The US dollar surged Tuesday on upbeat economic data. USD/JPY was the top performer and the pair broke out to an 8-year high. We take a closer look at three elements that may keep the dollar in demand. The remaining GBPUSD long in the Premium trades was stopped out today. Ashraf is long USDCAD and USDJPY for his personal account.
1) Data dependent
It's all about economic data and it doesn't take much to satiate the dollar bulls. The rally began last week on better housing starts data and more research suggesting the Q1 slowdown was due to various skews. At its core, the foundation of the dollar rally is that US growth is accelerating. Every data point matters.
On Tuesday, as Ashraf detailed, the durable goods orders report was the main catalyst but new home sales, consumer confidence and the Richmond Fed also helped.
2) Hawk talk
The Fed likely breathed a sign of relief over the past two weeks as economic data began to improve. They stuck to the belief that soft economic reports weren't a signal on the underlying economy and stayed patient. The next step will be to ramp up the hawkish rhetoric in order to make the market believe that a hike is possible at any meeting.
3) Bond yields must move
This is the final piece of the puzzle but it's not straight-forward. Treasury yields weren't US dollar supportive on Tuesday but could be a catalyst in the days ahead. There was chatter that month-end buying driving down yields.
In the past month, the retracement in EUR/USD was precipitated by rising yields but it was disorderly and led by Bunds. Ideally, Treasury spreads over Bunds will expand in a more-steady fashion in the coming days and that will underpin the dollar.
|Durable Goods Orders (APR)|
|-0.5%||-0.5%||5.1%||May 26 12:30|
|Durables Ex Transportation (APR)|
|0.5%||0.3%||0.6%||May 26 12:30|
|New Home Sales (APR) (m/m)|
|6.8%||5.0%||-10.0%||May 26 14:00|
|New Home Sales (APR)|
|517K||505K||484K||May 26 14:00|
|CB Consumer Confidence (MAY)|
|95.4||95.0||94.3||May 26 14:00|
|Richmond Fed Manufacturing Index (MAY)|
|1||0||-3||May 26 14:00|
If Friday's release of US April CPI showing core inflation at an unexpected two-year high was an aberration, then today's quadruple upside surprise in US data was no exception. Full charts & analysis here.
The week begins with a holiday and the United States, Hong Kong, South Korea and parts of Europe so trading will be thin. The long weekend may have let Fischer slip some important comments in under the radar at a central banking conference in Portugal.
“It's sort of ironic that at the present we have an output target and we have an inflation target, which are supposed to be conflicting, but we're more or less there on the output target,” he said. “We are not there on the inflation target, so that we have to put in a lot more steam.”
Yellen has generally been concerned with improving employment and gaining confidence in 2% or better growth with a secondary focus on inflation. If Fischer believes the economy is at full capacity on output, it shows he believes hikes could be coming sooner.
For her part, Yellen was moderately upbeat in her speech Friday and brushed aside soft Q1 data once again.
Other news from the central bank forum included more prodding for structural reforms from Draghi while Kuroda reiterated the BOJ would reach its inflation target around the first have of FY 2016.
Looking ahead, today's Asia-Pacific calendar includes April Japanese trade balance at 2350 GMT. A deficit of 351.1B yen is expected.
Commitments of Traders
Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.
EUR -168K vs -179K prior
JPY -22K vs -23.5K prior
GBP -23K vs -31K prior
AUD +7K vs +4.5K prior
CAD +4K vs -4K prior
CHF +9K vs +10.5K priorGiven the renewed slump in the euro, that was probably a short term 'bottom' in net shorts. If you're a USD/CAD long, the report is good news. It shows a balanced market before the latest rally in the pair. If oil sinks, the pair could have plenty of upside.
|FOMC's Mester speech|
|May 25 16:00|
|Fed's Stanley Fischer speech|
|May 25 16:45|
|Adjusted Merchandise Trade Balance (MAR)|
|¥3.3B||May 24 23:50|
|Merchandise Trade Balance Total (MAR)|
|¥-318.9B||¥229.3B||May 24 23:50|
If the Yellen-Fed had a single refrain this year it would be data dependency but at some point policymakers need to look at the numbers and decide. The pound was the top performer Thursday while USD and CAD lagged. The Fed's Williams and BOJ decision are due later. Both of our adjusted EURUSD and GBPUSD neared their final targeta as was confirmed in this week's Premium ideas and charts. EURGBP was stopped out.
Data dependency is more of a question than an answer. Since the Fed has hammered home the point about waiting for good news to hike, the numbers have been almost uniformly soft. It was underscored once again on Thursday with the Philly Fed at 6.7 compared to 8.0 expected, the Markit PMI at a 14-month low, existing homes sales at 5.04m vs 5.23m expected and initial jobless claims fractionally soft.
The US dollar shrugged off the numbers and only took a small step back after 3 days of strong gains but that could change if Yellen indicates some uneasiness at a speech on Friday. If the Fed wants to be data dependent, at some officials have to accept the data for what it is rather than reaching for excuses.
If Yellen indicates less confidence in the outlook the dollar will slide but she's also likely to be careful not to raise alarm bells. Either way, the chances of a September rate fall with every soft economic report.
One person who will almost assuredly brush off the economic data is the Fed's Williams in a speech at 2300 GMT. His San Francisco Fed authored the latest report question Q1 seasonal adjustments. That rhetoric has gone a long way toward the USD bounce this week and don't expect him to back down. In any case, the speech may be a bust because the title indicates it will focus on financial reform.
Up later is the BOJ decision. There is no set time but it's usually out at 0230-0330 GMT. There virtually zero chance of a change in rates or QE but there was chatter on Wednesday about upgrading the economic outlook and that's something that will severely diminish the chance of further QE this year and boost the yen.
|Markit Manufacturing PMI (MAY) [P]|
|53.8||54.5||54.1||May 21 13:45|
|Markit Manufacturing PMI (MAY) [P]|
|54.5||54.1||May 22 13:45|
|FOMC's Williams speech|
|May 21 23:00|
|Initial Jobless Claims (MAY 15)|
|274K||271K||264K||May 21 12:30|
|Continuing Jobless Claims (MAY 8)|
|2.211M||2.231M||2.223M||May 21 12:30|
|Philadelphia Fed Manufacturing Survey (MAY)|
|6.7||8.0||7.5||May 21 14:00|