USD: A disappointing GDP report

The US dollar closed out the past week somewhat stronger, but with a feeling of uneasiness. The release of a disappointing Gross Domestic Product (GDP) report on Friday showed that the economy grew by 2.6 percent in the final quarter of the last year.  After seeing an average annualized growth rate of 4.8 percent in the two previous quarters, the market had been expecting the final quarter growth rate to be between 3 and 4 percent.

An analysis of the 4th quarter growth data seems to support an emerging market view that a rapid climb of the dollar since July has become a serious headwind for the growth. American made goods have become more expensive for overseas buyers while less expensive imports are looking more attractive for buyers at home.  Net exports in the final quarter of last year subtracted the overall growth rate by one full percentage point.  If the dollar continues to rally amid global slowdown, falling commodity prices and geopolitical turbulences, the Fed may have no choice but try to pull back the dollar by postponing its planned interest rate increases for this year.

This week, all eyes will be on Friday’s release of January US Employment Report to see if the employment condition has been also affected by the negative effects of a strong dollar.  Stay tuned.

EUR: Deflation is here already

The euro came under pressure again last week after the release of January Eurozone inflation report which showed a 0.6 percent drop in consumer prices.  A dip in Eurozone unemployment to 11.4 percent from 11.5 percent failed to offset the bearish sentiment surrounding the common currency. The deflationary data will only hearten the European Central Bank (ECB) to buy bonds for a longer period than it had originally planned.

The ECB has announced that it will start printing €60 billion a month in March to buy private and sovereign bonds and inject more money into the financial system to combat deflation.  That said, the January inflation data suggests that the ECB may be already behind the curve and may need to extend its bond buying program well past the original forecasted end date of September 2016.  For that reason, it is no surprise that a number of analysts have adjusted their forecasts and called for the euro to devalue further against the major currencies, especially against the dollar, this month.  The next key technical level is the September 2003 low at 1.0762.

This week, the December EU Retail Sales report will be released on Wednesday.

GBP: Bank of England’s call on inflation

The pound has steadied last week following the release of above-forecast UK consumer confidence data.  The GfK January confidence index rose to +1 in January, matching the highs hit in mid-2014 and up from December’s 9-month low of -4. Analysts were expecting a smaller rise to -2.

This positive consumer sentiment is consistent with the market view that the labor market has improved in the recent months, and much anticipated wage pick up may finally materialize.  This development should add to the case that the Bank of England’s next move will be tightening the interest rate.  The forward interest rate market anticipates that the rate increase will be in the first quarter of 2016.

However, if the bank projects the current low inflation rate of 0.5 percent year-over-year to persist much longer than what market is expecting, then the anticipated rate increase may come later in the year – and correspondingly weaken the pound.

The Bank of England will meet this Thursday to discuss the UK growth and inflation prospects and release its monetary policy statement.  Thus, it will be interesting to learn if the bank is focusing on more growth or inflation.  Stay tuned.

CAD: Trying to shift away from commodities

The Canadian dollar fell hard last week after the release of November Gross Domestic Product report, which showed the economy contracted by 0.2 percent from the previous month.  Manufacturing and mining, quarrying, and oil and gas extraction industries all showed weakness in the October to November period.  Adding to rising concerns about the economy, a drop in manufacturing output was the most since January 2009.

Many analysts forecast the Canadian dollar to fall more in the coming months as long as energy prices remain low and global economy fails to generate sufficient demand for Canadian commodity exports.  That said, a weaker Canadian dollar should, in due course, make Canadian products and services more attractive for overseas buyers – particularly for American consumers – and rising exports should help to reverse the contraction.

Unfortunately, it will take some time for Canada to shift from its commodity-export growth strategy to a product and service oriented strategy.  However, if the shift drags then the Bank of Canada can help by cutting the short term interest rate to further devalue the Canadian dollar.  The Bank of Canada’s next monetary policy meeting will be in March.

This week, the January Employment Report will be released on Friday.

AUD: Rate cut is almost certain

The Australian dollar has come under renewed selling pressure last week amid continued falling commodity prices and a building speculation that Chinese economy will slow precipitously this year and thereby import less from Australia.

In fact, the 4th quarter export price index report showed export prices fell by 9.7 percent year-over-year, highlighting both a falling overseas demand and intensifying deflationary pressures.  As a consequence, the current account deficit remains elevated since export earnings have declined relative to import outlays.  In other words, there is a net capital outflow, and this will continue to undermine the Australian dollar.

The Reserve Bank of Australia (RBA) will be meeting tomorrow.  Anarticle in a major Australian newspaper this morning suggests that an RBA rate cut is “almost certain,” which is what a lot of people are thinking could stimulate more demand at home.  However, this will only pressure the Australian dollar to find new lows this week.

Have a great week.