Choppy trading around all-time highs for the S&P seems to be the norm for the week thus far, as the equity index tried with all its might to close green for 2014, but ended up falling back south of this level at unchanged on the day when the closing bell rang. FX markets were equally unsettled, although trade was more one-directional to the benefit of the USD and other safe-haven currencies like the JPY as the sabre-shaking between Russia and the United States escalated throughout the day.
New Home Sales in the US hit a five year high over the month of January, crushing expectations with a print of 468k and helping to rebuild some confidence in the housing industry after the soft existing home sales data last week. As expected, the market was caught somewhat off-guard for the upside surprise in new home sales, which lead to a ramp in the DXY and some enthusiastic buying of equities as investors increased exposure to the United States.
The equity exuberance didn’t last too long, as stocks dumped into the afternoon as US Secretary of State jumped into the Russia-Ukraine fray by stating that military intervention by Russia in Ukraine would be a costly decision, and that the US was working with the IMF and other institutions to ready at $1bn loan guarantee for Ukraine. The escalation of tensions in eastern Europe is wreaking havoc on emerging market currencies, with the Rouble collapsing further to push USDRUB above the 36 handle, while the Ukrainian Hrynia implodes causing USDUAH to trade up to the 11.0 level.
There is little in the way of relief this morning for the aforementioned currencies, with the political strains in Ukraine ratcheting up another notch overnight as 120 pro-Russian gunmen took over the parliament building and raised the Russian flag in the Crimean region of Ukraine. While the early reports are that negotiations with the gunmen are underway, and there have been no hostages taken, the sign of aggression by the ethnic Russian separatists sparks concerns that Russia is getting closer to intervening in the region to support its citizens living in Ukraine.
As such, global equities traded heavy during the overnight session, with a well-defined ‘risk-off’ tone sending investors searching for perceived safe-haven assets to weather the storm. Being a benefactor of the previously mentioned safe-haven flows, the Japanese Yen is finding itself well in demand, pushing USDJPY below the 102 level, an area which the pair has pivoted around for the majority of February.
The major equity indices in Europe are broadly lower as we approach the mid-point of their trading day, with the regional German index (Dax) underperforming its peers despite a better than jobs number which saw unemployment drop by 14k workers on expectations of a 10k print. More worrying though to the overall zone was that the flash CPI reading for February in German fell to 1.2% on an annualized basis, making traders skeptical that tomorrow’s flash CPI reading for the common-currency bloc can maintain the 0.8% level that was posted in January.
Also out overnight was money supply and private loan growth for the EZ, although both stayed pretty close to what economists had been expecting, and are still at depressed levels. Money supply growth came in a little warmer than expected at 1.2% for January, but mitigating the better reading was the fact that private loans dropped by more than forecast, decreasing by 2.2% compared to the previous twelve months. After all the data was digested the EUR was on weaker ground ahead of the Durable Goods report in the US, with investors trimming some of their long EUR positions heading into tomorrow’s inflation release. The EUR is sinking lower into the mid-1.36s against the American unit, which if held for today’s session, would signal the short-term upward trending environment for the EUR over the month of January could be over.
As we head into the North American open, US equity futures are recovering slightly from their overnight lows as investors get a little more optimistic on prospects for the American economy. Durable Goods orders for the month of January were just released, with the headline figure dropping by only 1.0%, less than the -1.5% analysts had forecast. Looking beneath the headline numbers and stripping out some of the volatile measures such as defense and aircraft orders, capital goods orders increased by 1.7% in the month of January, showing that business were back to investing in new equipment and other bigger ticket capital items. The DXY is catching a slight bid tone after the release of the numbers, while S&P futures try and claw their way back to unchanged before the opening bell.
The Loonie is unchanged from yesterday’s close, managing to stem its overnight losses on a better than expected current account deficit, although it still widened by $1.2bn to $16.0bn in the fourth quarter. Although the number was better than analysts had forecast, the trade surplus with our largest trading partner narrowed by $3.3bn, as the export demand from the US dampened in Q4, most attributable to changes in lower prices for crude petroleum. It wasn’t really until the latter part of Q4 where the spread between the Canadian benchmark of WCS and the US benchmark of WTI began to make up ground from its lows of over $40 witnessed back in early November, so we expect the pressures from crude oil to moderate should the spread hold in the $20-$25/barrel level moving forward.
Looking ahead to the remainder of the session, Janet Yellen is set to begin the second part of her semiannual testimony on monetary policy to Congress at 10:00EST, an event that has been postponed from earlier in the month due to weather issues. Although Boston Fed President Rosengren (dove and non-voter) spoke yesterday about taking a patient approach to removing monetary policy accommodation given the recent weakening of macro data and the excess slack in the economy, it isn’t likely we’ll see Yellen waver too much from her stance on the steady approach to tapering the Fed’s asset purchases.
The voting members on the FOMC are all on the same page in regards to the taper trajectory given the current economic outlook, so Rosengren’s comments from yesterday on urging to slow down on the reduction of stimulus did little to move markets, especially since Rosengren has now rotated out of a voting position in 2014. While we don’t expect the market to garner too much information that has not already been made public, despite the softening of macro data so far in Q1 2014, markets will be focused on GDP releases tomorrow for both the US and Canadian economies.
For the US it is likely that the initial estimate of fourth quarter GDP is marked down from 3.2% to something closer to 2.5%on Friday, largely due to weaker retail sales and sluggish export growth. The Canadian economy is also expected to show growth expanded by 2.5% on a y/o/y basis in December, edging slightly lower from the 2.7% annualized figure reported in November. Should the readings come out as expected, this will most likely bid up the value of the Loonie to the detriment of the American buck, not only because the growth differential for Q4 has narrowed considerably from first estimates, but also because any data out of Canada that doesn’t miss estimates is a good sign that things aren’t shoddier than already forecast.
For market participants short the USD and have been holding out in hopes this recent rally in USDCAD fades, any Loonie strength makes USDCAD a good buy on dips for near-term exposure, as it will continue to be a tough slog ahead for the CAD. On the other side of the spectrum, a stronger than expected US GDP figure (or weaker than expected CDN number) will boost the USD, although those long the American buck should start to think about beginning to leg into some hedges as we re-test the top in USDCAD from January, around the 1.12 mark. The key for USD sellers is to remain flexible and take advantage of structures that encompass optionality, as there is room to run higher if 1.12 is broken, but could spell trouble for the pair if there is another failed attempt at the January high.
Further reading:
US core durable goods orders exceed expectations – USD ticks up
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