By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
- 5 Reasons Why Forex is the Market to Trade this Week
- AUD: What to Expect from the RBA
- USD/CAD Closes Above 1.25
- NZD/USD Drops to 4-Year Low Intraday
- June is a Tough Month for EURO
- Sterling Marks its 8th Straight Day of Gains
5 Reasons Why Forex is the Market to Trade this Week
This will be a busy week in the financial markets with U.S. non-farm payrolls scheduled for release on Friday. Equities, Treasuries and commodities will be on the move but the market to trade will be currencies. In this day and age we can't just focus on U.S. developments, particularly in a week when there are 3 monetary policy announcements, employment reports from 2 countries besides the U.S. and a number of PMI reports on the calendar. Greece also has a EUR 300 million payment due to the IMF on Friday. Each one of these event risks could take the focus off the dollar but collectively, they assure an active and volatile week for currencies.
The 5 most important event risks to watch in order of release will be Monday night's Reserve Bank of Australia monetary policy announcement, Wednesday's ECB rate decision, the 300 million euro payment by Greece to the IMF on Friday along with the U.S. and Canadian employment reports. There are no shortages of other economic reports to watch but these should have the greatest impact on currencies. The RBA and ECB are not expected to change interest rates but the tone of the RBA statement and Mario Draghi's press conference could dictate how AUD and EUR trade for the next few weeks. Of course, the US dollar will also be in focus and while steady improvements are expected for the labor market, the speed and velocity of the dollar's rally suggests that a correction is likely. In the past 2 weeks, USD/JPY raced from 119 to a high just shy of 125 on the back of mixed U.S. economic reports. On Monday morning we learned that while personal incomes grew 0.4% in April, personal spending and the PCE deflator were flat. Manufacturing activity on the other hand grew at a faster pace with prices spiking and constructing spending accelerating. Dollar bulls chose to shrug off the soft earlier report to take USD/JPY to its highest level since 2002. While the momentum is certainly on the side of the dollar, concern that non-farm payrolls may not live up to expectations could lead to profit taking ahead of Friday's release. If USD/JPY fails to close above 125 in a meaningful way, the currency pair could retrace back to 122.
AUD: What to Expect from the RBA
All three of the commodity currencies traded lower against the U.S. dollar Monday with CAD experiencing the steepest losses despite the relative stability of oil prices. For the past 4 trading days, speculators have been trying to push for USD/CAD to close above 1.25 and finally their wish has been granted. However there is significant resistance between 1.26 and 1.2650 that could be difficult to break before the IVEY PMI and employment reports. Meanwhile in the next 36 hours the focus will be on the Australian dollar. The RBA meets to discuss monetary policy and based upon the latest economic reports and the current level of AUD, there is very little reason for the central bank to push for a rate cut. Last night, we learned that for the first time in 6 months, manufacturing activity expanded with the PMI index rising to 52.3 from 48. Inflationary pressures held steady according to TD Securities but operating profits increased in the first quarter. Building approvals declined but we doubt that this down-tick will spook the central bank, particularly since the Australian dollar dropped 7% in the past 2 weeks from a high of 0.8160 to 0.76. We know that the RBA is comfortable with an exchange rate near 75 cents and the currency is trading close to those levels. According to the table below, there's been just as much improvement as deterioration in Australian and Chinese data since the last monetary policy meeting in May so between the exchange rate and data, the RBA has every reason to maintain a neutral bias. No economic reports were released from New Zealand overnight but on an intraday basis, the currency traded to its lowest level against the U.S. dollar in 4 years.
June is a Tough Month for EURO
June is a very tough month for the euro because Greece must negotiate a fresh bailout package or it will face default. Greece and her European creditors have kicked the can down the road long enough and now it faces a strict deadline that will force everyone to make hard decisions. Thankfully it seems that no one is wasting any time as Draghi, Merkel and Hollande convene Monday night to discuss Greece. The headlines have already begun to flow in with reports of a deal one minute countered by denials the next. There's talk that an agreement will be made soon, but we've been down this road many times before and are extremely skeptical of their ability to find common ground outside of their desire to see Greece -- which owes more than 1.5 billion euros to the IMF this month -- avoid default. A deal of some sort has to be made and when the announcement comes it will be extremely positive for the euro even if it proves to be only a stop-gap measure. However between now and then, market skepticism and conflicting headlines should keep EUR/USD under pressure. Creditors have until the end of the month to work out a deal and they may opt to take their time in the hopes that they could strong-arm Greece into real reforms. In addition, while we do not expect the Federal Reserve to raise interest rates this month, their updated forecasts and Janet Yellen's press conference could give the market the impression that they are moving closer to liftoff, which would be positive for the dollar.
GBP/USD Marks Seventh Straight Day of Losses
In the past 2 months we have seen just how volatile sterling can be. In mid April, the currency pair surged from a low of 1.4560 to a high of 1.55 only to give up more than 450 of those pips in 2 trading days and later regain momentum for a move above 1.58. In the last 2 weeks the currency pair gave up nearly half of those losses to trade as low as 1.5170 intraday. What is amazing about the move in the pound is its persistence. Sterling can rise or fall for days on end without any major retracement. We are in the midst of such a move right now with GBP/USD falling for the seventh consecutive trading day. While we expect the currency to bounce in the next 48 hours, this does not mean that the downtrend is over. Monday's sell-off was driven by weaker-than-expected manufacturing data. The PMI index rose from 51.8 to 52, which should have been encouraging if not for the loftier forecast. Also, there was a major drop in the employment subcomponent that unnerved the markets and sent sterling below 1.52. According to our colleague Boris Schlossberg, "Although dollar strength has been dominant factor in the move lower, cable is also suffering from market fears of a Brexit from the EZ. With the re-election of the conservatives the referendum on the issue will now be put to UK voters as early as next year, and while the consensus view is that UK will stay in the EZ, the risk of an exit is clearly weighing on the pound."