Search ForexCrunch

With the Federal Reserve to release their most recent prescription on what they see as the optimal path of monetary policy later today, equity markets traded with a sanguine tone throughout the course of yesterday’s session.   The slight misses on Consumer Confidence and the Case Shiller Home  Price Index  did little to alter the markets’ perception that we would see the Fed drastically change their tone from the previous meeting,  with the confidence of continuation from the FOMC pushing the S&P higher by 0.48%, while the VIX traded heavy and slipped into the high 13% area.

The Loonie managed to snap out of its recent trading range, yielding solid bid tones as weakness on its crosses generated the buying interest.   USDCAD sunk below the 1.10 handle early in the session, and was unable to find its ground as the pair pivoted in the mid-1.09s as Governor Poloz  addressed the House of Commons  in Ottawa.

As expected, the Bank of Canada head didn’t waver much from what we’ve heard lately, continuing to reiterate the Central Bank remains neutral on the direction of interest rates, yet took a slightly dovish tone in  parlaying  that information.   Poloz noted that even after the roughly 10% percent depreciation in the  Canadian unit, the Loonie still remains high  by historical standard, also adding that it shouldn’t stymie  overseas capital expenditures by a noticeable amount.  Furthermore, Poloz  conveyed  that rate cuts for the Canadian economy could still be a possibility if exports didn’t pick up and inflation remained below target for a sustained  period of time, although he  did say that any cut in rates would have to be weighed against the risk of worsening consumer debt levels and household imbalances.  The Loonie saw only a muted  reaction to Poloz’s comments to the House of Commons, with traders  not  gleaning  anything  different in terms of stance towards the future path of monetary policy  then what has been  telegraphed previously.

The overnight Asian session saw subdued optimism in financial markets, despite a number of macro-economic indicators for Japan that missed expectations to the downside, while the Bank of Japan made no changes to its stance towards monetary policy.   Industrial output came in softer than expected with  only a 0.3% increase after last month’s 2.3% drop, with  manufacturing PMI  also disappointing by  sliding below the all-important 50 level.   The BoJ’s decision to  keep  monetary policy unaltered was widely expected, as we feel it  will be closer to the end of Q2 or early Q3 before some of the rough  affects of the sales-tax increase push the BoJ to expand their stimulus campaign.    USDJPY was pressured lower after the announcement, yet the pair has been able to claw back some of its earlier  losses and now trades in the mid-102s before  the  North American  data releases.

Turning our attention to Europe, the restrained optimism that had the Nikkei finish its session higher by 0.11% has the major bourses in Europe slightly positive ahead of the North American cross.   EURUSD has mustered a comeback from yesterday’s fall and has managed to work its way back into the mid-1.38s after the flash CPI data for the zone didn’t come in as soft as traders had expected given the  miss in German CPI witnessed yesterday.   The  flash reading for April in the common-currency bloc edged up to 0.7% from the 0.5% registered in March, and lessens the prospects the  European Central Bank will choose to act at their May meeting given that the core reading was in-line with estimates at a print of 1.0%.   The increase in forward looking inflation expectations has caused the Euribor curve to steepen, which  has  traders  looking to cover off  weaker short positions in the EUR, pushing it higher against the big dollar  prior to the ADP Employment Report and  the Advanced GDP release.

Heading into the North American open, the  economic calendar is chalked full of important releases.   The reading on private employment in the US as tracked by payroll company ADP was  just  released, and is usually a fairly good bellwether on helping  market  participants  gauge how the Non-Farm Payrolls  on Friday  will shake out.   Expectations had been for the private sector to add 210k jobs over the month of April, but the actual  print beat  forecasts and showed 220k new jobs had been created over the previous month.   The  good news for the American economy was that goods-producing industries continued to create jobs, with  construction and manufacturing accounting for roughly 20k  of the new positions as the weather starts to warm up and companies  start hiring.   Interesting to note is that the ADP number has under-reported the  Non-Farm jobs numbers (on the private side) for the last few months, so heading into  Friday  this could bode well for a strong NFP report.

Also of interest, readings on GDP growth from both North and South of the 49th parallel were also released earlier this morning.    The Canadian report showed that GDP growth expanded by 0.2% over the month of February, bang in line with what economists had estimated, but the real surprise was the drastic drop in GDP growth for their neighbours to the South.    The Advanced  reading on GDP growth for  the American economy in Q1 showed only a 0.1%, a  sharp drop from the 2.6% registered in  Q4, and far below the 1.2% which had been expected.   The main contributors to the disappointing reading were a decrease in exports and nonresidential fixed investment, both of  which struggled in the first quarter of 2014.   The silver-lining of the report was that personal consumption expenditure held up with a  3.0% increase, and absent of the decent consumer demand  Q1 GDP would have been a lot worse.

After the dust settled, S&P futures were little changed, mildly negative before the opening bell.  Currencies saw a bit a knee-jerk reaction to the US  GDP figures, with USDJPY sliding back into the low-102s, EURUSD reigniting into the high-1.38s, and USDCAD falling back into the mid-1.09s after  levitating higher on the back of the  stronger than expected ADP report.

As we get set for the remainder of the session, the big event risk still on the  docket is the FOMC interest rate statement to be released at  14:00 EST, although we expect that compared to recent meetings, this one will likely pass without major implications for market  direction.   The statement does not  carry with it a press conference from Janet Yellen or updated economic projections from the board, so it is likely the most we will see is  a slight tweak in language in the statement itself, potentially referencing  some softer than expected housing indicators for the first quarter of the year.   Outside of the housing market, the US economy has  picked up  after the  relatively slow start to the year,  thus balancing any cautious tones from the Fed in its statement later today.   That being said, we  modestly favour being long-USD heading into the release this afternoon, as the confirmation the economy is developing as expected and  the pace of asset purchases will be  slowing down by another $10bn/month should help underpin the DXY.

Also to note,  while April was choppy for price action in USD equities, the major indices generally underperformed other developed markets, and therefore signals month-end re-balancing from international hedgers  could see a slight bid-tone in the USD.

Further reading:

US Q1 2014 GDP only +0.1% – USD lower

Canadian February GDP +0.2% as expected