By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
- 3 Ways Euro Trade After EZ Meeting on Greece
- USD/JPY Slips on Weaker US Data and BoJ Exit Talk
- GBP Unfazed by Weak Retail Sales
- NZD Crashes after U-Turn from RBN
- ZAUD Shrugs Off Weaker Chinese and AU Data
- CAD Soars on Jump in Oil Prices
3 Ways Euro Trade After EZ Meeting on Greece
Investors are buying euros ahead of Friday's monthly Eurozone Finance Ministers meeting. While it may appear that they are slightly more optimistic about the potential for a deal that could unlock the next allotment of bailout funds for Greece, in reality the rebound in EUR/USD reflects short covering ahead of the meeting.
Three Ways Euro Could Trade On Friday's Meeting
#1 - If you believe the Greek government's comments about being close to reaching a new agreement with its creditors, then there is a small chance of a strong rally in currency. A deal would be a major surprise that would not only drive EUR/USD to 1.10, but would also fuel a risk-on rally for most currencies.
#2 - However Greece has psyched investors out more times than we can count and the more likely scenario is for the meeting to pass with no major progress. In fact shortly after Greek government officials expressed hope for a resolution, the EU's Dombrovskis said that a major breakthrough is unlikely. Indeed on Wednesday, a spokesman from Germany's finance ministry said there was "very limited expectations" for Friday's meeting. Analysts at Citigroup (NYSE:C) coined the clever new term 'GRIMBO', which translates as, "Greece: Running Out of Money, Ideas, Time and Patience." If zero progress is made at Friday's meeting, the euro will slip back toward 1.05 as the combination of the standoff between Greece and its creditors along with weaker Eurozone PMI reports give traders fresh reasons to sell the euro.
#3 - There's one more middle-ground scenario that would involve agreeing on a few actionable reforms that would yield just enough progress to keep EUR/USD within a 1.06 to 1.08 range. We view the latest move in the EUR/USD to 1.08 as an attractive opportunity to sell the pair as we expect the euro to drop back toward 1.07 after Friday's meeting. There's zero chance that the EU will agree to release bailout funds on Friday and that puts the country's $763 million payment to the IMF on May 12 at risk. However we fully expect the IMF to give Greece an extension and according to EZ and Greek officials, they have enough funds to meet their loan obligations and avoid a default until June. So in a nutshell, while we believe that Friday's meeting will be negative for EUR/USD, we do not expect it trigger a move below 1.05. The German IFO report is also scheduled for release but that data will take a back seat to the Finance Ministers meeting.
USD/JPY Slips on Weaker US Data and BoJ Exit Talk
The U.S. dollar traded lower against all of the major currencies Thursday with the exception of the New Zealand dollar, which dropped on dovish RBNZ comments. The decline was sparked by an increase in jobless claims and the big drop in new home sales. Claims rose to 295k from 295k, which is not the direction that is needed to support the dollar rally but is still a low enough reading that is consistent with a healthy and improving labor market. New home sales on the other hand dropped over 11%, erasing all of the positive sentiment created by Wednesday's stronger existing home-sales report. While we would have liked to see new-home sales increase, we are not worried that Thursday's report will alter the central bank's stance on raising rates this year. However it gave investors a stronger reason to keep USD/JPY below 120, especially as the Bank of Japan talks 'exit strategy'. According to central bank governor Kuroda, policymakers are discussing the technical details of just such a plan. They may be far from unwinding QE, but such comments are consistent with recent improvements in data that removes the need for additional easing this year. Durable goods orders are scheduled for release Friday and we don't expect the report to have a significant impact on the dollar.
GBP Unfazed by Weak Retail Sales
The British pound ended the day higher against the U.S. dollar today despite softer retail-sales data. Consumer spending dropped 0.5% in March against expectations for a 0.4% rise. The decrease was driven primarily by lower fuel prices as if we exclude petrol sales, spending rose 0.2%. That still represents a slowdown from February but is at least better than the headline release. While sales increased for the 24th straight month year over year, spending growth was significantly weaker in the first quarter of 2015 compared to the fourth quarter of 2014, which means Q1 GDP growth could be softer. So while U.K. policymakers are more concerned about inflation rising faster and therefore more inclined to raise interest rates, data calls for a longer period of steady policy. However we continue to view the rise in sterling as an opportunity to sell at higher levels ahead of next month's general election. Back in 2010, GBP/USD trended higher and consolidated before settling on a decline starting April 27. In the run-up to the election, GBP/USD dropped 300 pips. On election day it dropped 400 pips and then another 500 pips in the 2 weeks that followed. So if you share our view that sterling will fall ahead of and on the back of the May election, then the best place to sell GBP/USD would be between the 100-day and 50-day SMA.
NZD Crashes after U-Turn from RBNZ
The NZD was the only currency that performed worse than the USD. Kiwi fell sharply against the greenback Thursday after Reserve Bank of New Zealand Assistant Governor McDermott said that if prices fall further, the central bank would consider lowering rates. This complete U-turn in the central bank's policy stance could spell big trouble for NZD/USD, especially since speculators have been long the currency pair since the beginning of the month. There is now a very good chance that NZD/USD will drop to 74 and maybe even 73 cents. While weaker Chinese manufacturing activity added to the pain in kiwi, it did not have any impact on the Australian and Canadian dollars. AUD marched higher despite the soft Chinese report and a decline in business confidence. The loonie performed particularly well with USD/CAD falling close to 1% thanks to the sharp rise in oil prices -- 1.20 here we come!