By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
- Why EUR is Still a Better Sell than Buy
- Dollar Sells Off Ahead of Retail Sales
- Sterling Soars on Strong IP Data
- NZD: RBNZ Tightens Lending, No Talk of Easing
- AUD Up 1%
- USD/CAD Dips Below 1.20 on Oil
Why EUR is Still a Better Sell than Buy
For the first time in 4 trading days, euro moved higher against the U.S. dollar after Greece completed a EUR750 million loan repayment to the IMF. But that was not the only reason why investors found reason to bid up the currency. U.S. labor data surprised to the downside, Federal Reserve officials raised doubts about the timing of tightening and European bond yields continued to rise at a faster pace than U.S. rates. While there are plenty of reasons to explain Tuesday’s rally, none of them alter the near-term risks of holding euros. And for that reason we believe that EUR/USD remains a better sell than a buy. Greece had to tap reserves and drain emergency funds in order to meet the IMF payment and according to Finance Minister Varoufakis, they have at most 2 weeks of cash left to make payments. In fact, they had to tap their IMF reserves in order to make the first of a series of major payments due to creditors in the coming months. Between now and June, the country has another 1.5 billion euros due, which means their liquidity problems will only worsen. Greece and its debt troubles will remain in the spotlight, creating ongoing problems for the euro. Secondly, the weak U.S. labor data that was released Tuesday was a secondary report focused on the number of job openings. Fed President Dudley’s comments were consistent with the views of a well-known dove. Widening Eurozone–U.S. yield spreads provide the only sound case for the EUR/USD rally but given that the uncertainty that lies ahead for Europe and the certainty of a Fed rate hike this year, the spread will eventually revert back to dollar’s favor. In the near term, Wednesday’s first quarter Eurozone GDP reports and the U.S. retail sales number will determine how EUR/USD trades. But over a longer time period, the fleeting nature of Tuesday’s positive euro drivers and the technical resistance created by the convergence of the 61.8% Fibonnaci retracement of the record high and low and the 100-day SMA right above current levels means EUR/USD will have a tough time extending its gains.
Dollar Sells Off Ahead of Retail Sales
Investors sold U.S. dollars Tuesday after Federal Reserve President Dudley said “I don’t know when the Fed will hike rates” but when it occurs, it will “not be a big surprise.” These noncommittal comments from one of the most dovish members of the FOMC is not unexpected but investors read between the lines and interpreted his comment that liftoff will not be a surprise to mean that the Fed is not ready to raise rates because if they are, they would be preparing the market for tightening by telegraphing their plans well in advance. Of course we expect rates to rise in September and there’s plenty of time for policymakers to guide the market’s expectations in that direction. At the same time, Tuesday’s comments from Fed President Williams should provide assurance for dollar bulls. As another voting member of the FOMC this year alongside Dudley, he prefers that the Fed start raising rates earlier to ensure gradual increases. However according to the monthly Job Openings and Labor Turnover Survey, labor-market conditions deteriorated. At first glance this release, which is one of Yellen’s favorites, paints a dismal picture of the labor market but the decline comes off a 14-year high. Yellen and her counterparts at the Fed will be much more focused on the retail sales report. Economists are looking for a slowdown in spending because while job growth recovered in April, wage growth has been slow. An upside surprise should help to reinvigorate the dollar rally.
Sterling Soars on Strong IP Data
The British pound surged to a fresh 4-year high against the U.S. dollar on the back of stronger data. Industrial production rose 0.5% in April while manufacturing production increased 0.4%. This was the largest increase in industrial production in 5 months and it sets a positive tone ahead of the Bank of England’s Quarterly Inflation Report. The price action suggests otherwise but there is a 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.
NZD: RBNZ Tightens Lending, No Talk of Easing
The RBNZ’s Financial Stability Report and Central Bank Governor Wheeler’s comments failed to have a lasting impact on the currency because a cautious outlook on the economy was offset by no clear signal to ease monetary policy. The biggest announcement made was lending curbs on Auckland housing. What’s interesting about the move was that they took steps to curb lending and cool the housing market in Auckland yet they eased limits on mortgages outside of the city. The decision created quite a bit of volatility for the currency, particularly since it came with mixed comments on the currency. The RBNZ previously described the NZD/USD level as unjustifiably high and they have now dropped that phrase and instead called the recent decline helpful. Investors had hoped that Wheeler would set the stage for easing in June but instead he simply said they are putting together their forecasts. Meanwhile the Australian and Canadian dollars traded sharply higher. AUD was the day’s best performer, rising more than 1% against the greenback. No economic data was released from the commodity-producing country and given unchanged gold and iron ore prices, the only explanation for the move is U.S. dollar weakness and perhaps a delayed reaction to Chinese stimulus. Whether AUD/USD extends its gains to a fresh 3-month high will hinge on Tuesday night’s Chinese industrial production and retail sales data. Given the PBoC’s unexpected decision to lower rates, we expect that this data was weak. USD/CAD on the other hand made another move below 1.20 on the back of rising oil prices.