Euro, sterling and the Canadian dollar ended the month of February at their lows. The Swiss Franc, Australian and New Zealand dollars also saw significant losses and are hovering just above their weakest levels in 30 days. While USD/JPY is trading more than 100 pips above this same milestone, there’s no question that February was a difficult month for the pair. It extended lower today, confirming our view that the market interpreted Fed Chairman Jerome Powell’s comments on the economy and monetary policy to be more negative for risk appetite than the U.S. dollar. The Dow Jones Industrial Average, which started the day in positive territory ended down 380 points. This sell-off fills the gap at the start the week and puts stocks at risk of further losses. The latest U.S. economic reports also raised concerns that growth could slow after the Federal Reserve raises interest rates in 3 weeks. Fourth quarter GDP growth was revised down to 2.5%, the Chicago PMI index dropped to its lowest level in 6 months while pending home sales fell by the largest amount since 2013. While none of these reports are game changers for the Fed, coming at a time when investors are growing nervous about rising rates, they certainly add pressure on currencies and equities. Traders will be watching tomorrow’s personal income, personal spending, jobless claims and manufacturing ISM reports closely to see if the weakness is reinforced. With U.S. stocks ending the day at its lows, USDJPY is vulnerable to additional weakness.
The month of March could also kick off with more losses for euro and sterling. Starting with the single currency, on a technical basis there’s support near 1.2265 (the 2018 low) but fundamentally, the Italian elections and Germany’s SPD vote results could encourage additional liquidation ahead of these weekend event risk. Data has been mixed – although Germany reported fewer unemployment claims, consumer price growth in the Eurozone eased slightly in the month of February. Tomorrow is an important day for Switzerland with fourth quarter GDP, retail sales and manufacturing PMI scheduled for release. Weaker retail sales and trade activity in the fourth quarter points to weaker growth. For the Eurozone, we only have revisions to PMI so the path of the currency will be determined by the market’s appetite for risk.
Sterling was the day’s worst performer, losing nearly 1% of its value against the U.S. dollar. Brexit negotiations have taken a turn for the worse and could quickly become a political crisis for Prime Minister May. The EU released a draft of its Brexit agreement and in it they proposed a “common regulatory area” for Ireland after Brexit. May responded by saying that “no UK prime minister could ever agree” to a separate customs agreement for Northern Ireland. This has long been a serious area of contention and despite reports of progress at the end of last year, its returned as a potential deal breaker. The draft Brexit agreement also brings back the issues surrounding the European Court of Justice. The UK doesn’t want to be obligated to the ECJ’s decision but the EU wants disputes over Brexit to be settled by a joint committee. So in a nutshell, the EU hasn’t eased on their initial demands and instead their stubbornness has set back Brexit negotiations. Unfortunately Prime Minister May’s speech on Friday isn’t going to instill any confidence in her ability to get a deal done. UK negotiators will continue to work with the EU on reaching a deal and the main focus on Friday will be how amenable she is to their terms. With U.S. stocks ending the day at their lows, we expect further weakness in sterling. Manufacturing PMI numbers are scheduled for release on Thursday and based on the drop in the CBI index, softer activity is expected.
All 3 of the commodity currencies traded lower against the greenback today with the Canadian dollar leading the slide. USD/CAD rose to its strongest level in 2 months on the back of falling oil prices, U.S. dollar strength and risk aversion. According to the latest industrial product and raw material price reports, inflation increased slightly in the month of January. The main resistance level now for USD/CAD is 1.2900 and if stocks continue to fall, the pair could test this level ahead of Friday’s GDP reports. The Australian dollar gave up earlier gains and turned negative versus the U.S. dollar after the London close while NZD was under water throughout the North American session despite stronger business confidence and activity according to ANZ. Softer Chinese manufacturing activity validated the declines in both currencies. At the Asia open, we learned that job ads in New Zealand plunged and manufacturing activity in Australia slowed. Australia’s report could extend the losses for the currency.