Highlights
* Dollar gets slammed on monetary policy outlook
* ECB keeps its cards close to its chest
* The UK: pricing out a rate hike
* Will the BoC do anything Loonie next week?
* Key technical levels to watch in the week ahead
* Key data and events to watch next week
*Dollar gets slammed on monetary policy outlook*
The U.S. dollar has weakened significantly this past week as monetary
policy divergences became more prevalent and commodities continued to
soar. Precious metals marched higher with gold hitting new record
highs while silver broke above $40 and oil topped $110 a barrel.
Currencies whose countries export commodities were beneficiaries as
highlighted by new post-float highs in AUD/USD which climbed above
1.0500 and multi-year lows in USD/CAD which fell below 0.9600. The ECB
lifted rates by 25 bps to 1.25%, the first move on interest rates
since May 2009 but no gave indication that it will be the beginning of
a series. This is largely different from the Fed's policy stance which
has maintained its commitment to keep rates low for an 'extended
period'. Moreover, while recent speeches by some members of the Fed
have suggested cutting short the plan to purchase $600 billion in
assets through June, this week's FOMC Minutes showed little evidence
that the idea has gained traction among the FOMC voting members. In
the week ahead, FOMC voting members Dudley, Evans, and Yellen are set
to deliver speeches and we would note that these members are
considered to be dovish. The monetary policy outlook remained the key
driver as dollar index sunk to new 16-month lows and though budget
talks and a looming government shutdown are viewed mostly political
theater and are likely to have little economic impact, it gives
investors yet another reason to sell the buck.
The exception to USD weakness has been against the Japanese yen which
has continued its sharp reversal lower following the G7 coordinated
intervention. Japan was struck with another earthquake, this time
around the magnitude of 7.1. While reports of the earthquake were
initially met with risk aversion, markets breathed a sigh of relief
after tsunami warnings were retracted and resumed their appetite for
risk. The week ahead will include the Fed's Beige Book to give clues
on the outlook of the economy, speeches by FOMC voting members, and
inflation data. We would anticipate a stabilization in the buck as
investors take profit ahead of key levels and events.
*ECB keeps its cards close to its chest*
So the ECB hiked rates as anticipated but the question now for
investors is what they will do next. The market thinks there will be a
further two hikes before the end of the year with the next hike coming
in July, according to the Eonia swaps market.
The 11 per cent increase in the euro versus the dollar since the start
of this year suggests that a lot of the expected ECB tightening is
already priced into the single currency. So if things stay as they are
then the euro may lose its yield advantage and could come under
pressure. This would happen if investors think the ECB may not deliver
as much policy normalisation as they originally anticipated.
However, on the back of last week's meeting we know two things:
firstly that the ECB has not yet decided if this will be the start of
a rate hiking cycle, and secondly, that the future trajectory for
interest rates depends on inflation since price stability is the ECB's
sole mandate.
So this week's second inflation reading will be crucial for interest
rate expectations in the currency bloc. The first reading saw
inflation rise to 2.6 per cent in March from 2.4 per cent in February.
Above target inflation is unacceptable to ECB policy makers and
March's price data most likely sealed Thursday's rate hike. We will
get the regional breakdown of the inflation figures on Thursday. We
already know that inflation in Germany rose to 2.2 per cent while even
debt-laden peripheral nations have experienced inflation pressures
including Ireland, where EU harmonised inflation jumped from 0.9 per
cent in February to 1.2 per cent in March.
It is the large jumps in inflation that the ECB want to avoid, and
right now price pressures continue to build as energy prices surge to
multi-year highs. If we see an upward revision to inflation next week
then a rate hike before July becomes a possibility.
We think that dips in EURUSD will remain fairly shallow and a weekly
close above 1.4420/30 may herald further gains to 1.4700 then 1.5000.
But a caveat to this is the dollar. Arguably weakness in the greenback
is pushing the euro higher and any swift resolution to the US's budget
impasse could see a reversal in short dollar positions and thus weigh
on the euro in the short-term. In the long-term the direction of
EURUSD depends on the clarity provided by the Fed about its intentions
regarding monetary policy normalisation.
*The UK: pricing out a rate hike*
It wasn't that long ago that the UK was considered the first of the
major central banks to hike interest rates. Yet that seems like a long
time ago now. The ECB has moved first and the UK's growth outlook has
deteriorated sharply. This has weighed on interest rate expectations
and 3-month Sonia rates (GBP inter-bank swap rates that follow
interest rate expectations closely) have fallen sharply.
The market is increasingly coming to the conclusion that the Bank of
England won't hike interest rates at their next meeting in May, and
instead will wait until August to do so. This is consistent with our
call and we expect the BOE to remain on hold this quarter.
Economic data has been largely weak with only a couple of upside
surprises. One was service sector data for March, yet we believe this
was an anomaly and service sector activity played catch-up after
weather-related disruption in January and February.
But, while we think the BOE may be on hold longer than the market
currently expects, there are a couple of important caveats to
remember. The first is the Q1 GDP release on 27 April. This is the
deal-breaker in our view. Lacklustre quarterly growth - something
below 0.8 per cent would be viewed as a disappointment - would make a
rate hike less likely in the current environment.
Another risk is the May Inflation Report. We think the economic
backdrop, the impact of austerity measures and weak wage growth will
be enough for the Bank to maintain its cautious stance in May. The
Bank tends to hike rates after an Inflation Report, so the next
logical date for an increase in rates would be August - after the
Bank's summer Report.
This makes the pound a sell on rallies in our opinion. It has already
tested 1.6400 highs, but we think it is vulnerable to a pullback
especially versus the dollar and the euro since a lot of its recent
strength was fuelled by rate hike expectations. With this major source
of support gone, sterling strength is likely to be curtailed going
forward.
*Will the BoC do anything Loonie next week?*
On April 12th the Bank of Canada will announce their interest rate
decision. By nearly all measures the market is expecting them to
remain on hold at 1.00%, but their statement will be closely watched
for any potential changes to their accommodative stance. As a result
of rising food and energy prices economists have begun to shift their
inflation forecasts higher for 2011 and 2012, however immediate
pricing pressures continue to remain subdued. Nevertheless, such a
backdrop makes the BoC's job that much more challenging as they begin
to deliberate on the path of future rate hikes.
On Wednesday the BoC will release the April Monetary Policy Report.
The MPR is going to provide further economic incite and will likely
touch upon turmoil in the Middle East and earthquake/tsunami in Japan
- which has caused a rise in oil (energy) prices, as well as provide a
slightly more optimistic bias regarding GDP over the coming quarters.
While the stronger CAD has restrained Canadian exports, something
Governor Carney continues to highlight, it will be unable to keep the
BoC on the sidelines for too much longer. Going forward we believe the
BoC is likely to remain on hold until the beginning of the 3rd
quarter, where we expect a rate hike of 25bps at each meeting through
the end of 2011 (July, Sept., Oct. & Dec.).
The CAD has been one of the strongest commodity currencies since the
beginning on 2011, appreciating roughly 4.4% year to date, as it has
benefitted from strong domestic fundamentals, improving global growth
and rapidly rising oil prices. Just today crude oil (WTI) made fresh
multi-year highs around $112.55/60,and firm demand from both emerging
& developed economies, as well as ongoing unrest in the MENA region
will likely to continue to support the 'black-gold' going forward.
Therefore, while commodities remain strong and the U.S. dollar remains
offered, we'll look to be a seller of USD/CAD on rallies towards
0.9625/35 and 0.9680/00 in the week ahead.
*Key data and events to watch next week*
The greenback remains on the offer, driven fundamentally by widening
rate differentials between the U.S. and other CBs. The USD Index broke
below its short term bear flag formation to fresh yearly lows just
above the 75.00 figure. Additionally, USD weakness is being confirmed
by other asset groups - gold broke above the key 1450 level, also the
neckline of an inverted H&S pattern suggesting a measured move
objective to the 1550/75 area. Technical developments this week
suggest the greenback's woes may continue but considering the steep
rate of USD declines, pullbacks should be expected and may provide
better value for those looking to establish USD shorts.
*EUR/USD*: The ECB's 25bp hike to the main refi rate may be a historic
step as the central bank could be initiating a tightening cycle before
the Fed for the first time. Uncertain Fed policy direction continues
to weigh on the buck elevating EUR/USD above key technical levels. The
most significant being the weekly close above primary downtrend
resistance (around 1.4300) suggesting sustainable EUR strength in the
weeks ahead. 1.4450 (61.8% retracement for the 1.6035/50-1.1875/80
decline) , however, is proving to be a formidable hurdle as EUR
strength was capped into it on Friday trading. Below 1.4300 sees
additional support into the 1.4250 pivot which may provide decent
value for EUR longs as the medium term technical outlook has now
shifted to the upside.
*GBP/USD*: The BoE remained on hold as expected and with rate
differentials driving FX, the uncertain outlook for UK rates has seen
the sterling underperform relative to other majors against the buck.
GBP/USD, however, looks set to close above its respective primary
trendline which technically suggests a potential reversal for the
primary decline from the 2.1160 peaks. 1.6500 is likely to be a
psychological barrier ahead of the key 1.6825/50 daily horizontal
pivot. Immediate support may be seen into 1.6275/00, broken trendline
resistance, ahead of the key 1.5975/1.6000 daily pivot.
*AUD/USD*: Commodities have been screaming higher which has seen
commodity currencies benefit substantially. AUD/USD posted post-float
record highs on a seemingly daily basis this week and looks set to
close near weekly highs around 1.0540/50. The 1.0600 figure is likely
to provide some technical hurdles to further Aussie strength but if
commodity upside continues, the 1.0900 measured move objective for the
symmetrical triangle breakout may be in view next. Downside
corrections may find meaningful support into the rising trendline
around 1.0450 ahead of the 2010 1.0255/60 highs.
*USD/JPY*: Another earthquake in Japan saw USD/JPY upside capped ahead
of the all-important 85.50 barrier. Rumored options related stops
above 85.50 were never hit as the declining trendline from the 2007
124.10/15 peaks and the 55-week SMA effectively stunted further JPY
weakness against the greenback. Immediate support may be seen into the
84.50 daily pivot ahead of 83.50 which sees the 200-day sma converge
with broken daily triangle tops. Considering uncertain USD monetary
policy, USD/JPY is likely to underperform relative to other JPY pairs.
*EUR/JPY*: With loose BoJ monetary policy now a given for the
foreseeable future and the ECB possibly embarking on a tightening
cycle, EUR/JPY blew through a number of key technical levels this
week. 120.00, psychological barrier and Feb. 2010 lows, proved to be
no match for the pair. Furthermore, EUR/JPY has managed to close above
weekly Ichimoku cloud tops ( 121.90/00) suggesting upside trend
continuation may be sustainable and should be a level of immediate
support on downside corrections. Below may find more meaningful
support into the Feb. 2010 lows around the 120.00 figure which may
provide value for EUR/JPY longs.
*Key data and events to watch in the week ahead*
United States: Monday - Fed's Yellen and Dudley speak Tuesday - Mar.
Import Price Index, Feb. Trade Balance, Apr. IBD/TIPP Economic
Optimism, Fed's Tarullo to speak Wednesday - Mar. Retail Sales, Feb.
Business Inventories, Fed's Beige Book Thursday - Weekly Jobless
Claims, Mar. PPI, Fed's Duke, Plosser and Tarullo speak Friday - Mar.
CPI, Industrial Production and Capacity Utilization, Apr. Empire
Manufacturing, Feb. Net TIC Flows, Apr. prelim U. of Michigan
Confidence, Fed's Evans speaks
Eurozone: Tuesday - Mar. final German CPI, Apr. EZ and German ZEW
Survey, ECB's Stark speaks Wednesday - Mar. German Wholesale Price
Index, Feb. EZ Industrial Production Friday - Mar. EZ CPI, Feb. EZ
Trade Balance, ECB's Constancio speaks
United Kingdom: Monday - Mar. RICS House Price Balance Tuesday - Feb.
Trade Balance figures, Mar. CPI, RPI Wednesday - Mar. Claimant Count
Rate, Jobless Claims Change, Feb. Avg. Weekly Earnings, ILO
Unemployment, Mar. Nationwide Consumer Confidence
Japan: Monday - Feb. Machine Orders Tuesday - Mar. prelim Machine Tool
Orders Wednesday - Mar. Domestic CGPI Friday - Feb. final Industrial
Production and Capacity Utilization
Canada: Tuesday - Feb. New Housing Price Index, Feb. International
Merchandise Trade, Bank of Canada Announces Interest Rates Wednesday -
BOC Monetary Policy Report Thursday - Feb. Manufacturing Sales
Australia & New Zealand: Tuesday - NZ Finance Minister English speaks,
Mar. AU NAB Business Confidence and Conditions Wednesday - Mar. NZ
Food Prices, Apr. AU Westpac Consumer Confidence, Apr. AU DEWR Skilled
Vacancies Thursday - RBA Governor Stevens to speak, Mar. NZ Business
NZ PMI
China: Sunday - Mar. Trade Balance Friday - Mar. Industrial
Production, Retail Sales, CPI, PPI, Industrial Production, Fixed
Assets Investment, 1Q GDP
Source: ActionForex.Com
