By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
There’s been very little movement in the U.S. dollar this week, as a light economic calendar provides no specific catalysts. Instead, the greenback has been taking its cue from market sentiment, Treasury yields and political developments. Throughout this week we’ve seen notable intraday volatility in U.S. rates, which drove USD/JPY down to 113.40, taking the pair back up to 113.90 as yields ended the day in positive territory. However even with this intraday reversal, the U.S. dollar still underperformed most of the major currencies after the Democratic victories on election day raised concerns about the passage of the GOP tax bill. Some viewed Tuesday’s victories in Virginia and New Jersey as a referendum on Trump and those losses sent a warning signal to the GOP ahead of the more important 2018 midterm election. Reports that the Senate won’t release its version of the GOP tax bill on Thursday is a sign of the challenges that the tax bill faces, though it is unlikely that the Senate would have shared a version before the House Ways and Means committee finished marking up theirs. Nonetheless, the Republicans want to wrap-up the markup by Thursday, paving the way for a vote next week. We could still see the dollar extend its gains when the House announces a finalized bill. Throughout this week, the market’s focus has been on the commodity currencies but even with data and rate decisions on the calendar, AUD, NZD and CAD failed to break out of their recent ranges. As expected, the Reserve Bank of New Zealand left interest rates unchanged but the New Zealand dollar soared after the central bank brought forward its forecast on when it thinks inflation will reach its target by 3 quarters to Q2 of 2018 and the timing of the next rate hike by a quarter to Q2 of 2019. With that in mind, RBNZ still sees inflation slowing in the first quarter of next year but it believes that a lower currency will help boost prices. In the press conference, RBNZ’s Spencer was generally optimistic, confirming that the central bank is less dovish now than in September. This should pave the way for a stronger recovery in NZD/USD. The Australian dollar was also a big beneficiary of U.S. dollar weakness. The commodity currency traded higher against the greenback despite a materially weaker Chinese trade balance. China’s trade deficit rose to 254.7B instead of 280.45B with export and import growth slowing in October. This report should have had a more significant impact on the currency but AUD/USD traders are focused on keeping the pair confined within its 0.7625-0.7730 trading range. The Canadian dollar shrugged off record crude production and lower oil prices to trade higher against the greenback. Rising Canadian yields and stronger housing starts and building permits helped to lift the currency. EUR/USD, like USD/JPY, has been trading in an exceeding narrow range this week. On Wednesday, the currency pair was confined within a 32 pip range, which is the type of move that we expect during the holidays. No Eurozone economic reports were released Wednesday but that will change on Thursday with Germany’s trade and current account balances on tap. Germany’s council of economic advisors also presents its 2018 growth forecasts, which will be preceded by a speech from Chancellor Merkel. Wednesday’s worst-performing currency was the British pound, which spent the entire day in negative territory. No economic reports were released from the U.K. but right out of the gate, the European Parliament said the U.K.’s new offer for EU citizens to appeal a rejection to stay in the Union is inadequate. They feel that EU citizens should automatically be allowed to stay because, according to the European Parliament’s Brexit coordinator Guy Verhofstadt, “EU citizens in the UK and UK citizens in the EU were told that nothing would change because of Brexit. The fact that the UK Government needs 25 paragraphs to explain how lives will change proves this was a fabrication.” While the U.K. is trying to be more accommodative, the EU has taken a more defensive stance in its posture and has so far refused to bend on its demands.