By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
- 3 Days, 3 Forex Volatility Drivers
- Euro: Can You Really Believe Greece?
- GBP Hovers Below 1.50 Ahead of Bank of England Minutes
- AUD/NZD Headed for Parity
- CAD: Oil Prices Give Up Gains
3 Days, 3 Forex Volatility Drivers
By now you should know the market's appetite for U.S. dollars is not the primary driver of currency flows this week. There's very little U.S. data on the calendar and only a handful of Federal Reserve officials are scheduled to speak. Of the few U.S. economic reports set for release, none are game changers for monetary policy. For this reason investors have shifted their focus abroad and in doing so are realizing that, outside of the U.S., the outlook is grim. Heading into this new trading week, we talked about 3 things that could drive a dollar recovery and all three have contributed to the greenback's rally. This includes stability in Treasury yields, minor U.S. data that poses no threat to the greenback and the dollar index finding support at the 50-day SMA. But these factors are minor and in reality, the dollar is recovering because last week's decline shook out some long-dollar trades and this week, bargain hunters jumped back in. These are of course small fluctuations in the greenback, which for the most part is consolidating and trading in a narrow range against most of the major currencies. As for Tuesday's price action, there was very little consistency in the dollar's performance Tuesday. Federal Reserve President Rosengren said an initial liftoff could take some experimentation but he is not a voting member of the FOMC. The big events this week are yet to come and they include Eurozone and Chinese PMIs, the Bank of England minutes and the April 24th Eurozone Finance Ministers. In the next 3 days at least 3 of these events should have a significant impact on currencies. If activity in Europe and China continues to falter, the dollar will resume its rise against the euro and commodity currencies. Sterling is trading right below 1.50 and dovish central bank minutes would be needed to keep it below that rate. Everyone is also watching the April 24th meeting to see if Greece's funding problems are resolved this week. While the Greeks are saying that a deal can be reached, most market participants are skeptical that any progress will be made. U.S. existing home sales are scheduled for release on Wednesday -- a rebound is anticipated but recently we have seen a pullback in housing that could weigh on Wednesday's report. Regardless of the outcome, we expect only a short-lived impact on the dollar.
Euro: Can You Really Believe Greece?
Based on the price action of the euro Tuesday, investors are still hopeful that some positive news flow will come out of this week's Eurozone Finance Ministers meeting. We know that this sentiment drove the rebound in EUR/USD because at the start of the North American trading session, the euro was trading lower but the single currency recovered its losses after Greek Finance Minister Varoufakis said there are clear signs of convergence, paving the way for Greece, and its EU/IMF lenders, to reach a deal. However Varoufakis has become an expert tap dancer known for sending mixed signals to the media and EU officials. The chance that any meaningful progress will be made is still extremely slim especially since the Germans refuse to release additional bailout funds without a credible reform plan from Greece. If the next allotment is not provided, the IMF's May 12th payment and the ECB/IMF/Treasury Bill payments in June and July will be at risk. A default would not be imminent because the IMF would most certainly give Greece an extension but this slippery slope won't bode well for the currency. There's no better measure of investor sentiment than this month's German ZEW survey. Quantitative Easing made investors extremely confident about current conditions but for the first time in 6 months, the expectations component declined reflecting the severity of the uncertainty created by Greece's debt troubles. No major Eurozone economic reports are scheduled for release on Wednesday but the euro will be in play with PMIs on Thursday and the Finance Ministers meeting on Friday.
GBP Hovers Below 1.50 Ahead of Bank of England Minutes
While sterling traded slightly higher on Tuesday, it continued to hover below 1.50. Whether it powers higher from here and makes another run above this key level or fades back below 1.49 could be determined by the Bank of England minutes. Between the March and April monetary policy meetings, we saw small improvements in the U.K. economy. Retail sales rebounded, while manufacturing and service activity accelerated, but one of the main problems was wage growth, which slowed further in February. Much of the concerns that U.K. policymakers expressed in March remain true in early April. Low inflation and a strong currency were two of the central bank's biggest worries last month. At the time, they feared that the currency could rise further and that would cause low inflation to persist for longer as a result. While sterling lost significant value versus the U.S. dollar in March and April, it traded sharply higher versus the euro and for U.K., the level of EUR/GBP is far more important than the level of GBP/USD. The decision to keep interest rates unchanged was unanimous but 2 members continued to see the decision to leave policy steady as "finely balanced" with the one member calling for looser policy in Feb. moving to the consensus view. While we expect these same concerns to be reiterated in Wednesday's report, the decision to leave rates steady will remain unanimous.
AUD/NZD Headed for Parity
Based on the way AUD/NZD is trading, the currency pair looks poised for a move to parity and this time, the level could break. When that happens we don't expect a swift move lower and instead anticipate a quick bounce above parity after stops are swept out. Fundamentally, the slide in AUD/NZD has been driven primarily by the underperformance of AUD. Both AUD and NZD have been moving in the same direction and for the most part, the Reserve Bank's dovish bias and its concerns about the currency has limited the losses. According to Monday night's RBA minutes, the central bank is still looking to ease monetary policy. Central Bank Governor Glenn Stevens was surprised that the currency was trading so strongly and believed that it should move lower. Data from Australia hasn't been terrible but growth in China is a major concern. Nonetheless the bounce in iron ore prices and the recent rate cut by the PBoC should stem the slide in the currency. At the same time, there is very little reason for the outperformance of NZD. Dairy prices continue to fall, consumer prices continued to decline and manufacturing activity slowed in March. The lower the value of AUD/NZD, the more trouble it brings for New Zealand's economy.