Currency Update 22nd of February

Our trade call is to sell Cable. Key themes from last week included a beat on US CPI and a rebound in global equities despite failure of oil-producing nations to agree on output controls. There was no crucial economic data out during the Asian session. The Aussie rallied as iron ore and copper futures opened higher and rallied during the session. The Nikkei and Shanghai Composite both also rallied, helping risk appetite; AUDJPY was up 80 pips on the session. Cable gapped 140 pips lower at the open due to London Mayor, Boris Johnson, supporting the campaign to leave the EU. Sterling is likely to remain pressured heading into the June 23 referendum – especially if polls show fair chance of Brexit. Today the main economic events are PMIs from Europe. FX pairs may generally trade sideways given it’s Monday. Start your week off on the right foot by reading my currency update below.

Currency Update:

USD: CPI for January beat estimates with Core CPI y/y ticking up to 2.2% and rising 0.3% for the month. Headline CPI was at 1.4% y/y. Minutes from the January meeting struck a cautious tone, noting increased uncertainty regarding inflation and potential financial risks. NFP for Jan saw 151,000 jobs added, versus expectations for 190,000. The unemployment rate fell to 4.9%. Average hourly earnings jumped 0.5% for the month, however the y/y figure held steady at 2.5%.

EUR: At the January 21 ECB meeting, Draghi made dovish comments, saying that monetary policy will be reviewed at the March meeting due to further deterioration in inflation expectations and other financial uncertainty.

GBP: Retail Sales beat estimates across the board with the m/m figure printing its highest value since December 2013. Average Earnings were at 1.9% for December, while the jobless rate moved up to 5.1%. Core CPI for January missed estimates and dipped back to 1.2%. The Bank of England vote split changed back to 9-0 with McCafferty no longer voting for a hike. Growth forecasts for 2016 and 2017 were downgraded while inflation is expected to remain below 1% til the end of the year. The referendum regarding Britain’s exit from the EU contributes to bearish sentiment on the currency due to political uncertainty.

AUD: 7,900 jobs were lost in January while the Unemployment Rate ticked up to 6%. On February 2, the RBA left its cash rate unchanged as was expected. The accompanying rate statement was fairly upbeat and signaled growing confidence in a domestic recovery, while low inflation still remains a concern and could provide scope for further easing moving forward if warranted. CPI for the fourth quarter beat expectations overall with Trimmed Mean y/y remaining at 2.1%, which is within the Banks’s target of 2-3%. The Australian dollar remains a neutral currency which will be guided by direction in key commodity assets.

NZD: RBNZ Inflation Expectations for Q4 2015 came in at a 22-year low at 1.6%which puts pressure on the Bank to ease further. The RBNZ kept rates on hold in January but struck a dovish tone saying that the NZD needs to move lower and further easing is a possibility. Westpac forecast a cut to 2.25% at the March meeting. CPI for Q4 was poor showing deflation of -0.5% for the 3-month period and a rise of only 0.1% throughout all of 2015. This increases chances of further RBNZ cuts. On February 3, the Quarterly Employment Change printed at 0.9% versus the 0.8% consensus, while the Unemployment Rate tumbled to 5.3% smashing expectations of a 0.1% rise to 6.1%, and the lowest since the first quarter of 2009.

CAD: January employment declined 5,700 – its second decrease in the last three months, and missing consensus of a 6,000 gain. The jobless rate ticked up to 7.2%, on par with its highest mark since March 2013. The BOC kept rates on hold at the January 20 meeting, which surprised some analysts. The tone of the statement and Poloz’s press conference was less dovish than anticipated, which is in line with Poloz and the BOC’s generally optimistic stance. The severe depreciation of the CAD due to falls in oil means there is less urgency to cut rates, as the lower CAD will boost inflation by making CAD-denominated goods more attractive to overseas buyers. Further, it appears that the Canadian government may introduce fiscal stimulus measures in the next budget which allows the BOC to refrain from action for now. CAD will continue to be directed by the price of WTI.

JPY: GDP for Q4 2015 missed estimates at -0.4%. The Bank of Japan announced negative interest rates of -0.10% on January 29 but left the QQE program unchanged. The inflation target was pushed back to end 2017 and the Bank remains prepared to ease further if necessary. The BOJ are watching CPI excluding food & energy to gauge underlying inflation trend. The BOJ’s own measure of underlying inflation is at 1.2%, with a target of 2%.

CHF: The franc is fundamentally a weak currency given the SNB’s negative interest rates, however it can suddenly rally on safe-haven flows. The SNB regularly recite that the franc is overvalued and they are prepared to intervene to weaken the currency. The franc’s direction is difficult to predict due to regular intervention by the SNB.

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