The U.S. dollar index pared some of yesterday’s gains to trade lower overnight. A stronger than expected reading of Chinese first quarter GDP assuaged some worries about the health of the world’s second largest economy and encouraged investors back into riskier and higher yielding assets. Traders are also trimming some exposure to the dollar ahead of a speech later today by Fed Chair Janet Yellen, who has not shied away from her dovish reputation in statements since taking the helm of America’s central bank earlier this year. Any statements from Mrs. Yellen that play up the level of slack in America’s economy or that effectively dampen expectations for a Fed rate hike sooner than previously expected, would keep Treasury bond yield pressured and keep the dollar on the defensive.
The Japanese yen fell against the dollar and the euro while the Nikkei rallied overnight in the wake of comments from the nation’s Finance Minister, Taro Aso, who suggested the government’s massive pension fund could step up its purchase of domestic equities. The subsequent rally in Japanese stocks encouraged investor to seek higher returns in assets abroad.
The British pound rallied against the dollar and the euro overnight after data showed the U.K.’s unemployment rate fell to a five-year low below the Bank of England’s 7.0% threshold in February. Importantly, the steady rise in U.K. wages remains a pillar of strength for the broader economy and is likely to keep alive expectations for a BOE lending rate hike in early 2015.
The euro pared some of the previous day’s losses but remained well within recent ranges. Continued demand for peripheral bonds in Italy and Spain remain supportive of the euro and for now, has largely offset recent dovish comments from ECB monetary officials.
JPY: Comments overnight from Japan’s Finance Minister, Taro Aso, suggested that the government’s $1.26 trillion pension fund could step up its domestic equity purchases in the months ahead. The comments sent the Nikkei index soaring by over three percent overnight. Rising Japanese stocks tend to be inversely correlated with the value of the yen. As Japanese investors become more confident, they often seek higher returns in riskier assets abroad. Data overnight showing stronger than expected Chinese Q1 GDP added to the buoyant mood in global markets, which added to the yen’s heavier tone overnight as well.
GBP: The British pound rallied against the greenback and the euro overnight after data showed the U.K.’s unemployment rate fell from 7.2% in January to 6.9% in February, below the 7.0% threshold that that the BOE said would prompt it to begin considering tightening monetary policy. Importantly, wage growth for U.K. workers continued its impressive rise over recent months. Wage increases matched the level of inflation for the first time in five years, a phenomenon that has helped the overall purchasing ability of U.K. households and remains a key tailwind for the nation’s economy. The solid data will likely bolster expectations of a BOE rate hike in the early part of 2015. However, if U.K. monetary officials attempt to dampen rate hike expectations by tweaking their unemployment rate threshold in the months ahead, some of the pound’s recent allure could be dulled.
EUR: The euro pared some of the previous session’s losses ahead of this morning’s speech by Fed Chair Janet Yellen and as investors continued to flood into higher returning euro zone peripheral bonds. Yellen has lived up to her dovish reputation in recent speeches and any additional comments that play up the weakness in America’s economy would dampen expectations for a rate hike sooner than previously expected. Meanwhile, investors continue to flood to bonds in Spain, Italy, Portugal and even Greece in search of yields and ahead of a possible asset purchase campaign by the ECB.
CNY: China’s economy grew by 7.4%(y/y) in Q1, its slowest pace of expansion in 18 months but still better than the median forecast for 7.3%(y/y). The data prompted a bit of a relief rally in riskier assets, which outperformed following the news overnight. However, mounting signs of a slowdown in China and its slowing demand for natural resources could prove to be an increasing headwind for risk and growth-sensitive assets.
USD: U.S. housing starts by rose 2.8%(m/m) to an annualized rate of 946K, below forecasts for 973K units in March. Permits, a forward looking gauge of starts, fell by 2.4%(m/m). The data confirms that America’s housing market got off to a soft start in the early months of the year but had little impact on the USD.