Currency markets traded within a narrow range overnight, with participants waiting for the US data drop to determine the direction of the greenback, and the associated impact it would have on its crosses. The yen strength witnessed yesterday on the back of comments from the Prime Minister Abe’s advisor has somewhat stalled, with Hamada clarifying his remarks that the 105 level for the USDJPY exchange rate was acceptable based on purchasing power parity (PPP), and wasn’t suggesting the current spot level of 120 was unacceptable. Hamada went on to say that he wasn’t suggesting the BoJ ease further at their April meeting, but the central bank does have further room to expand their asset purchase program, which if executed, would lead to further JPY weakness that would widen the PPP gap. Given the recent comments from Kuroda, and the minutes from the last policy meeting that were released yesterday, it seems as if the bank isn’t in a hurry to tweak its current pace of expansion, though the absence of constructive inflation expectations make one wonder how long the BoJ will be able to hold out until they either have to alter their inflation pledge or add further stimulus to try and jump-start consumer prices. USDJPY is pivoting just below the powerful magnet-like 120 figure ahead of US retail sales, while the Nikkei was essentially unchanged on its session.
The pound has managed to recover off its early morning lows, getting hit early after inflation for the month of March came in lower than expected, with the core reading printing at 1.0% compared to the last twelve months, falling short of the 1.2% increase that had been forecasted. Headline consumer prices were virtually unchanged but did dip into deflationary territory with an annualized print of -0.01%, adding to the downward pressure on GBPUSD, especially as election uncertainty continues to hang like a dark storm cloud over the pair. With inflationary pressures giving the Bank of England some breathing room to remain accommodative and likely not having to move on raising rates until at least 2016, combined with ongoing uncertainty surrounding the upcoming election, we expect the pair to continue to trade with a downward bias. GBPUSD has regained some ground to trade in the mid-1.46s, while the FTSE is the only major European index to be having a positive session in equity markets ahead of the North American cross.
On the North American economic data docket, both Retail Sales and producer prices for the month of March hit the wires earlier this morning. Producer prices edged slightly lower but came in roughly right around where economists had expected, though it was the soft bounce in Retail Sales figures that has hit the USD fairly sharply after the numbers crossed the wires. Illustrating that even after three months of consecutive declines consumers are still having a tough time opening their pocketbooks, with headline spending increased by only 0.9% on expectations of a 1.0% increase. The retail control group that filters more directly into the GDP calculation missed by a wider margin, coming in with only a 0.3% increase on expectations of a 0.5% print, taking markets by surprise as the month of March was forecast to be a major rebound after the early slump witnessed in 2015. The knee-jerk reaction to the numbers kicked the DXY to test the 99 level to the downside, a consequence of EURUSD making an attempt to establish a foothold above the 1.06 handle, with GBPUSD following suit to try and retake 1.47 to the topside. While it is likely the Retail Sales data will set the tone for the greenback today, we view this setback as an opportunity to acquire the big dollar at less lofty prices.
The loonie witnessed a fairly tight overnight trading range, with market participants exhibiting caution ahead of tomorrow’s Bank of Canada rate announcement. While the consensus is for the BoC to hold on current policy, there is an outside chance we could see a rate cut tomorrow, though we think the chance is a slim one from a probability perspective. Though we do think the BoC will hold fire on amending the current level of interest ratestomorrow since WTI has stabilized in the $45-$55 range, consumer spending and the employment picture in Canada hasn’t been anything to write home about. Should Governor Poloz sound cautious in regards to the economic outlook for the latter half of 2015 after a lackluster Q1, it is quite likely we see the loonie loose some ground as market participants start to build in another rate cut from the BoC later in the year. In our view we will likely have to see the full-time labour market remain soft while WTI moves back below $45 before the BoC would tweak monetary policy to become more accommodative, though Poloz does want the non-energy export sector to catch fire and in order for that to happen, the loonie needs to move lower from the current levels. The USDCAD pair dropped into the mid-1.25s immediately after the US retail sales report, but has run into initial support ahead of the opening bell.
Further reading:
US retail sales rise 0.9% – below expectations – USD slides
GBP/USD in 3-wave pattern; USD/CAD could fall before rising – Elliott Wave Analysis
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