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Mixed GDP Reports Shift Stimulus Expectations

Whether it was increased concern that  the adoption of a large scale bond purchase program from the European Central Bank might not  materialize in June, or stronger wholesale prices in the US sending worries  that CPI might come in warmer than expected this morning, investors chose to offload higher yielding positions and rotate into safe haven asset classes yesterday.    Comments from the Russia’s foreign minister that Ukraine was  on the brink of a  civil war didn’t help bolster market sentiment, with the S&P finishing the day lower by 0.47%  and the yield on the 10 year US treasury sinking to 2.55%.   The  VIX futures curve displayed some interesting price action, with  the front month contract actually easing lower by 1.8%, while  the spot contract edged up by 0.74%  to protect against the slide in equities.   The inversion on the near months  of the VIX curve  hints that yesterday’s action was more about hedging the move lower in equities, versus larger scale geopolitical worries.

The highlight of the overnight Asian session was the release of Q1 GDP figures for the Japanese economy, and its relative strength before the implementation of sales tax increase that  took effect  on  April 1st.   It was expected that growth for the first quarter in 2014 would show a meaningful increase from the 0.2%  advance registered in Q4 2013, which did materialize as the quarterly growth rate jumped to 1.5%.   On an annualized basis the figures were even more impressive, with a stellar reading of a 5.9%  increased compared with the median analyst  estimate of 4.2%.   Strength in in private consumption and capital expenditures underpinned the biggest GDP beat in three years, but sent equity markets into a tailspin as  the positive surprise decreases the chances  the Bank of Japan will ramp up their bond purchase program  by  middle of this year.   While last night’s numbers highlight growth in Q1 has pulled forward demand from Q2 and Q3 in order  to mitigate some of the sales tax  effects, the real test will be to see if these numbers can be maintained the in coming months, or if the BoJ will have to give the economy a helping hand.   The Nikkei finished its session lower by 0.75%, while USDJPY has managed to recover from it’s earlier losses and is trading right around the 102 level heading into the North American open.

Turning our attention to Europe, the common-currency bloc was not able to follow in Japan’s footsteps, with initial reports showing that economic growth stalled in the region over the first quarter.   While Germany did come in ahead of expectations with first quarter growth of 0.8% (2.5% on an annualized basis), France and Italy weighed down the composite report with disappointing misses, a main factor in the sluggish 0.2% quarterly growth rate (0.9% annualized)  for the entire zone.   In addition, the European Central Bank said professional forecasters had  revised longer-term inflation projections lower as a result of a  relatively strong  Euro, commodity prices, and the weak economic situation.   With Q1 economic progression coming in at half of what economists had expected, and forecasters revising inflation forecasts lower,  this has reinforced expectations of further policy  easing from the ECB in June, and  kicked the legs out from the common-currency.   EURUSD has tumbled into the mid-1.36s, with the next key line of support coming in at the 200-day moving average at 1.3625, which the pair hasn’t traded under since the third quarter of 2013.

Heading into the North American open, the consumer price index for the US economy, along with manufacturing sales in Canada were both released.   The releases were both a bit boring when compared to the GDP  figures seen overnight,  as headline CPI for the American economy over the month of April came in bang on estimates with a 2.0% increase on a y/o/y basis.   Manufacturing Sales for March in Canada showed a 0.4% increase from the previous month, besting the median analyst estimate of a 0.3% gain, however still coming in at a slower clip than the 1.5% jump in February.

S&P futures are trading flat before the opening bell, managing to work their way off the overnight lows experienced after Japan’s GDP beat caused concerns around further monetary policy easing from the BoJ.   The  further capitulation in the EUR has boosted the appeal of the DXY this morning, pushing the USD-index up to 80.3.   After moving lower overnight 10-year US treasury yields are perking back up after the solid CPI reading and  the weekly  jobless claims figure that printing below the 300k mark; as we go to print the 10-year yield is currently sitting at 2.55%.   The Loonie didn’t elicit too much of a response after the North American data points were released, still managing to hold its overnight gains on the back of the Euro wash-out that brought with it macro-sales of EURCAD  which also forced USDCAD lower.   Currently USDCAD is putting in  work just shy of the 1.09 handle, a level the pair has felt extremely comfortable with over the course of the week. We would caution that like a spring, currency markets don’t  follow volatility patterns consistently, and while susceptible to volatility clustering,  periods of sustained low volatility usually give way to a break-out in either direction.

The data deluge this morning is not quite over yet, with the Philly Fed  Manufacturing survey still to be released at  10:00 EST.   Analysts are expecting to see some give back  from the sharp increase seen in April, with the May reading coming in around the 14 mark.   After a shaky start to the year, manufacturing activity in the Philadelphia region appears to be rebounding, and anything  at  or above expectations will help boost the appeal of the USD,  with the DXY currently sitting at a monthly high.

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Scott Smith

Scott Smith

Scott Smith is a Senior Corporate Foreign Exchange Trader with Cambridge Mercantile Group and has a diverse background in the foreign exchange industry, with previous experience in both credit and trading related functions. Scott holds a Bachelor of Commerce degree from the University of Victoria, has completed all three levels of the Chartered Financial Analyst designation, and is currently working towards the Derivative Market Specialist certification offered through the Canadian Securities Institute. Cambridge Mercantile Group.