The liquidation of USD long positions is continuing ahead of tomorrow’s FOMC interest rate decision, with market participants keen to shrug off disappointing global economic data while focusing on positioning ahead of tomorrow’s announcement. The soft price action of the DXY has the USD-linked index closing in on the lows reached back in mid-March, though still within the range witnessed over the last two months. A continuation of the slide that would push the DXY through to the south-side of the 96 level would increase pressure on the already shaky USD bulls, likely to lead to further capitulation of weaker USD long positions. Also aiding in the downward pressure that is being exerted on the greenback is a resurgence in the euro, with buying interest in EURUSD materializing after the shake-up in Greece’s negotiating team gave markets increased confidence surrounding Greece’s commitment to reaching a deal. Given the animosity from the Eurozone finance ministers towards Greece’s Varoufakis, Prime Minister Tsipras announced yesterday that he would be replacing Varoufakis with Deputy Foreign Minister Tsakalotos as coordinator of the negotiating group. Though the proverbial pig might just be getting a new make-up application, the initial response by participants has been well-received, which is flowing through to the euro as attempts to move back into the low 1.09s against the greenback.
The overnight Asian session kicked off with retail sales out of Japan falling by 9.7% on a year-over-year basis in the month of March, tumbling by a larger amount than the 7.3% decline that had been expected, and the 1.8% drop in February. While today’s dreary consumption figures are unlikely to alter the course of Japanese monetary policy atThursday’s BoJ meeting, it does warn of overall soft Q1 growth, increasing the chances the BoJ will acknowledge the failure of their inflation goal and seek to expand monetary policy to underpin both growth and inflation. Cheaper energy prices have yet to provide a much needed boost to the world’s third largest economy, and while it has been a positive factor for the country’s trade balance figures, the BoJ will likely start to feel the heat if Q1 GDP growth falls short of estimates. Currency markets largely shrugged off the Japanese retail sales numbers, with USDJPY remaining essentially unchanged and pivoting around the 119 handle heading into the North American session.
Following on the heels Japan’s disappointing retail sales figures was the initial estimate for Q1 GDP growth in the UK, where real economic output only rose by 0.3% in the first quarter, short of the 0.5% that had been expected. The drop in oil prices were one of the main factors that contributed to the slower than forecast GDP reading, as the fall in North Sea production weighed on the UK’s industrial sector. This development is slightly troublesome for Prime Minister David Cameron and his Conservative party, who are closing in on the general election and are in a heated race with the main opposition Labour Party that is currently too close to call. That being said, today’s data is unlikely to swing sentiment so out of the Conservative’s favour that expectations for a Labour majority transpire overnight, especially given how susceptible first estimate GDP figures are to revisions. By the same token, the soft initial GDP figures are unlikely to alter the BoE’s trajectory for monetary policy, as the MPC has telegraphed in its most recent monetary policy meetings that output survey data has generally been more upbeat than the official output data suggests, as the data is volatile and susceptible to revision. After an initial knee-jerk reaction to the data that took the pound lower, GBPUSD has been able to recover its earlier losses and now sits higher by 0.3% on the session, back into the high-1.52s.
As we get set for the opening bell in North America, equity futures are witnessing a red hue materialize across the tape, while oil prices also give back a bit of ground from yesterday as front month WTI changes hands just south of $57. The loonie is starting the day on positive footing given the overall market theme of a weaker greenback, and as we go to print Poloz is speaking before the House of Commons in Ottawa. The initial headlines that are filtering through as his speech kicks off are that the main risk to the Canadian economy is the duration of the oil price shock balanced by the positives that are building in the non-energy export sector. To wit, Poloz remains confident a shift in strength is underway in the non-energy export sector, and the positives already occurring will see continued progress as activity in the US picks up. In addition, Poloz cautioned that despite labour market improvements, companies continue to be cautious towards business investment and hiring intensions, a trend that Poloz hopes will reverse course of the balance of 2015. The loonie strength has translated to a USDCAD rate that is establishing a foothold just south of the 1.21 handle, though is likely in for a volatile few sessions with US GDP, FOMC and Canadian GDP all on tap later this week.
Further reading:
USD/CAD: Sharp Hammer; EUR/USD: Getting Very Tricky – Goldman Sachs
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