By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
We've got a slightly different format for our daily report today.
3 Currencies that You Should be Trading this Week
It will be another busy week in the foreign exchange market and Monday's big moves in currencies provide forex traders with a taste of what they can expect in the days ahead. The British pound broke higher against all of the major currencies while the euro and New Zealand dollar moved sharply lower. We have U.S. retail sales on the calendar this week but the main focus will be on the rest of the world because unless retail sales declines in April, which is unlikely, it will not affect the Fed or the market's expectations for tightening. The market's appetite for dollars will always be a factor, but the 3 currencies that you should be focusing on this week are the same ones that moved significantly on Monday -- the euro, British pound and New Zealand dollars.
Sell New Zealand Dollars: We are starting with NZD because our favorite trade is the New Zealand dollar, which was hit hard Monday by speculation that the Reserve Bank could lower interest rates twice this year. Economic data from New Zealand has been very weak and earlier this month, the central bank warned it could ease if prices fall further. However Monday's more than 1.5% slide versus the U.S., Australian and Canadian dollars was sparked by ANZ bank's prediction that the RBNZ will cut 25bp in June and another 25bp in July. We believe that the weakness in data and change in monetary-policy outlook is very bearish for the currency and the main catalyst for further losses will be the central bank's Financial Stability Report and Wheeler's press conference Tuesday afternoon/Wednesday morning local time. If Wheeler talks easing, NZD/USD could drop below 72 cents. The New Zealand dollar is a currency that you should be trading this week and after Monday's sharp decline, the best tactic would be to sell on a bounce.
Euro and Trading IMF Payment: The euro dropped to Monday's lows after the Eurozone Finance Ministers meeting ended without a deal for Greece as the focus now turns to Tuesday's EUR750 million payment to the IMF. According to Athens officials, Greece has already taken steps to meet its IMF payment on Tuesday and when the payment is received, it could trigger a relief rally in the currency because it means that at least for the time being, default is avoided. So there are 2 ways to trade the IMF repayment. The first is to buy euros immediately, assuming that the payment will be made (and we think it will) or sell euros if, after the repayment is official, on the premise that Greece will remain in the spotlight because it only has enough funds to meet its loan payments until June. Between now and then, more negative news flow will hit the currency.
When to Buy the British Pound: Sterling surged to a 4 month high versus the U.S. dollar on Monday as investors express continued relief that the Tories remain in control of the government. Continuity is good for the currency and has even revived talk of tightening. Had the Conservatives lost, we would still be knee-deep in post-election trading. However the focus this week shifts from politics to economics. The Bank of England left interest rates unchanged Monday but the rate decision was never seen as more important than the Quarterly Inflation Report this week. While the price action suggests otherwise, there is fear that mixed U.K. data, low commodity prices and concerns about fiscal austerity could lead to a more cautious report. If the BoE maintains a neutral outlook that places equal emphasis on the upside and downside risks, sterling will give up its gains quickly. However we think they will be optimistic about the country's longer-term inflation and growth outlook, which will drive further gains in the pound. The only problem is that the currency pair has already experienced significant gains, which makes pricing a trade difficult. It may be best to opt for a momentum trade that involves buying GBP versus EUR, NZD, AUD and, to a lesser degree, USD 0.5% above market a few hours before the Quarterly Report is released.
Comments on other currencies
We still like the U.S. and Canadian dollars but there are no major Canadian economic reports scheduled for release this week, which means that oil will be the main driver of USD/CAD flows. We are looking for USD/CAD to make another move below 1.20, but it may not occur until later this month ahead of the Bank of Canada's monetary policy announcement. Nonetheless, we suggest looking for opportunities to buy the CAD on dips versus the euro, dollar, yen, NZD and AUD.
As for the U.S. dollar, we are not looking for any big moves this week. USD/JPY will remain confined within a 118.30 to 120.80 range while EUR/USD trades between 1.09 and 1.14. U.S. yields continue to rise and eventually this should reinvigorate the rally in the greenback.
Last but not least, the Australian dollar, which normally benefits from Chinese stimulus, completely shrugged off the People's Bank of China's decision to lower interest rates. The problem is that investors have become immune to Chinese stimulus because they see it as the government's desperate attempt to stimulate the economy. We have a number of important Chinese economic reports this week and the central bank could be tempering the disappointment with easing. This was also the third rate cut by the PBoC in 6 months and further reductions are likely. Nonetheless, AUD is still holding up well thanks to the recent recovery in iron ore prices.