EUR – The Magnetic Attraction of 1.30
JPY – Will Short Yen turn into the Long Gold Trade?
GBP – Ends Week at 2 Month High
NZD – Shrugs Off Stronger New Zealand Trade Numbers
CAD – Higher Gold and Oil Prices
AUD– Heavy Chinese and Australian Data Calendar Next Week
Forex Outlook – Action Packed Week Ahead
Strap on your seatbelts, we have an action packed week in the forex market ahead. Key economic reports are expected from the U.S., Eurozone, China, U.K. and Australia. With so much economic data on the calendar, it will be difficult to tell which ones will have the largest impact on currencies.
In the U.S., we have a Federal Reserve monetary policy meeting along with ISM numbers and non-farm payrolls. Considering that the Fed has no reason to act, we don’t expect much from the FOMC statement. Instead, non-farm payrolls will be the number to watch, but given that it's at the very end of the week, country specific factors rather than risk on / risk off sentiment should drive currency flows for most of the week. In other words, the performance of the dollar could be mixed in the coming days depending upon how Chinese, U.K. and Australian data fare and whether the ECB cuts interest rates.
However, we fear that the PMI numbers from these countries will show a slower pace of growth in the month of April, which could compound concerns about the sustainability of the global recovery. If we are right, the stall that we are seeing in some of the major currencies and maybe even equities could turn into a more significant reversal.
The 4 key events next week will be Chinese manufacturing PMI on Tuesday evening, the FOMC rate decision on Wednesday, ECB rate announcement on Thursday and Friday’s non-farm payrolls report. Despite last month’s abysmal non-farm payrolls number and decline in consumer spending, the Federal Reserve is not expected to alter its stance on monetary policy.
Based upon the Beige Book report, there is evidence that the pullback in March did not extend until April and some policymakers share this view. The answer lies in Friday’s non-farm payrolls report. Economists are looking for job growth to rebound from 88K in March to 150K in April. Anything less than 100K will drive the dollar lower, particularly against the yen. Job growth between 100K to 175K will be a relief for the Fed but probably won’t inspire much optimism in the market. We need to see job growth in excess of 200K for the rally in USD/JPY to resume.
EUR – The Magnetic Attraction of 1.30
There’s something to be said about the magnetic attraction of the 1.30 level in the EUR/USD. Despite extremely disappointing economic data this past week and discussions about the possibility of a rate cut by European Central Bank policymakers, the euro refuses to fall.
Each time the currency pair dropped below 1.30, it was quickly magnetized back above this key level. 1.30 may be an important psychological support level for the currency pair but given that the EUR/USD dropped to 1.2955 this past week, 1.2950 could be the more significant level. Friday morning’s U.S. GDP report fell short of expectations, which helped to drive the U.S. dollar lower but the benefit to the EUR/USD pair was only a mere 25 pips or so.
Instead, we think there’s a tremendous amount of stop orders and option barriers below 1.2950 that are keeping EUR/USD propped above this level. Therefore, a very big catalyst is needed for the EUR/USD to see a sustained break below 1.30 and more specifically 1.2950. There’s no shortage of event risks this coming week that could trigger that move including Eurozone confidence numbers, German retail sales, German unemployment, Final Eurozone PMI and of course, the ECB rate decision.
The key to the EUR/USD’s fate lies in whether or not the ECB cuts interest rates. If they do, 1.2950 will break easily and even if they don’t and set the stage for a rate cut in June, the EUR/USD could also move significantly lower. If the central bank sounds wishy-washy and noncommittal about the need for a rate cut, expect the EUR/USD to hold 1.30 and power higher.
JPY – Will Short Yen turn into the Long Gold Trade?
All of the Japanese yen crosses traded lower Friday with USD/JPY, EUR/JPY, CAD/JPY and AUD/JPY falling more than 1%. The Bank of Japan did not announce any new monetary easing measures Thursday night, which wasn’t a surprise but investors were still disappointed because policymakers can’t agree on whether 2% inflation can be achieved in 2 years.
According to their median forecasts, CPI is expected to hit 1.9% in March 2016, which is 3 and not 2 years from now. Going into Thursday night’s event risks, we said that the sooner the BoJ expects to reach their goal, the more positive it would be for USD/JPY. Unfortunately the BoJ now expects this target to be reached at the end of 3 years, 1 year longer than their initial pledge. In other words they just started easing aggressively and they have already resigned themselves to failure.
Driving inflation up to 2% was never going to be easy, especially with CPI dropping further last month but the range of forecasts by BoJ policymakers is wide with some members looking for CPI to be at 0.8% and others at 2.3%, implying that there is a huge amount of division within the central bank. So with BoJ officials skeptical about their own ability to boost inflation to 2%, it is no surprise to see USD/JPY under pressure. For the time being this should be a near term top in USD/JPY.
We have seen zero evidence of Japanese investors raising their foreign bond exposure and until all of the investment plans by Japanese lifers to diversify are put into action (which will happen eventually), there’s no reason for FX traders to jump back into the short yen trade. Hopefully this won’t turn into the Gold trade where everyone bought gold on the expectation that QE would drive up inflation only to be stopped out brutally – but we wouldn’t be surprised if it did.
If Japanese stocks continue to perform well, Japanese investors could keep their money in domestic equities. There is some hope for USD/JPY this coming week however – if U.S. yields rise on optimism from the Fed or stronger non-farm payrolls numbers, it could reverse the slide, but unless we have a blowout NFP number (250K or more), USD/JPY may not be able to break 100.
GBP – Ends Week at 2 Month High
What a week it was for the British pound. The currency pair climbed to its highest level in 2 months thanks to Thursday’s stronger GDP report and Friday’s sharp rise in the services index.
While the data was for the month of February, the services industry expanded at its fastest pace in 6 months. This coming week’s economic reports will shed light on whether the outperformance of the U.K. economy continued. Aside from consumer confidence, manufacturing, construction and services, PMI numbers are scheduled for release. Currently economists are looking for very minor improvements. If the data is good, the rally in the GBP/USD could extend to 1.56. If they surprise to the downside--and the chance is high given the sharp drop in the CBI index-- the rally could fizzle quickly as speculation of the need for additional returns. Remember, the chance of additional Quantitative Easing is not off the table – this week’s economic reports only softens the case and pushes the decision to Mark Carney, when he becomes central bank governor in July.
NZD – Shrugs Off Stronger New Zealand Trade Numbers
It was a mixed day Friday for the commodity currencies with the Australian dollar holding steady, New Zealand dollar ticking lower and the Canadian dollar tacking on gains against the greenback. New Zealand was the only one of the three countries to release economic data at the very end of last week, but the stronger trade balance failed to lift the NZD/USD.
Thanks to a sizeable increase in exports in the month of March, New Zealand’s trade surplus rose to 718M from 441M, the highest level since April 2011. Stronger exports of meat and edible offal helped to drive the increase, and the belief is that the farmers stepped up their early production of meat exports because of the drought.
Dairy exports on the other, the bread and butter of New Zealand were surprisingly weak but nonetheless the stronger trade numbers are consistent with the RBNZ’s recent optimism. While there was no data from Canada or Australia, both currencies recovered from earlier losses this past week. A rebound in commodity prices and stronger than expected Canadian retail sales helped the rally.
This coming week, Australian and Chinese PMI numbers are due for release, which means that the AUD/USD will be in play. Further weakness could drive the currency pair below 1.02.
JPY – Will Short Yen turn into the Long Gold Trade?
GBP – Ends Week at 2 Month High
NZD – Shrugs Off Stronger New Zealand Trade Numbers
CAD – Higher Gold and Oil Prices
AUD– Heavy Chinese and Australian Data Calendar Next Week
Forex Outlook – Action Packed Week Ahead
Strap on your seatbelts, we have an action packed week in the forex market ahead. Key economic reports are expected from the U.S., Eurozone, China, U.K. and Australia. With so much economic data on the calendar, it will be difficult to tell which ones will have the largest impact on currencies.
In the U.S., we have a Federal Reserve monetary policy meeting along with ISM numbers and non-farm payrolls. Considering that the Fed has no reason to act, we don’t expect much from the FOMC statement. Instead, non-farm payrolls will be the number to watch, but given that it's at the very end of the week, country specific factors rather than risk on / risk off sentiment should drive currency flows for most of the week. In other words, the performance of the dollar could be mixed in the coming days depending upon how Chinese, U.K. and Australian data fare and whether the ECB cuts interest rates.
However, we fear that the PMI numbers from these countries will show a slower pace of growth in the month of April, which could compound concerns about the sustainability of the global recovery. If we are right, the stall that we are seeing in some of the major currencies and maybe even equities could turn into a more significant reversal.
The 4 key events next week will be Chinese manufacturing PMI on Tuesday evening, the FOMC rate decision on Wednesday, ECB rate announcement on Thursday and Friday’s non-farm payrolls report. Despite last month’s abysmal non-farm payrolls number and decline in consumer spending, the Federal Reserve is not expected to alter its stance on monetary policy.
Based upon the Beige Book report, there is evidence that the pullback in March did not extend until April and some policymakers share this view. The answer lies in Friday’s non-farm payrolls report. Economists are looking for job growth to rebound from 88K in March to 150K in April. Anything less than 100K will drive the dollar lower, particularly against the yen. Job growth between 100K to 175K will be a relief for the Fed but probably won’t inspire much optimism in the market. We need to see job growth in excess of 200K for the rally in USD/JPY to resume.
EUR – The Magnetic Attraction of 1.30
There’s something to be said about the magnetic attraction of the 1.30 level in the EUR/USD. Despite extremely disappointing economic data this past week and discussions about the possibility of a rate cut by European Central Bank policymakers, the euro refuses to fall.
Each time the currency pair dropped below 1.30, it was quickly magnetized back above this key level. 1.30 may be an important psychological support level for the currency pair but given that the EUR/USD dropped to 1.2955 this past week, 1.2950 could be the more significant level. Friday morning’s U.S. GDP report fell short of expectations, which helped to drive the U.S. dollar lower but the benefit to the EUR/USD pair was only a mere 25 pips or so.
Instead, we think there’s a tremendous amount of stop orders and option barriers below 1.2950 that are keeping EUR/USD propped above this level. Therefore, a very big catalyst is needed for the EUR/USD to see a sustained break below 1.30 and more specifically 1.2950. There’s no shortage of event risks this coming week that could trigger that move including Eurozone confidence numbers, German retail sales, German unemployment, Final Eurozone PMI and of course, the ECB rate decision.
The key to the EUR/USD’s fate lies in whether or not the ECB cuts interest rates. If they do, 1.2950 will break easily and even if they don’t and set the stage for a rate cut in June, the EUR/USD could also move significantly lower. If the central bank sounds wishy-washy and noncommittal about the need for a rate cut, expect the EUR/USD to hold 1.30 and power higher.
JPY – Will Short Yen turn into the Long Gold Trade?
All of the Japanese yen crosses traded lower Friday with USD/JPY, EUR/JPY, CAD/JPY and AUD/JPY falling more than 1%. The Bank of Japan did not announce any new monetary easing measures Thursday night, which wasn’t a surprise but investors were still disappointed because policymakers can’t agree on whether 2% inflation can be achieved in 2 years.
According to their median forecasts, CPI is expected to hit 1.9% in March 2016, which is 3 and not 2 years from now. Going into Thursday night’s event risks, we said that the sooner the BoJ expects to reach their goal, the more positive it would be for USD/JPY. Unfortunately the BoJ now expects this target to be reached at the end of 3 years, 1 year longer than their initial pledge. In other words they just started easing aggressively and they have already resigned themselves to failure.
Driving inflation up to 2% was never going to be easy, especially with CPI dropping further last month but the range of forecasts by BoJ policymakers is wide with some members looking for CPI to be at 0.8% and others at 2.3%, implying that there is a huge amount of division within the central bank. So with BoJ officials skeptical about their own ability to boost inflation to 2%, it is no surprise to see USD/JPY under pressure. For the time being this should be a near term top in USD/JPY.
We have seen zero evidence of Japanese investors raising their foreign bond exposure and until all of the investment plans by Japanese lifers to diversify are put into action (which will happen eventually), there’s no reason for FX traders to jump back into the short yen trade. Hopefully this won’t turn into the Gold trade where everyone bought gold on the expectation that QE would drive up inflation only to be stopped out brutally – but we wouldn’t be surprised if it did.
If Japanese stocks continue to perform well, Japanese investors could keep their money in domestic equities. There is some hope for USD/JPY this coming week however – if U.S. yields rise on optimism from the Fed or stronger non-farm payrolls numbers, it could reverse the slide, but unless we have a blowout NFP number (250K or more), USD/JPY may not be able to break 100.
GBP – Ends Week at 2 Month High
What a week it was for the British pound. The currency pair climbed to its highest level in 2 months thanks to Thursday’s stronger GDP report and Friday’s sharp rise in the services index.
While the data was for the month of February, the services industry expanded at its fastest pace in 6 months. This coming week’s economic reports will shed light on whether the outperformance of the U.K. economy continued. Aside from consumer confidence, manufacturing, construction and services, PMI numbers are scheduled for release. Currently economists are looking for very minor improvements. If the data is good, the rally in the GBP/USD could extend to 1.56. If they surprise to the downside--and the chance is high given the sharp drop in the CBI index-- the rally could fizzle quickly as speculation of the need for additional returns. Remember, the chance of additional Quantitative Easing is not off the table – this week’s economic reports only softens the case and pushes the decision to Mark Carney, when he becomes central bank governor in July.
NZD – Shrugs Off Stronger New Zealand Trade Numbers
It was a mixed day Friday for the commodity currencies with the Australian dollar holding steady, New Zealand dollar ticking lower and the Canadian dollar tacking on gains against the greenback. New Zealand was the only one of the three countries to release economic data at the very end of last week, but the stronger trade balance failed to lift the NZD/USD.
Thanks to a sizeable increase in exports in the month of March, New Zealand’s trade surplus rose to 718M from 441M, the highest level since April 2011. Stronger exports of meat and edible offal helped to drive the increase, and the belief is that the farmers stepped up their early production of meat exports because of the drought.
Dairy exports on the other, the bread and butter of New Zealand were surprisingly weak but nonetheless the stronger trade numbers are consistent with the RBNZ’s recent optimism. While there was no data from Canada or Australia, both currencies recovered from earlier losses this past week. A rebound in commodity prices and stronger than expected Canadian retail sales helped the rally.
This coming week, Australian and Chinese PMI numbers are due for release, which means that the AUD/USD will be in play. Further weakness could drive the currency pair below 1.02.
