By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
Between the Reserve Bank of Australia and New Zealand monetary policy announcements along with Canada’s IVEY PMI and employment reports, this is an important week for commodity currencies. AUD, CAD and NZD have performed well thanks to a variety of factors. The best-performing currency was the Australian dollar, which rose more than 1% against the greenback after the Reserve Bank left interest rates unchanged, suggesting it won’t be easing again any time soon. While the RBA saw the strong A$ as a complication for inflation and the economy, it felt the current level of monetary policy is consistent (we interpret that to mean “sufficient”) with achieving sustainable growth and bringing CPI back to target. AUD/USD appears poised for a move to 75 cents but first it needs to break the 50-day SMA near 0.7275. The New Zealand dollar also performed extremely well ahead of the RBNZ’s monetary policy announcement on Thursday. Data from New Zealand has been mostly better than expected helping NZD/USD come within arm's reach of 70 cents.
The Canadian dollar tacked on gains despite an extremely weak IVEY PMI report. Manufacturing activity contracted at its fastest pace since January 2015 but traders chose to focus on oil, which climbed to fresh year-to-date highs above $50 a barrel. Having fallen to fresh 1-month lows, we can see USD/CAD slipping to the 1.26 handle. Aside from RBA and higher oil prices, the commodity currencies also benefitted from the rally in stocks, improvement in risk appetite and continued weakness of the U.S. dollar. But for the rallies to last, Tuesday night’s Chinese data needs to be good. China’s trade balance was scheduled for release and the surplus was expected to grow while imports and exports looked like they might fall further. These numbers will be just as important for the commodity currencies as the headline report.
The U.S. dollar resumed its slide against all of the major currencies although its losses versus the euro were retrained. Now that Yellen’s speech is behind us, there are no major U.S. economic reports scheduled for release this week so the drop in yields, a new year-to-date high in the S&P 500 and falling expectations for a July rate hike fueled the follow through selling. The tone for trading has been set and with little data on the calendar, we expect existing trends to continue, albeit at a slower pace. USD/JPY has found some support above 107 but the downtrend remains intact as long as the pair holds below 108.
Meanwhile the euro's underperformance had nothing to do with the latest economic reports. First-quarter Eurozone GDP was revised higher and German industrial production increased more than expected. The ECB is poised to provide more stimulus to the Eurozone in the coming few weeks with corporate-bond purchases set to begin Wednesday and the TLTRO starting on June 22. The prospect of more stimulus has not only limited the rally in EUR/USD but also led to euro weakness against many major currencies including the British pound and comm dollars.
But the real rollercoaster ride was in sterling, which soared nearly 200 pips in a matter of minutes during the Asian trading session, only to give almost all of it back before the European open. It then soared at the London open and trickled lower throughout the U.S. session. The big spike was attributed to a “fat-finger” trade during a period of low liquidity. There were only 2 pieces of U.K. data released overnight – the BRC retail sales index and Halifax house prices – both reports were better than expected but Brexit polls are the main focus this week. According to our colleague Boris Schlossberg,
YouGov has given the Remain vote a narrow lead and the Betfair website placed the implied probability of UK staying in the union at 72%. The news stood in stark contrast to a series of polls at the start of the week that suggested the Leave campaign was gaining momentum.
While day-to-day volatility for GBP has been significant, the pair remains confined within a wide, well defined 1.43 to 1.48 trading range.