What was looking to be another dismal day for US equities after the opening bell yesterday was quickly reversed as Janet Yellen’s testimony to Congress finished up, with the question and answer period providing investors with enough fodder to drive stocks higher through the remainder of the session. The head of the FOMC sent a calming message to market participants by advising that equity market valuations weren’t stretched by historical standards, and although Yellen expected the American economy to perform better in 2014 than 2013, the slow rise in labour compensation and the low levels of inflation warranted the current stimulus measures in place.
The confirmation of continuity in Fed policy came on the heels of initial reports that Putin was ready to discuss ways to end the crisis in Ukraine and that Russia had pulled their troops back from the border, with the potential for the de-escalation of the Ukrainian conflict giving traders impetus to rotate into high-yielding assets. Although NATO later denied they had any indication of the withdrawal of Russian military forces, the combination of an encouraging testimony from Yellen and the potential for Putin to enter into talks about doing more to defuse the conflict in Eastern Europe pushed the S&P higher by 0.56%, while USDJPY took off into the high-101s. The Loonie rally was stymied as a consequence of a firmer USD and a soft domestic building permit print, although USDCAD had a hard time regaining the 1.0900 handle as traders were content to sit on the sidelines ahead of the European Central Bank statement this morning and Canadian jobs data on Friday.
The overnight Asian session began with the Aussie resuming its upward trend against the USD after the region’s unemployment numbers for the month of April crushed estimates coming in with 14.2k new jobs created, more than double the roughly 7k analysts had expected. The unemployment rate also stayed flat at 5.8% during April, a better outcome than the 5.9% that was forecast as the participation rate remained unchanged and more people looking for work were able to find jobs.
Also helping out the Aussie and it’s commodity-linked brethren, Chinese trade balance numbers for April hit the wires, and showed exports and imports rose on a y/o/y basis, somewhat of a shock to analysts that had expected both measures to fall when compared to the same time period over the last 12 months. The value for imported good increased by 0.8% on a y/o/y basis in April, clawing back some of the drastic 11.3% drop in March and better than the 2.3% decline economists had expected heading into the report. The export side of the Chinese economy also performed better than expected last month, increasing by 0.9% on expectations of a 1.7% decline, which has boosted optimism the second quarter rebound is underway and could put a floor under the slumping growth rates seen in Q1. While we have opined there is a low likelihood the Chinese government would resort to larger-scale monetary easing unless economic indicators really fell off the deep-end, last nights’ trade data should help corroborate the transition to a slower growth trajectory for the Chinese economy is underway. The combination of better Australian employment data and stronger trade number out of China helped ignite AUDUSD into the high-0.93s, with the next level of resistance coming in at the 0.94 handle.
It was a busy day in Europe for central banks, with both the European Central Bank and Bank of England making decisions on the appropriate path for monetary policy in their respective regions. The BoE decided to stay the course and made no change to its current policy regime, leaving its asset purchase program at £375bn and the overnight lending rate at 0.5%. Today’s release is essentially a non-event for Sterling as when the BoE doesn’t make any changes to policy, it also doesn’t release a statement to support its decision; therefore, the big event risk for the Pound now that the BoE is out of the way are the unemployment numbers and inflation report that are both to be released on Wednesday of next week. Cable is trading sideways after the conclusion of the Monetary Policy Committee meeting, pivoting in the mid-1.69s ahead of the opening bell in North America.
Similarly to the BoE, the European Central Bank also decided to leave interest rates unchanged, feeling the current economic situation in the zone didn’t warrant negative deposit rates or the introduction of a quantitative easing program. An ‘un-changed’ decision from the ECB was widely expected heading into the announcement given some of the better PMI reports that have hit the wires as of late, and that next month’s meeting brings with it updated economic forecasts from the Governing Council. While the EUR popped on the inaction from the ECB, Mario Draghi’s press conference is likely to add some volatility to EURUSD depending on the tone he takes. The beginning of Draghi’s press conference had sent EURUSD into the high-1.39s, with Draghi continuing to promise there is unanimous agreement on the Council to introduce unorthodox monetary policy measures should there be a prolonged period of disinflationary pressures. The initial statements were nothing that investors have not heard before, with Draghi reiterating the high level of the Euro was somewhat worrying in the context of medium-term inflation expectations. What did appear to spook the EUR bulls was Draghi’s continued reference to next month’s meeting, and the appearance he is becoming more concerned that the prolonged downward pressure on inflation may not be transitory. Participants have seem to be using this as a foreshadowing that next meeting could be where the ECB chooses to act, and as we go to print EURUSD had been hammered back to the 1.39 handle, sparking volatility across the Euro crosses and flowing through to other FX markets.
Heading into the North American open, equity futures are slightly negative before the opening bell, but hardly phased by the military operations that Russia conveniently exercised overnight. After just 24 hours ago saying that he was removing troops from Ukraine’s border, Putin oversaw a military exercise supposedly to deal with a massive retaliatory nuclear strike in response to an enemy attack. Front month WTI is trading with a modest offer tone but managing to hold above $100/barrel this morning, while Gold is retracing some of the losses experienced after Yellen’s testimony, but still pinned below $1,300/ounce. The Loonie is slightly stronger against the USD before the opening bell, gaining off positive Chinese trade data and better than expected housing data. The number of new homes under construction during the month of April increased to an annualized reading of 195k, trumping estimates that had pegged the release at 175k, and somewhat blunts some of the sting from the building permits number from yesterday. USDCAD is pivoting in the high-1.08s, yet the early morning Loonie strength is looking to have fizzled, with corporates and real money happy to pick up USD between current levels and strong support in the mid-1.08s.
Looking ahead to tomorrow and the close of the trading week, the big data point to watch for Loonie traders will be the release of Canada’s employment situation over the month of April. The amount of jobs created in March came in much better than had been expected, but tempering some of the optimism was the fact that the majority of the jobs created were part-time, and therefore not indicative of good quality jobs for the broader economy. Tomorrow’s number will be an important inflection point for the labour market in Canada as to whether it could be the start of some sustained strength, or whether the pattern of strong numbers followed by a drawdown continues to repeat itself; since December of 2013 the Canadian economy is averaging about 5k new jobs created each month. The good news for the labour market is that the employment index from the Ivey PMI survey managed to work its way above the all-important 50 level for the first time in 2014, signaling the purchasing managers were optimistic on employment prospects and were hiring more than the previous month. That being said, the employment index was below 50 in March and the economy added over 40k new jobs, so there is definitely not a perfect correlation between the Ivey PMI and Employment Change.
Make sure to speak with your dealing teams heading into the report, as a good employment number north of the 20k level could force USDCAD to test the 1.0850 level, where a loss of jobs during the month of April would allow USDCAD to vault into the 1.09s and potentially start a deeper correction after the latest bout of Loonie strength.
further reading:
European Central Bank
Draghi’s continued reference to next month’s meeting
