Daily FX Market Roundup 11.26.18
By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
The best performing currency pair today was USD/JPY, which broke out of a 5-day long consolidation to trade above 113.50. A number of factors contributed to today’s moves but the primary driver was strong Black Friday sales. According to Adobe Analytics, which tracks transactions from 80 of the top 100 internet retailers, online sales hit a record $6.22 billion this Friday, up 23.6% from last year while Mastercard (NYSE:MA) projects that overall sales will top $23 billion. Adobe expects consumers to spend another $7.8 billion on Cyber Monday, which would represent a whopping 18% increase from last year’s levels. As the one day event turns into a week-long sales drive, retailers have done solid job of drawing out consumers. At these rates we could be looking at a retail recovery that is good for not only equities but also currencies. The S&P 500’s 1.5% rally along with the increase in Treasury yields also helped to drive USD/JPY higher. With the currency pair now trading back above the 20-day SMA, the momentum has shifted back to upside with USD/JPY eyeing a move to 114. No major U.S. economic reports were released today but tomorrow, house prices and consumer confidence numbers are scheduled for release – unfortunately we don’t think either one of these reports will help the dollar because stocks tumbled sharply this month.
Also, President Trump isn’t approaching the G20 meeting with optimism. Today he told the Wall Street Journal that its highly unlikely they will postpone additional China tariffs. Not only does he expect to move ahead with 25% tariffs on $200B of Chinese goods but he even suggested that iPhones and laptops imported from China could be subjected to a 10% tariff. We haven’t been hopeful going into the Trump-Xi meeting and these latest comments from the U.S. President reinforce our view that no meaningful progress will be made at the upcoming talks and if we are right, further trade tensions would make it difficult for USD/JPY to sustain its gains. With these comments in tow, it should be no surprise that the Australian and New Zealand dollars were the day’s worst performing currencies. Although AUD fell more than NZD, New Zealand retail sales were very disappointing – economists had hoped for a 1% increase in Q3 retail sales but instead spending stagnated. As for the Canadian dollar, the rise in the greenback prevented the loonie from reacting to the recovery in oil prices.
Meanwhile EUR/USD fell to its lowest level in 6 trading days on the back of U.S. dollar strength and cautious ECB comments. According to ECB President Draghi, recent economic data has been weaker than expected and while some of the slowdown may be temporary, prevailing uncertainties call for patience. These worries were reinforced by the lower German IFO business confidence report. Draghi feels that world growth momentum has slowed considerably and while inflation has been going up, it is expected to decline in the coming months. The central bank is still expected to end bond purchases in December but the usage of the words “at current time” to describe their plans to halt bond buying raised some concerns that they could reconsider if the global economy weakens materially over the next few weeks. Since we don’t expect a shock in the financial markets before the December 13th monetary policy meeting, the ECB should go ahead but all signs point to dovish guidance and lower economic projections. The ECB’s worries overshadowed reports that Italy could be willing to bring its fiscal deficit targets back in line with the EU’s requirements. With EUR/USD ending the day at its lows, a test of 1.13 seems likely.
EU leaders have approved the Brexit Withdrawal agreement but instead of rising, sterling ended the day unchanged because investors know that the big challenge now is Parliament. Prime Minister may needs 320 votes to pass the Brexit deal and there are 650 seats in Parliament. She should have at least 316 conservative votes but there’s almost no chance that she’ll get any of the 10 DUP votes so her job will be to convince members of the opposition Labour party to support her deal. It will be an uphill battle because Labour thinks most of their members will reject her agreement but there are Labour rebels and Brexit supporters who could be swayed. Parliament will vote on the deal on December 11th so between now and then, GBP will most likely trade in range as the skeptics hold out for a final outcome.