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Forex: Strong Canadian Employment Data Sends Loonie Soaring

DailyFX Fundamentals 06-09-06

By Kathy Lien, Chief Strategist of www.dailyfx.com

- Inflation in Focus – Looking for CPI and PPI to Validate Fed’s Hawkish Stance
- Yen Ends the Week Lower as Nikkei Ends the Week down 8.5 Percent
- Strong Canadian Employment Data Sends Loonie Soaring

US Dollar

The US dollar staged its strongest rally in 4 months off of Ben Bernanke’s newly hawkish comments. Aside from Ben, we also heard from a long list of other Federal Reserve members who echoed the same view. With the Fed coming out in force to tell the market that they plan on raising interest rates, there is no reason for us to question otherwise especially since market expectations for a quarter point hike at the end of this month has now shot up above 80 percent. The longer the Fed continues to tighten interest rates, the longer the US dollar will remain bid. There are a great deal of US data due for release next week and it really remains questionable whether all of these core inflation risks that the Fed have been warning about will actually show up in the core consumer and producer price numbers. Consensus forecasts are for a slight up tick in the growth of core producer prices, but a downtick in growth for core consumer prices – which is at odds with the Fed’s comments. The risks are clearly to the upside because the Fed knows that if inflation pressures prove to be less prevalent, all of their efforts to talk up the dollar will have been futile. However inflation numbers are not the only catalysts for volatility next week, we are also expecting retail sales, the Fed’s Beige Book report, Net Foreign Purchases of US Securities (TIC), industrial production, Philly Fed survey and the current account balance. Any one of these pieces of data could cause big movements in the market. Collectively, we could be setting up for a rollercoaster ride. Today the trade balance report caused quite a bit of intraday volatility but on a daily basis, the US dollar ended the day unchanged against the Euro and Japanese Yen. The deficit was slightly better than expected, widening to -$63.5 billion from -$61.9 billion, which was less than the initial -$65 billion forecast. This is good news for second quarter GDP, but does not undermine the fact that the deficit is still huge. Imports are continuing to rise as the trade balance with China widens and the value of oil imports increase after crude prices hit a record high in April. It is difficult to handicap the market at the moment. Given the recent state of the economy and the horrid non-farm payrolls number reported recently, most figures in the week ahead should come in weaker. However, the confidence and solidarity of the Fed is causing many traders to rethink their dollar bearish outlooks, at least for the next three weeks.

Euro

The weakness of the Euro has been exacerbated by the lack of clear hawkishness from the European Central Bank yesterday. It seems that the ECB may have the benefit of foresight as Eurozone economic data surprises to the downside, something we haven’t seen in days if not weeks. French industrial production fell a whopping 1.4 percent in the month of April, which compares to the market’s forecast for 0.2 percent growth. Manufacturing production also faced a similar slide while German industrial production rose 1.6 percent compared to a 2.0 percent forecast. In terms of trade, the April surplus in Germany dropped from $14.4B to $11.2B. The same was seen with the current account balance, but if you account for seasonal adjustments, the number was not as bad. Exports jumped 4.3 percent, indicating that the Euro, which rose from 1.2150 to 1.2635 that month and oil which rose from $66 to a high of $75 before retracing has yet to have a negative impact on trade. However, currency effects tend to be delayed, so we not are surprised to see worse numbers in the following month. Although the longer term trend for the Euro remains upward, the tamer comments from ECB this past week could make it a bit more difficult for the Euro to rally back to last week’s highs. Looking ahead to next week, there continues to be a lot of Eurozone economic data with inflation the main focus. However, in addition to that, we are also expecting the ZEW survey of analyst sentiment and the French non-farm payrolls. Analysts have been warning about the negative impact of the high Euro for weeks now, so it would not be surprising to see those comments translate into weaker ZEW numbers.

British Pound

It has been a bad week for the British pound against both the US dollar and the Euro. Even though the trade balance report came in stronger than expected today, narrowing from –GBP5.7 billion to –GBP3.3 billion in the month of April thanks to stronger imports, most of the data that were released previously produced mixed to disappointing results. The most notable of which was industrial production, which took a strong nosedive in the month of April, catching all forecasters by surprise. In the week ahead, the UK like the rest of the world will be releasing a large amount of economic data including inflation figures, retail sales, employment figures and more house price numbers. We doubt that any of these reports will shift the outlook for the Bank of England as they have good reason to continue to leave interest rates at 4.50 percent. Only more merger and acquisitions news can help the currency now.

Japanese Yen

The Japanese Yen is stronger against most of the majors today except for the commodity currencies which have took off on the combination of rising oil and gold prices as well as solid Canadian employment data. Machinery orders released overnight were strong rising 10.8 percent in the month of April compared to a 3.5 percent forecast. Comments from Bank of Japan official Iwata was slightly hawkish overnight, but we doubt that it will have much impact on monetary policy. He said that the central bank will not be swayed by the recent volatility in the equity markets which has fallen 17.3 percent over the past month. Not being swayed can be interpreted as not being afraid to raise rates which would cause an even bigger slide in the stock market. However given previous comments yesterday about deflation and the government’s June 13 monthly economic report indicating that deflation still persists, the Bank of Japan has little option than to keep rates unchanged at least until the fourth quarter. In the week ahead, Japan also has a lot of important data due for release including GDP, consumer confidence, industrial production as well as a monetary policy meeting. It will be a big week for the currency market in general with so many key pieces of data expected from around the world.

 

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