Intraday Market Thoughts Archives

While market grapples with the direction of the US economy and what the ECB plans to do next, the commodity FX bloc is grinding higher. NZD and CAD were the best performers on Thursday while the euro lagged. Traders now brace for a big day of data in Japan.  

Traders were focused on the inflation since of the PCE report but it was consumer spending that stole the spotlight. Core inflation rose 1.5% y/y, as expected but spending was soft at +0.2% vs the +0.4% consensus. USD/JPY fell 30 pips to below the 200-dma to 101.49 on the report but later recovered.  

Barclays dramatically cut its Q2 GDP forecast to 2.9% from 4.0% after the report but like yesterday's GDP report, the driver of the consumer spending miss might have been healthcare spending. The PCE data doesn't itemize but the miss was in services spending which includes healthcare.

The Fed remains optimistic and Bullard pulled a Carney-like move and said markets don't appreciate how close the Fed is to its goals. That caused a minor round of risk aversion in stocks but very little reaction in USD or Treasuries.

The bigger headline move came on an MNI story citing ECB sources saying further interest rate cuts are possible. The kneejerk was lower in EUR/USD down to 1.3576 from 1.3605 but the text of the story was a bit more revealing. It said the ECB will wait 6-9 to assess before taking any action and that 10 bps rate cuts could come instead of QE. A closer read helped EUR/USD to rebound to 1.3617.

With traders watching those news stories it was the loonie and kiwi quietly stealing the show. We've outlined the technical improvements in CAD and now NZD/USD has crossed above the 2014 highs to the best levels since 2011. Be wary of a near-term pullback from overbought conditions but it's tough to envision any real pain ahead.

Looking ahead, there is a major data slate due for Japan starting at 2330 GMT with the employment and CPI reports for May. Look for CPI ex-food and energy to rise 3.4% but also keep an eye on adjustments due to the consumption tax hike. Twenty minutes later it's the retail sales report  and the consensus is for a 2.9% monthly rise in a rebound after the 13.6% drop in April when the tax first hit.

Signs of a slowing economy or inflation could rekindle dormant chatter about further BOJ moves and boost yen crosses.

The US dollar reacted to a sharp downward revision in first quarter GDP Wednesday but will the Fed fret about data that's 3 months old? The New Zealand dollar led the way and closed near a 9-month high Wednesday while the pound and US dollar lagged. The Asia-Pacific calendar is light.  

The market had two looks at the US economy on Wednesday. The Q1 GDP report showed a shocking 2.9% annualized contraction, much worse than the -1.8% consensus. The main reason for the miss was a sharp downward revision in healthcare spending to -1.4% from +9.1.% as the statisticians clearly misunderstood the costs and effects of Obamacare. Alone that shaved 1.1 percentage points from growth. Inventories, trade and the consumer were also drags but that was driven to some extent by weather.

For the market, that report was all that mattered. The economy will now need to grow at a 3.6% clip or better for the rest of the year just to hit 2% growth. The 3% forecast from the Fed at the start of the year is virtually impossible. USD/JPY fell 30 pips and EUR/USD rose by 50.

The other data point on the day was durable goods orders and although the headline was soft the core component, which is the measure of business investment rose 0.7% compared to 0.5% expected.

It underscores that nearer-term data is painting a much better picture of the US economy. The Markit services PMI also rose to the highest in its 8-year history at 61.2 compared to 58.0 expected. Later in the day the market began to reflect the improvement as much of the US dollar decline eroded.

Up next is Thursday's May PCE report. It offers a sense of consumer spending and inflation. Ford said US auto sales have continued to be robust in June and more good news on the near-term economy or a rise in inflation could quickly turn the tables on USD weakness. 

7 days after the FOMC issued its latest statement, AUDUSD short hit its final 0.9440 target for a total gain of +200 pips from the trade opened in April. EURUSD has edged up about half a cent, While Aussie extended its gains vs most currencies. We issued a fresh note on EURUSD with a new monthly chart, highlighting some key cycles, alongside the 2-year trendline.  We also added 2 new trades in EURAUD with 2 related charts following the last 2 trades of the same pair hitting all targets. All the trades and charts are in the Premium Insights. 

Traders are busy watching the World Cup but signs that the US economy is kicking into a higher class continue to emerge. The Swiss franc was the top performer on Tuesday while commodity currencies lagged on a round of risk aversion. Japanese corporate prices and central bank chatter are highlights later.  

On Tuesday US new home sales surged to a 504K annual pace from 425K, far surpassing expectations. Consumer confidence was similarly strong, rising to 85.2 from 82.2. Consider this:

Today new home sales hit the highest since 2008 Today consumer confidence hit the highest since 2008 Monday the Markit manufacturing PMI hit the highest since 2007 JOLTS are the highest since 2007 Core CPI is at the highest since Feb 2013 The signs of growth and inflation have been cast aside, partly because the Fed appears willing to tolerate higher inflation for a period as employment improves. The Fed's Dudley almost said as much on Tuesday as he indicated employment can fall substantially before inflation becomes a problem.

But from here there is nowhere for the Fed to go expect toward the hawkish side of the scale. As they do the US dollar will climb.

Aside from the current pre-occupation with the World Cup, the stock market made a tough-to-explain turnaround Tuesday. Stocks rallied on the data but late in the day wilted and the S&P 500 closed almost 20 points below the highs. One of the risks is another set of political primaries later today. If the Tea Party continues the momentum after the Cantor defeat, markets could get jittery.

Other risks in the hours ahead are the Japanese corporate service price index at 2350 GMT, the Fed's Williams at 2230 GMT and the RBA's Williams at 0300 GMT.  

The Canadian dollar is the worst-performing major currency in 2014 but it might not be for long. The loonie was the top performer last week and vied with AUD as the best-performer Monday. The calendar is light in Asia but UK house price numbers will garner some attention.

The Canadian dollar has been as hapless as the Canadian football team this year, sliding to a 1.25% loss versus USD but the winds of change are blowing (at least on the currency field). Canadian CPI jumped Friday to 2.3% y/y in May versus 2.0% expected and retail sales rose the most in 11-months. The gains in both reports were broad-based and certain to catch the BOC's attention.

In addition, a survey from Poloz's former employer – Export Development Canada – showed an impressive swing in optimism. That's key because the two pillars the BOC expects to build a recovery on are investment and exports.

USD/CAD has broken down falling Monday as low as 1.0717 and closing below the 200-day moving average. CAD/JPY is another mouth-watering Canadian dollar charts as it closed above the April high on Monday. If the stars continue to align the loonie could end the year on top.

The US dollar was sleepy to start the week despite some better signs. The Markit flash manufacturing survey rose to the highest since 2010 at 57.5 compared to 56.5 expected. The dollar barely budged on the report but it might be a chance to catch a trade in a sleepy market. The Fed won't stay dovish forever.

Commitments of Traders

• EUR -62K vs -57K prior
• JPY -68K vs -82K prior
• GBP +53K vs +36K prior
• AUD +27K vs +28K prior
• CAD -21K vs -24K prior
• CHF -4K vs -3K prior
• NZD +4K vs +17K prior