G10 FX Weekly – Weak US data weigh on USD

by: Georgette Boele , Roy Teo

In this publication: Weak US data weigh on the US dollar. JPY resume gains – over to you Kuroda. New Zealand dollar outperformer

 

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Weak US data weigh on the US dollar

Yesterday, there were two interesting market reactions. The stronger-than-expected ADP report failed to support the US dollar. This is because currency markets are currently biased towards negative news from the US, because this would decrease the possibility of Fed rate hikes this year. As a result, stronger data are ignored and weaker data have a more substantial negative impact on the US dollar. The weaker-than-expected Markit services PMI and ISM non-manufacturing caused a dramatic sell-off in the US dollar yesterday. EUR/USD broke the psychological level of 1.10 again and rallied to a high of 1.1146 while USD/JPY dropped to a low of 117.06 thereby fully erasing the gains after the BoJ decision last week. This morning the US dollar has remained under pressure. The ball is now back in the court of the ECB and the BoJ (see below). We expect the ECB cut its deposit rate in two steps (March and June) to -0.5% and to increase its asset purchase program by 10bn in March. This is not fully priced in by financial market.

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It is likely that in the near-term, currency markets remain biased towards softer US economic data and therefore the downward pressure on the dollar could continue. However, improvement in investor sentiment and monetary policy divergence should support the US dollar versus the euro and the yen during the course of this year.

JPY resume gains – over to you Kuroda

The Japanese yen (JPY) losses, after last Friday surprise move by the Bank of Japan (BoJ) to introduce negative interest rates, were fully erased this week as safe haven flows resumed and the US dollar fell on weak US data. Later this year, the BoJ could increase monetary stimulus further if the yen remains resilient and continues to weigh on the outlook for exports and inflation in Japan.

New Zealand dollar outperformer

The New Zealand dollar (NZD) was the strongest currency this week as the unemployment rate in the last quarter of 2015 plunged from 6% to 5.3% and employment grew 0.9% after falling 0.5% in the previous quarter. However, weakness in the labour market remains as the labour force participation rate recorded its third consecutive quarterly decline to its lowest level since 2013 Q2 and there are no signs of a pick-up in wage growth. We maintain our view that the Reserve Bank of New Zealand (RBNZ) is likely to lower the Official Cash Rate (OCR) by 25bp to 2.25% as soon as March. Around 30% of this is priced in by financial markets. Our year end NZD/USD forecast is 0.58.

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