Greenback Narrowly Mixed as Market Awaits Fresh Drivers

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  • BOC held policy steady yesterday but CAD sold off as the statement was dovish
  • Sterling was sold more in response to softer than expected CPI than to the government’s loss in the House of Lords
  • UK reported weak March retail sales today
  • New Zealand’s CPI slowed to 1.1% y/y in Q1 from 1.6% in Q4 17; Australia’s employment report disappointed
  • Poland reported weak March industrial and construction output; Bank Indonesia is expected to keep rates steady at 4.25%

The dollar is mixed against the majors in very narrow ranges. The Scandies are outperforming, while the yen and Kiwi are underperforming. EM currencies are mostly weaker. KRW and TWD are outperforming, while RUB and TRY are underperforming. MSCI Asia Pacific was up 0.5%, with the Nikkei rising 0.2%. MSCI EM is up 0.9% so far today, with the Shanghai Composite rising 0.8%. Euro Stoxx 600 is up 0.1% near midday, while S&P futures are pointing to a lower open. The 10-year US yield is up 2 bp at 2.89%. Commodity prices are mixed, with oil up 0.8%, copper flat, and gold down 0.2%.

The Bank of Canada held policy steady yesterday but the Canadian dollar sold off as the statement was dovish. A rate hike in Q3 still seems to be the most likely scenario, and by then, some of the uncertainty about NAFTA will likely be lifted. The overnight rate at 1.25% is half of the lower bound of what the BOC has identified as neutral policy (2.5-3.5%).

Potential growth was lifted to 1.8% this year and next from 1.6% estimated in January. It did slash its Q1 18 growth forecast to 1.3% from its earlier 2.5% projection. However, for the year as a whole, the growth forecast was shaved only 0.2 percentage points to 2%, while the 2019 growth forecast was lifted to 2.1% from 1.6%. The Bank of Canada is saying look past Q1 softness, and as demand has picked up, investment has expanded capacity.

The US dollar rallied against the Canadian dollar in February and consolidated in March, forming a head and shoulders technical topping pattern, which projects toward CAD1.2475. The greenback made great strides toward the target, but momentum stalled last week, and our read of the technical indicators warned of a coming bounce. Even though the US dollar made new lows on Monday, the short-term market seemed vulnerable to some profit-taking.

Our target was the CAD1.2640 area and post-BOC, CAD1.2660 was reached. The close was back below our target, but the technical indicators warn of more near-term upside risk. It could extend a little above CAD1.2700, but much more than that might call into question the CAD1.2475 target. Today, the Loonie has traded in very narrow range around the 200-day moving average near $1.2620.

Sterling was sold more in response to the slightly softer than expected inflation data than in response to the government’s loss in the House of Lords. As sterling reached its best level since the referendum this week, so was the vote the strongest pushback by the pro-EU camp. They defeated the government twice.

First, it succeeded in attaching an amendment to the Withdrawal Bill that requires remaining in the customs union, something Prime Minister May has explicitly ruled out. Second, the House of Lords passed a bill to prevent the government from changing the regulations governing employment, consumers, and the environment without parliament’s consent. While the House of Commons can and most likely will swat away the House of Lords’ initiatives, it gives a sense of what lies ahead as Brexit requires votes on at least three other crucial bills (trade, customs, implementation).

UK reported weak March retail sales. Headline sales fell 1.2% m/m, twice the expected 0.6% drop. This led the y/y rate to drop to 1.1% from 1.5% in February. Given the combination of weak data and negative political developments, sterling remains heavy.

Sterling recorded its low near $1.4175 before the House of Lords votes. This corresponds to the 50% retracement objective of the leg up that began from the brief dip below $1.40 on April 5. The next retracement objective and 20-day moving average are found in the $1.4125-$1.4145 area. Today, cable made a marginal new low near $1.4160 but has since stabilized.

The euro has staged an important reversal against sterling at the end of last week, but there was no follow-through even though the technicals seemed to favor it. Patience was rewarded yesterday. The euro bounced 0.6%, the most since the late February. From a low near GBP0.8620 the day before, the euro reached GBP0.8720 yesterday, which is where the 61.8% retracement of the drop since the peak on March 1 and the 20-day moving average. Nearby resistance is seen near GBP0.8750, which is around where today’s move ran out of steam.

New Zealand’s CPI slowed to 1.1% y/y in Q1 from 1.6% in Q4 17. This was in line with expectations but reinforced the conviction that monetary policy is on hold. Australia’s employment report disappointed, with a loss of full-time positions (-19.9k), a decline in the participation rate (to 65.5% from 65.6%, the second consecutive decline), and meaningful downward revisions to the February series.

The Australian dollar’s advance has been stalled near $0.7800, and the employment data provided another incentive for short-term participants to take some profits. A break of the $0.7730-0.7740 area may encourage more along the same lines. The New Zealand dollar has been underperforming, and a break of the $0.7290 area could spur losses toward $0.7200 before strong chart support is encountered.

During the North American session, the US reports weekly jobless claims, April Philly Fed survey, and March leading index. ADP reports Canada March payrolls. Fed speakers include Brainard, Quarles, and Mester.

Bank Indonesia is expected to keep rates steady at 4.25%. CPI rose 3.4% y/y in March, near the bottom of the 3-5% target range. As such, the central bank should be able to keep rates on hold for most of this year. Next policy meeting is May 17, and rates are likely to be kept steady then too.

Poland reported March industrial and construction output as well as PPI. Real sector data slowed significantly from February, while PPI rose 0.3% y/y vs. flat expectations. The central bank tilted even more dovish last week, with Governor Glapinski talking about potential for a rate cut. For now, we see steady rates well into 2019. Next policy meeting is May 16, and rates are likely to be kept steady at 1.5%.