term trend and the danger in trading against it.
Geopolitics are also a focus with the loonie surging on the back of an oil rally as Saudi warplanes bomb Yemen. The kneejerk higher in crude ebbed later, in part because Middle East countries aside from Yemen are showing rare signs of solidarity and that diminishes the chance of any kind of repeat of an Arab Spring.
The Canadian dollar slid slightly on comments from Poloz. He said first quarter growth will be lower than BOC projections but, importantly, he qualified that by saying the January rate cut has bought time for evaluation – a sign that near-term rate cuts are unlikely.
Up next the focus shifts to Japan with February CPI and jobs data due at 2330 GMT. As Ashraf outlined, the BOJ has moved away from rhetoric suggesting a sagging economy and even though inflation is low, policymakers believe it's transitory. CPI is expected up 2.1% y/y ex-food and energy but even a soft reading may be brushed aside. At 2350 GMT, the focus shifts to retail sales which are expected up 0.9% in February. Signs of better inflation or sales could add to tentative arguments for yen longs.
|Tokyo CPI Ex-Fresh Food (MAR) (y/y)|
|2.2%||2.2%||2.2%||Mar 26 23:30|
|National CPI Ex Food, Energy (FEB) (y/y)|
|2%||2.1%||2.1%||Mar 26 23:30|
|National CPI Ex-Fresh Food (FEB) (y/y)|
|2.0%||2.1%||2.2%||Mar 26 23:30|
|National CPI (FEB) (y/y)|
|2.2%||2.3%||2.4%||Mar 26 23:30|
|Tokyo CPI (MAR) (y/y)|
|2.3%||2.3%||2.3%||Mar 26 23:30|
|Tokyo CPI Ex Food, Energy (MAR) (y/y)|
|1.7%||1.7%||1.7%||Mar 26 23:30|
|Retail Trade s.a (FEB) (m/m)|
|-1.3%||Mar 26 23:50|
|Retail Trade (FEB) (y/y)|
|-1.5%||-2.0%||Mar 26 23:50|
|GDP Annualized (Q4)|
|2.4%||5.0%||Mar 27 12:30|
|GDP Price Index (Q4)|
|0.1%||1.4%||Mar 27 12:30|
|Fed's Stanley Fischer speech|
|Mar 27 10:30|
|Fed's Yellen Speech|
|Mar 27 19:45|
|Flash Services PMI|
|58.6||57.2||57.1||Mar 26 13:45|
|282K||291K||291K||Mar 26 12:30|
The only thing the stock market likes less than the prospect of a rate hike is the prospect of a rate hike in a softer economy. The Nasdaq posted its worst day in 11 months Wednesday following a downgrade of semiconductor maker AMD as the euro led and the kiwi lagged. The Asia-Pacific calendar is quiet. EURGBP Premium trade is open ahead of tomorrow's UK retail sales.
Atlanta Fed President Lockhart said it's quite likely that rates will rise in September or sooner. He said the FOMC would need to be “really disappointed” in the economic data to wait longer with something close to an economic shock the only way hikes could be derailed beyond year end.
We mulled the prospect of the Fed waiting beyond year end yesterday but that sounds less likely in light of Lockhart's comments. It seems even with soft economic data, the Fed wants to get away from zero interest rates.
And soft data was what came on Wednesday as core Feb durable goods orders fell 1.4% compared to +0.3% expected. It was compounded by a revision in the January reading to -0.1% from +0.6%. It makes six consecutive months of declines in the core capex reading which is a prominent leading indicator.
The stock market groaned and gave up all the post-FOMC gains. The S&P 500 was down 1.5% and Nasdaq down 2.4% in the largest loss since April 10, 2014.
The US dollar generally strengthened although gains against the euro and yen were minimal after the comments and data. One factor that points to repositioning rather than true fear is the upcoming end of the quarter/fiscal year. That bonds sold off alongside stocks and that FX was relatively unshaken argues for calm but there is definitely apprehension about soft Q1 earnings due to the US dollar and that may continue to weigh.
Geopolitics are also back on the agenda. Oil brushed off another high inventory report and instead focused on Yemen where rebels chased the President from the Southern capital of Aden and looters ransacked the Presidential compound. There is talk of an increasing military buildup along the border with Saudi Arabia and oil prices rose more than 3%.
The market will have a chance to digest the latest moves with the schedule quiet in Asian trading.
|Retail Sales (FEB) (m/m)|
|0.4%||-0.3%||Mar 26 9:30|
|Retail Sales ex-Fuel (FEB) (m/m)|
|0.4%||-0.7%||Mar 26 9:30|
|Retail Sales (FEB) (y/y)|
|4.7%||5.4%||Mar 26 9:30|
|Retail Sales ex-Fuel (FEB) (y/y)|
|4.2%||4.8%||Mar 26 9:30|
|Core Durable Goods Orders (m/m)|
|-0.4%||0.3%||0.0%||Mar 25 12:30|
Will the plunge in JPY the last 2 1/2 years help restore Japan's trade balance into surplus? Aside from USDJPY nearing its 55-day moving average for the first time in four weeks, we observe that net long contracts in JPY vs USD have broken above their 3-year down channel. Full charts & analysis.