Wednesday 28th of March 2018 was a risk-on day, AUD increased and JPY and CHF fell. Gold and silver also fell. In this case, it looks like the risk was not stock markets, which ended the day little changed (DJIA) or lower (S&P 500) in the US, but rather geopolitical – it was reported that North Korea wants to hold a summit meeting with Japan.
The biggest move though was that USD increased. That was mostly against a weaker JPY, which fell on the news of North Korea’s summit bid plus end-month flows. It may seem contradictory that a summit with North Korea, which could be good news for Japan in that it might reduce tensions in the region, would cause the currency to weaken, but lower tensions mean greater risk appetite among Japanese investors, and that usually means larger outflows.
The dollar was boosted by a higher-than-expected upward revision to Q4 Gross Domestic Product (GDP), which was revised to +2.9% qoq SAAR from +2.5%, vs 2.7% expected. The growth data outweighed the negative news that the US trade gap was wider than expected in February 2018 and indeed was the widest for nine years despite an increase in exports. The US is likely to keep up the pressure on its trade partners and may continue with tariffs and other obstacles to free trade.
First up today is the German consumer price index (CPI). The goal is the harmonized index of consumer prices (HICP), which is the national CPI measured the same way for Germany as it is for all the other EU countries. That won’t come out until later in the day. Before then, we get information for the CPIs for various lander, or states, the first of which is Saxony. There’s no forecast for Saxony, but it’s closely watched anyway, as the national CPI tends to go the same way anyway. Look for an acceleration in the inflation rate, because Easter falls early this year and so more of the price hikes for package holidays fell in March 2018 than usual.
By the time it comes out, the German HICP is pretty well discounted and doesn’t have that much impact on the market. Nonetheless it could prove positive for the euro, since the German CPI figure is naturally a major component of the EU-wide CPI and is naturally a good indicator of what that figure is likely to be.
There is also the German employment data. The fall in unemployment is expected to be less than average recently (the average for the last six months has been -22k) but the unemployment rate is expected to fall a notch to a record low. The market probably pays more attention to the change in the number of unemployed, if for no other reason than that that’s harder to predict and so more often comes in different than the actual figure. But in fact neither indicator is particularly closely correlated with subsequent movements in the FX rate. This should be neutral for EUR.
Next up is the big indicator of the day: the US personal consumption expenditure (PCE) deflator and its sub-index, the core PCE deflator. The Federal Open Market Committee (FOMC) stated back in January 2012 that the PCE deflator was “most consistent over the longer run with the Federal Reserve's statutory mandate.” The things to watch here are how the mom rate of change of the PCE deflator and the yoy rate of change of the core deflator come in relative to estimates. The core deflator is more important, but as it doesn’t change very much, the market usually gets it right. In that case, attention will focus on the overall measure and any deviation from expectations there.
In this case, the core PCE deflator is expected to accelerate 10 bps to 1.6%, a little closer to the Fed’s 2% target. That could be positive for the dollar.
The personal income and personal spending figures that come out at the same time are a big indicator for the US economy overall, as about 70% of GDP is related to consumption, but they’re relatively insignificant indicators for the FX market. In any case, income is expected to grow in line with the recent trend as job and wages continue to rise, but sluggish retail sales figures suggest that spending is likely to grow at the same weak rate as it did in the previous month of February 2018. This may be because people expected tax cuts and so increased their spending late last year. This could be negative for the USD.
Philadelphia Federal Reserve System (Fed) President Patrick Harker, a non-voting FOMC member, speaks on the economic outlook. There will be a Q&A. He said back in February 2018 that he has “penciled in two hikes for 2018.” However, that would mean his dot on the dot plot would’ve been at 1.875%, but there weren’t any dots there this time (as opposed to three back in December 2017).
Overnight, Japan releases its end-of-month indicators, of which probably only the Tokyo CPI matters. Few Japanese indicators have an impact on USD/JPY. Japan started splitting out the Tokyo CPI and releasing it a week before they release the national CPI. When the two were released together, the market largely ignored the Tokyo CPI, but now that it comes out ahead of time, it may be seen as a leading indicator of the subsequent national CPI.
Today’s indicator is expected to show core inflation at the same rate as in the previous month of February 2018 and a small deceleration in headline inflation, which could be negative for JPY.
The Japan unemployment rate seems to have a modest correlation with the subsequent movement of JPY. In this case too, an expected rise in the unemployment rate could also be negative for JPY.
Note that the job-offers-to-applicants ratio, which comes out as part of the employment data, and also industrial production, which comes out shortly afterwards today Thursday 29th of March, doesn’t seem to have any significant correlation with the subsequent movement of the currency. The Fundamental Analysis are provided by Marshall Gittler, an external service provider of an independent analytical company. Any views and opinions expressed are explicitly those of the writer. Any information contained in the article, is believed to be reliable, and has not been verified by STO and is not guaranteed to be accurate. References to specific products, are for illustrative purposes only and are not a form of solicitation, recommendation or investment advice. Past performance is not a guarantee of future performance.