By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
- 9 Reasons You Should Be Trading Forex This Week
- GBP Hits 7-Week High Ahead of GDP
- EUR Rises After Greece Appoints New Leader in Debt Talks
- USD/CAD is Headed for 1.20
- CAD: More Optimism from BoC
- AUD: Oil and Gold Prices Move Lower
9 Reasons You Should Be Trading Forex This Week
Currencies took a back seat to equities Monday with the market focused on the first-quarter earnings report from Apple (NASDAQ:AAPL). Once the results were released, investors began a day-long period of data digestion before shifting their focus to the long list of important events on this week's economic calendar. Three central banks have monetary policy announcements and the same number will be releasing GDP reports. The global nature of this week's event risks means currencies will be on the move and here are 9 reasons why we think you should be trading forex this week:
- Fed Rate Decision will drive up volatility in the USD
- NZD could get crushed by the RBNZ statement
- Chinese PMI Could Stall the AUD Rally
- And RBA Glenn Stevens Could Talk Down the Currency
- Beware of the Impact of Q1 GDP on the USD
- Major Disappointment in UK Q1 GDP Could Reverse the Rise in GBP
- More Upside Surprises in CAD Data (Feb GDP) Could Drive USD/CAD to 1.20
- Rebound in German Retail Sales or Drop in GE Unemployment Could Accelerate Gains in EUR
- Upcoming May Day holiday (May 1) in Europe and Australia Could Encourage Position Adjustments in EUR, GBP and AUD
Even though there wasn't much in the way of forex news flow on Monday, currencies were already on the move. The U.S. dollar traded lower during the North American session and that weakness drove GBP/USD to its strongest level in 7 weeks and USD/CAD to its lowest level in more than 3 months. According to Markit Economics, the U.S. economy expanded at a slower pace in April. The report adds to the string of disappointments in U.S. data and is driving the dollar lower by causing investors to position for a more dovish FOMC statement. Between a slowdown in manufacturing and service-sector activity -- along with the weakest pace of non-farm payrolls growth since December 2013 -- there's no doubt that the recovery lost momentum over the past month. The Federal Reserve is not expected to change monetary policy but dollar bulls can't help but worry that the central bank will take June tightening off the table.
GBP Hits 7-Week Highs Ahead of GDP
Sterling rose to its strongest level versus the U.S. dollar since March with Monday's rally taking GBP/USD above the 100-day SMA for the first time since August 2014. The move was driven entirely by U.S. dollar weakness because the only piece of U.K. data released on Monday was the Confederation of British Industry's Total Trends Orders report, which fell well short of expectations. Not only was order growth weak, but prices declined and business optimism dropped to its lower level since January 2013. Whether sterling extends its gains to 1.54 or fizzles at these levels will be determined by Tuesday's Q1 GDP report. Given the weakness of retail sales and trade activity in the first 3 months of the year, we believe that growth slowed. A soft report could put an end to the currency pair's rally and allow the market to shift its focus to election risk. Technically, our friends at Forex Live made a very insightful observation. They said the last time GBP/USD rose 10 out of 11 trading sessions was in April 2012, a move that preceded a deep correction. In fact, taking a look at how the pair traded in recent years, it is rare not to see a 100+pip correction in an uptrend that lasts for 9 or 10 trading days.
EUR Rises After Greece Appoints New Leader in Debt Talks
No major economic reports were released from the Eurozone Monday but the euro traded higher after Greek Prime Minister Tsipras reshuffled his debt negotiation team. Finance Minister Varoufakis -- known for his flashy talk and style -- will now have to relinquish his leadership role to Deputy Foreign Minister Tsakalotos. Investors are excited about this change as it signals newfound resolve by Tsipras to reach a deal with creditors after last week's frustrating EZ meeting where Varoufakis was called a time waster. In contrast, Tsakalotos is an economist known to have a good rapport with EU, ECB and IMF officials. The hope is that fresh talks will get under way after Monday's personnel changes. It's too early to say whether negotiations will accelerate but the possibility is more realistic than ever. The next time European leaders meet to discuss Greece will be May 11. So for the week, the market's appetite for dollars will drive EUR/USD flow.
USD/CAD is Headed for 1.20
All three commodity currencies traded higher against the greenback on Monday. The Canadian dollar was the best performer, rising to its strongest level against the U.S. dollar in over 3 months. What is interesting about the move is that no economic data was released from Canada and oil prices declined. However, last week's positive news flow continued to boost the currency. The price of crude increased 20% this month, leading the Bank of Canada to drop its bias to lower rates. In fact on Friday, Bank of Canada Governor Poloz said he is very optimistic about the U.S. economy and believes that the adverse effect of lower oil prices will be gone by the second half of the year. The pickup in consumer spending and trade activity should lead to a stronger GDP report, which is one of the main reasons why we are looking for USD/CAD to hit 1.20. Higher gold prices contributed to the rise in the Australian and New Zealand dollars. Australian and Chinese leading indicators are scheduled for release this week but the most important event risk for the comm dollars will be New Zealand's monetary policy announcement. Last week, Assistant Governor McDermott said the central bank would consider lowering rates if prices fall further. The U-Turn in the central bank's policy stance should cap the gains in NZD/USD.