Dollar Ends Bruising Week - More Losses Ahead?

It has been a challenging week for the US dollar as the greenback sold off against most of the major currencies. Weaker US data combined with Federal Reserve Chairman Powell's benign outlook for the US economy reinforced the market's view that low rates will be here to stay. Trade talks also hit a snag this week and the ongoing uncertainty is taking its toll on currencies. Unless President Trump officially announces rollback of some US tariffs (which is possible), the dollar is vulnerable to further losses against euro and the Japanese Yen. For other currencies, risk aversion will offset demand, leading to restrained moves in sterling, the Australian and Canadian dollars.

We've learned this past week that while consumer prices edged higher in October, manufacturing activity slowed and the recovery in consumer demand was shallower than expected. Fed Chairman Powell is holding onto the view that the economy is recovering but the slow pace means that monetary policy needs to remain accommodative. According to Powell, there's a lot to like about today's labor market but it's a puzzle as to why we've not seen more uptick in wages.   This may have to do with low inflation and the fact that lower inflation and lower growth is the new normal. This isn't likely to change in the near term, which is why interest rate hikes are not on horizon. He also admits that there are downside risks and there's nothing booming in the economy that could go bust. Slower global growth, Brexit and trade are the main concerns and for the time being, there's no relief in sight. Of course, all of that could change if President Trump decides to delay or cancel the December 15th Chinese tariffs or better yet, combine that with tariff rollbacks but his recent language suggest that he wants to play hardball. Looking ahead, the main focus next week will be on the FOMC minutes, more manufacturing sector reports and trade. Barring any positive surprises, we expect USD/JPY to head back down to 108.

Euro could also make a run for 1.11 ahead of ECB President Lagarde's speech on Friday. One of the biggest stories last week was that Germany avoided recession. This set a bottom for EUR/USD and we expect the single currency to outperform the dollar, sterling, Aussie and yen in the week ahead. Lagarde could throw wrench in our positive outlook for the euro but she's not speaking until the end of the week. Since the beginning of the month, we've seen a number of upside surprises in EZ and German data including factory orders, retail sales and ZEW. We are still waiting for an official US decision on EU auto tariffs (may it be delays or not) but Friday will be the big day for euro with November PMIs and Lagarde on the calendar.

We also like the New Zealand dollar. The RBNZ surprised the market when they left interest rates unchanged this week at 1%. According to Governor Orr, there is no urgency to act at this point because the lower NZ$ is supporting the economy. The central bank feels that policy is already very stimulatory and rates will need to stay low for a long period of time. They think that the economy is near a turning point and there could be acceleration but according to RBNZ Deputy Governor Bascand, "if pickup fails to materialize, we'll do more." The central bank is done for the year but they haven't ruled out additional easing in 2020. In fact, RBNZ Assistant Governor Hawkesby says February is a "live" meeting but a rate cut would require a material change to their outlook. Governor Orr seems to agree - he said we're starting to see signs of pickup in activity but the door is open for a rate cut if needed. Considering that the next policy meeting won't be for another 3 months, the RBNZ's decision to leaves rates unchanged should have residual impact on the currency.

The Australian dollar on the other hand took a nosedive on the back of disappointing labor data and this divergence in the performance of the antipodean currencies drove AUD/NZD to its lowest level since August. Job growth unexpectedly declined in October with more than 19K full time and part time jobs lost. This drove the unemployment rate up to 5.3% and the participation rate down a tick to 66%. Between US-China trade tensions and this report, investors turned on the Australian dollar hard this week driving AUD to its weakest level in nearly a month. Dovish RBA minutes could keep A$ under pressure.

The Canadian dollar on the other hand is setting up for a recovery. After rallying for 2 weeks straight, the stability in oil prices and sell-off in the US dollar led the pair to find resistance at the 200-day SMA. Next week Canadian CPI and retail sales are scheduled for release. There will also be speeches from Bank of Canada Governor Poloz and Deputy Governor Wilkins. Poloz spoke earlier this week and he did not say much about the economy or monetary policy outside of a comment that wage inflation is now above 4% by most measures and that the labor market is telling us more than GDP data.

Last but certainly not least, sterling shrugged off back to back disappointments in economic data to end the week at 8 day highs near 1.29. Brexit is taking its toll on the UK economy but investors are relieved that the UK won't be spiraling out the EU and that Nigel Farage reduced his Brexit Party challenge this past week. With that said, we can't put lipstick on the pig. The UK economy is slowing - over the past week, we seen GDP growth fall short of expectations, the trade deficit widen, industrial production contract for the second month in a row, job losses mount, wage growth ease and most importantly CPI and retail sales decline in October. If next week's manufacturing, service and construction sector PMI reports show a further slowdown in November, GBP/USD won't be able to hold onto its gains.