By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
Most of Wednesday's major currencies traded higher including the U.S. dollar. Ten-year bond yields are up more than 3bp across the globe with U.S. stocks hitting fresh record highs. While housing starts and building permits fell more than expected, risk appetite remains strong. We haven’t heard any new confrontational comments on North Korea and Fed President Powell – the leading Fed chair candidate according to the betting markets – follows the same mantra of slow rate hikes as Yellen, who is positive for the equity market. Investors are also encouraged by stronger corporate earnings and hope that President Trump won’t nominate someone completely unexpected. The Federal Reserve’s Beige Book added fuel to the rally as Fed districts reported widespread labor tightness. We could see the dollar extend its gains with USD/JPY breaking 113.50 if yields continue to rise and there are no negative headlines to offset the flow. The Philadelphia Fed survey is scheduled for release on Thursday and the sharp jump in manufacturing activity in the NY region signals similar strength in the Philadelphia region.
Sterling dropped to a low of 1.3140 before reversing to the settle the day much closer to its highs than lows. While wage growth was stronger than expected, investors did not feel that the overall report was positive enough to offset the doubt caused by Tuesday’s comments from MPC officials. Jobless claims ticked up slightly but the unemployment rate remained unchanged and most importantly, wage growth was revised up to 2.2% in July and remained at that pace in August. Retail sales are due Thursday and this increase along with the uptick in spending reported by the British Retail Consortium suggests that spending may not have fallen in September like economists expect. Unfortunately, even if the report beats expectations, Brexit and BoE concerns could prevent sterling from seeing a meaningful rally. However on technical basis, it appears to be due as Wednesday’s slide found support right at the 50-day SMA.
The Australian dollar was also in play ahead of the country’s labor-market report and Chinese GDP, retail sales and industrial production. AUD/USD has found support above 78 cents, but if significantly weaker job growth is reported, we could see this key level broken. Australia added 54K jobs in August but job growth is expected to have slowed to 15K in September. According to the PMIs, employment growth in the manufacturing and service sectors slowed last month. As usual, full-time job growth is more important than the headline number. Meanwhile, China is expected to report slower Q3 GDP growth, but stronger retail sales and industrial production. These reports should not only affect AUD, but NZD as well. After rising strongly last week, NZD/USD found solid resistance at the 20-day SMA. Investors completely shrugged off the stronger but backward-looking Q3 CPI numbers in favor of weaker manufacturing activity and lower dairy prices. Despite the fact that it bounced off its lows on Thursday, NZD still appears poised for a move back to 71 cents. The Canadian dollar, on the other hand, was one of the strongest-performing currencies, soaring on the back of higher Canadian yields, a sharp unexpected jump in manufacturing sales and a mild increase oil prices. If USD/CAD breaks its October low of 1.2433, the next stop should be 1.2375.
Thanks to the sharp rise in German yields, euro also snapped a 4-day downtrend, finding its way back up to 1.18. There were no major economic reports released Wednesday, but if EUR manages to rise above 1.1820, we could finally see the currency gain upside traction ahead of next week’s European Central Bank monetary policy meeting.