• USD is higher on better unemployment figures
• GBP tumbles on bearish outlook
• Commodity Currencies higher on strong data
USD – The dollar strengthened against the Japanese yen and pushed higher against the euro after the release of better than expected unemployment figures. U.S. data showed that initial claims for state unemployment benefits dropped 27,000 to a seasonally adjusted 341,000. Some economists had expected to see claims drop to only 360,000. Analysts and traders have turned their attention to the G-20 meeting, which gets under way in Moscow today for further insight into the currency wars and the dollars role. The G-20 will most likely further try to assuage the currency debate, by reiterating the need for central banks to focus on market driven flexibility as central banks continue to use rhetoric to drive their currencies lower. In addition to this topic delegates will discuss the overall global economic outlook, implementation of the G-20 Framework agreement for sustainable and balanced growth and further implementation of financial regulation reforms.
EUR – The euro weakened on stronger data out of the U.S. and the further focus on currency rhetoric. European Central Bank Vice President, Vitor Constancio appeared at a European Union event and stated that policymakers must be careful not to ratchet up rhetoric about "currency wars,” which could lead to a worse situation. He went on to say that, “the euro has been volatile ... so the situation is what it is. We look at the exchange rate because it has an impact on the inflation rate that we are analyzing all the time." Contradictory remarks from officials from G-7 officials about a G-7 statement designed to cool international currency tensions have fueled more market volatility. Also weighing on the single currency was the ECB’s release of the latest set of figures from the survey of professional forecasters, which showed that analysts are calling for lower inflation. The 56 analysts surveyed now see next year's inflation at 1.8 percent, down slightly from November's 1.9 percent forecast. Look for the euro to remain pressured on the heels of the lower inflation forecast coupled with the market starting to focus on a potential rate cut from the ECB. With deposit rates currently at zero, the move would take rates into negative territory, ultimately, giving banks incentives to lend rather than sit on their money.
GBP – Sterling hit a six-month low against the dollar after the central bank forecasted higher inflation and weak growth. The BOE stated yesterday that inflation will remain above its 2 percent target until early 2016, hurting households' ability to spend and pressuring the struggling economy. The central bank, however, also stressed a domestic economic recovery was in sight and that it was unclear how much more monetary easing would help the economy. BOE Governor King suggested yesterday that the central bank would be happy to see a weaker pound. He stressed the importance to "find ways of boosting overseas demand for our products in order to bring about the rebalancing that the UK economy needs to see." With mixed messages coming from the BOE in regards to the status of the economy and uncertainty over further monetary easing, look for sterling’s outlook to remain bearish.
JPY – The Japanese yen strengthened overnight and then gave up some of its gains after the release of disappointing GDP figures. GDP released weaker than expected, showing that the economy contracted to a negative 0.4 percent annualized or a negative 0.1 percent on a quarterly basis, versus expectations for a rise of 0.4 percent and a rise of 0.1 percent respectively. The weakness in GDP came in part due to lower net exports, which are expected to have improved this year on yen depreciation. With weakness, however, in capital investments, private demand and inventories, along with BOJ’s decision to leave rates on hold, look for Japan’s economy to continue to struggle to pull itself out of stagnant to negative growth. Analysts, however, will turn their attention to April when the new Governor and two deputy governors will be in place for further direction into the yen. Kazumasa Iwata, a prominent candidate stated that USD/JPY between 90 and 100 would be a return to equilibrium.
Commodity Currencies – The Canadian dollar is little changed against the greenback and stronger against its European counterparts. Pressuring USD/CAD continues to be the lower trend on the spread between Brent and Western Canadian crude, having peaked in December at $65 and now trading at $44. With little economic data out today, look for the loonie to hold close to current levels. The Aussie dollar held on to its gains, while the kiwi pushed higher against the dollar. The push higher came after the release of upbeat domestic data highlighted expanded manufacturing activity and strong consumer confidence, rising to a near three-year peak. The BNZ’s seasonally adjusted performance of manufacturing index (PMI) rose to 55.2 from 50.4 in December. Consumer confidence rose 2.7 points to 121 this month, with the biggest pick up being in the survey of people’s perceptions of the broader economy over the next five years, which rose 8 points to 29. With the New Zealand economy outperforming many other struggling economies worldwide, look for the kiwi to remain well supported and push higher. The market will look towards tomorrow’s retail sales figures to potentially push the kiwi even higher.
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