The FOMC projects strong Q2 GDP


Despite a jam-packed day of important macro-economic events and releases, financial markets held tight to recent ranges, with investors failing to take any large directional bets as participants were content with adhering to the current market narrative.  GDP growth for the American economy in the first quarter saw the large inventory build in the latter half of 2013 drag on economic output, while weather also played a factor in weighing down non-residential investment.  These factors were noted by the FOMC later in the day within their rate statement which saw the Fed shave another $10bn of monthly asset purchases, as the Committee specified that while activity “slowed sharply” in Q1, indicators for March and April have picked up and suggested economic growth will rebound in the second quarter.  The stronger than expected ADP employment report and Chicago PMI from earlier in the day corroborated the FOMC assessment of the economic landscape, and helped stem some of the shaky sentiment that resulted from the sharp slowdown in GDP growth.

The “steady-as-she-goes” mentality from the FOMC statement didn’t rattle currency markets by a large margin, although the big dollar did finish weaker on the session as it conceded ground to the JPY and EUR.  The Loonie traded with a moderate bid tone for a good portion of the North American session, although USDCAD remained tethered in the mid-to-high 1.09s, as decent buying interest in the mid-1.09s appeared to halt the pair’s slide.  Interesting to note, the options market has shown investors have been picking up cheap protection against a higher USD throughout the month of April, as the price of calls relative to puts has increased from 0.125 to 0.425.  That being said, implied volatility in USDCAD has also remained depressed compared to the price action in the spot market over the month of April, increasing the risk USDCAD catches down to implied volatility in the coming weeks.

After the dust settled post-FOMC, the S&P levitated higher by 0.30%, although money was also flowing into debt markets as the yield on the US 10-year crumbled to 2.65%.  The VIX ebbed lower after the Fed statement as protective hedges were unwound, maintaining lock-step with the S&P as the fear index slid into the mid-13% area.

Although many markets are closed today in observance of International Workers Day (more commonly referred to as “May Day”), there were a few notable reports released overnight.  The government compiled manufacturing PMI survey out of China hit the wires overnight, and showed that while the reading edged up from 50.3 to 50.4, it was still short of the 50.5 that analysts had forecast heading into the report.

While purchasing activity for large manufacturing companies in China might be stabilizing, the domestic currency is not.  The Chinese Yuan continues to collapse as speculators cover existing exposures, which has pushed USDCNY precariously close to the PBoC’s permissible daily trading band of 2%.  Interesting to watch over the next few days will be if the PBoC decides to fix the CNY lower in order to try and remove some pressure from the band, or look to intervene in currency markets to push USDCNY more comfortably back into the range; with the latter potentially causing volatility to flow through to other currency markets.

Although most of Europe is shuttered for the labour holiday, the situation in Ukraine continues to evolve, as more buildings in eastern Ukraine are overtaken by pro-Russian separatists.  While rebel activity has increased tensions between Russia and the West that are likely to provoke more sanctions, the IMF did approve a $17bn loan to Ukraine, with part of the money being earmarked to settle unpaid natural gas bills.  The IMF funds should allow Ukraine to keep its lights on for the time being, with the money helping ease some of the concerns around the geopolitical issues going on in eastern Ukraine.

Turning our attention to the UK, manufacturing PMI in the region blew expectations out of the water, coming in at 57.3 vs. the median forecast of 55.4.  The eight-month high for purchasing manager activity has pushed Cable to test the 1.6900 handle, a level not seen since August 2009.  Next week’s services PMI could give GBPUSD the needed push to make a run at the 1.70 handle, a level that beckons traders given the momentum of the uptrend that has been in place since last July.

Getting set for the North American open, subdued trading activity due to the May Day holiday has futures pivoting around the unchanged mark.  USDCAD is seeing yesterday’s losses consolidate as the pair drifts back towards the 1.10 handle, with the Loonie being the worst performing major currency so far this morning.  The RBC compiled manufacturing PMI for Canada is due out at 09:30 EST, and although unlikely to cause a major alteration in trajectory, could see a knee-jerk reaction in Loonie trading should the release deviate materially from expectations.  Jobless claims for the prior week in the US were just released and showed some give back from the last report, increasing from 330k to 344k.  Despite the slightly negative jobless claims number, equities are little changed and the DXY continues to trade flat.

Capping off a busy week, the US Non-Farm Payroll report is still to come tomorrow morning.  The strong ADP print from yesterday should have traders and analysts positioning accordingly ahead of the release, as the ADP report has under-reported the last few private payroll numbers from the BLS.  The median analyst estimate for the NFP report tomorrow comes in at 210k, but other indicators such as workweek hours and earnings will also be closely watched as the Fed expands their net of indicators to assess the health of the US labour market.  While a print north of 200k should substantiate claims the American economy is picking up speed to begin the second quarter and generate demand for the USD, a report south of the 200k could expose the market as unprepared, and thus leaves us feeling the larger tail-risk for the report is a surprise to the downside which would leave participants scrambling to diversify away from the big dollar.

Further reading:

US jobless claims disappoint at 344K, other figures beat expectations

EUR/USD: Trading the US Non-Farm Employment Change

Get the 5 most predictable currency pairs

About Author

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.

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