By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
At the start of Thursday's North American trading session, the U.S. dollar hit new highs against many of the major currencies. By the end of the day, however, it had retraced most of those gains. While Wednesday’s hawkish FOMC minutes breathed new life into the dollar, the momentum waned despite supportive comments from Dudley. But the rally is stalling for now because one of the most dovish members of the FOMC from a district with contracting manufacturing activity sounded relatively upbeat. Dudley said June is “definitely” a live meeting and a June-July rate hike is reasonable if the economy meets his outlook. June is unlikely because “another variable in the mix is Brexit,” but his comments on Friday confirm that he’s one of the “many members” who thought tightening in June is a real possibility -- especially since he feels that the market’s pricing for Fed hikes is “way too low.” If one of the most dovish members of the central bank thinks that a rate hike is imminent, then perhaps investors really need to re-think and re-price their expectations for tightening this year. All of this suggests that USD/JPY should be trading higher and will at minimum hit 110.50. Although the slowdown in manufacturing activity in the Philadelphia region will make it difficult for the Fed to justify raising rates ahead of the U.K. referendum, there’s a very good chance that the FOMC statement, along with Janet Yellen’s press conference will be hawkish, limiting the slide and possibly encouraging a rise in the dollar. U.S. existing home sales are scheduled for release Friday and not likely to have a significant impact on the greenback.
USD/CAD experienced the strongest move Thursday, extending its gains to fresh 1-month highs on the back of continued demand for U.S. dollars and lower oil prices. When a trend gets underway in USD/CAD it can extend faster and last longer than most would anticipate. The rallies in December and January were perfect examples. In both cases we saw USD/CAD rise more than 400 pips with very little retracement. The downtrend between January and April on the other hand were choppier with more retracement opportunities. We are not saying that USD/CAD will hit 1.3300 with zero pullbacks, but they could be shallow and now that the currency pair is trading above 1.3000, the next level of resistance is 1.3200 and then the 38.2% Fib retracement of this year’s move at 1.3320. How quickly the Canadian dollar rises will hinge in part on Friday’s retail sales and consumer price reports. If spending and inflation slows as much as economists expect, it could drive the currency pair to its next resistance level. Friday’s economic reports are exceptionally important because the Bank of Canada meets next week and its plans for monetary policy will have a big impact on the loonie.
While EUR/USD hit a fresh 1-month low Thursday, demand below 1.1200 slowed/limited the slide. The account of the ECB’s last monetary policy meeting was the primary catalyst for the break of this key level but as we can see by Thursday’s price action, investors were not shocked by the report. It was simply the nail in the coffin for EUR/USD. According to the “minutes”, the risks to growth are still tilted to the downside and ECB is worried about the decoupling of inflation expectations and oil. Its focus now is on implementing the latest measures with plans to start buying corporate bonds in June. In other words, this report confirms that ECB is in no rush to ease again, though it still maintains a dovish bias.
Exceptionally strong U.K. retail sales numbers drove sterling to a high of 1.4664 against the U.S. dollar. However as the North American trading session progressed, dollar bulls regained control and sterling could no longer hold onto its gains. With that in mind, Thursday’s consumer spending numbers were very strong. Retail sales rose 1.3% in April, which was the second-strongest monthly rise in 7 months. Excluding gas, retail sales rose 1.5%, more than double market expectations. The March numbers were also revised higher, paving the way for stronger second-quarter growth. There’s no question that the momentum is on the side of sterling bulls and with two out of this week’s three key economic reports surprising to the upside (jobs and spending), the outperformance of the pound versus other major currencies is likely to continue.
The Australian dollar dropped to fresh 2-month lows versus the greenback after Wednesday night’s employment report failed to lend support to the currency. Just over 10k jobs were created in April, which was slightly less than anticipated. Unfortunately full-time jobs were shed for the third time in 4 months with the only growth seen in part-time work. The unemployment rate held steady at 5.7% but the participation rate declined. If the jobless rate did not remain steady, we would have probably seen a much deeper slide in AUD. Technically, Wednesday’s close below the 200-day SMA and Thursday’s move beyond the 61.8% Fib retracement of the December-to-April rally near 0.7215 opens the door to a deeper slide toward 0.7150. With no data on the calendar, the New Zealand dollar ended the North American trading session unchanged versus the greenback. AUD/NZD, however, hit fresh 3-month lows and we believe that rallies in the pair should be sold as Australia’s economy continues to underperform New Zealand's.