Mixed week for the U.S. dollar as traders priced in net negative U.S. economic updates versus improving geopolitical headlines and counter currency sentiment.
United States Headlines and Economic Data
- Fed’s Bowman says she is comfortable with policy stance
- Small business optimism falls for fifth straight month, NFIB says
- U.S. Job Openings Hit Record High of 7.3 Million as Worker Shortages Persist
- Fed’s George says she backed pausing rate hikes in order to assess impact
- U.S. consumer prices unchanged in January
- Mortgage applications drop 3.7% as homebuyers pull back
- U.S. posts another budget deficit as tax revenues sag
- U.S. retail sales post biggest drop in nine years in December
- US unemployment claims rise by 4,000 to 239,000
- Fed Gov. Brainard sees ‘downside risks’ increasing, says balance sheet runoff should end this year
- Dovish Fed talk sends dollar lower, euro recovers
Major Market Drivers for the U.S. Dollar
First, we’ll briefly touch on global risk sentiment, and for a general rundown of what drove traders broadly this week, check out my review of this week’s risk sentiment drivers and broad market behavior in my Japanese yen weekly review here.
In short, we saw broad risk-on sentiment to start the week and it dominated almost all the way through Friday as traders seemed to mainly focus on the improving geopolitical risks related to the U.S.-China trade negotiations and the avoidance of another U.S. government shutdown with a new border security bill. Both stories have been among the top major market risk themes, so the fading uncertainty on those drivers naturally had traders leaning more towards high-yielders and riskier assets over low-yielders and safe haven plays. This is likely the reason why we saw the U.S. dollar outperform against the usual “safe haven” currencies (Swiss franc and Japanese yen) while losing out against the Loonie, Aussie, and Kiwi– typical behavior for this type of environment.
Counter currency sentiment was also a driver for USD pairs with a tough week for the British pound (weak economic data and Brexit issues) and euro (weak German data and political headlines) likely contributing to the Greenbacks positive performance against both currencies. The Aussie found buying support with the help of positive economic updates (consumer sentiment and inflation expectations higher), while the Kiwi dollar had a monster bullish week after the RBNZ goes against traders’ dovish expectations.
As for U.S. specific events, it was a heavy week of economic data, most of which were lower tier reports that didn’t seem to have an observable and/or clear uniform affect on USD pairs. We find that this is the case since most economic updates were net negative reports and yet, the dollar did not sell off after U.S. data releases in most cases.
There was one clear exception though on Thursday as U.S. retail sales was reported to have dropped the most since September 2009, and the Greenback took a mostly uniform dip lower with exception to the Loonie (Canada released bad manufacturing sales data at the same time). But besides that, it was clear that the main focus was the improving geopolitical sentiment surrounding the U.S.-China story as the negotiations are very active and possibly close to a breakthrough, and that the U.S. avoided another government shutdown.
The Greenback did fall somewhat uniformly on Friday, but there doesn’t seem to be a direct economic catalyst as U.S. economic data was mixed on the session, but it might be due to dovish comments from San Francisco Federal Reserve Bank President Mary Daly who suggested that the Fed may hold off on raising interest rates in 2019. Whatever the case may be, this put the U.S. dollar in its final position of under performing against the comdolls while out performing the safe havens and European currencies on the week.