By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
- Dollar Rips Higher, More Gains Ahead
- EUR/USD Crashes Despite Positive News flow
- AUD Soars After RBA Leaves Rates Steady
- CAD: Oil Prices Continue to Rise
- NZD Hit by USD Strength
- GBP: UK Economy Gains Momentum
Dollar Rips Higher, More Gains Ahead
Dollar bulls are back in control and they plan to take the greenback higher. The biggest threat to the dollar rally was last Friday’s non-farm payrolls report and even though the weak release triggered a short-term correction in the currency, investors viewed the move as an opportunity to buy at lower levels. Markets around the world came back online Tuesday after the Easter holiday and instead of reversing Monday’s gains, investors took the dollar and global equities higher. As we indicated after the payrolls report, the monthly number can be volatile. What is important is the general trend of job growth, the unemployment rate and earnings. The general demand for risk assets and specific appetite for U.S. dollars in the last 48 hours tells us that investors have dismissed the soft release as a one-month correction that will not affect the Federal Reserve’s plans to tighten. This outlook was reinforced by Tuesday’s second-tier economic reports – JOLTS job openings and the IBD/TIPP index continue to paint a positive outlook for the economy. The number of job openings rose to a 14-year high, a reflection of strength for U.S. companies and a positive signal for the labor market. Investor optimism also increased with the IBD/TIPP index rising to 51.3 in April from 49.1 – a reading above 50 indicates optimism. Fundamentally, the rally in equities, sell-off in Treasuries and rise in the U.S. dollar reflect a consistent interpretation of the latest report and we believe that Wednesday’s Federal Reserve minutes will harden the market’s expectations for tightening and send the dollar higher. The minutes should confirm that the central bank is on track to raise interest rates in the next 5 months. Technically, USD/JPY rose to its strongest level in 2 weeks while the EUR/USD officially rejected the 1.10 level by trading down to 1.08. The double-top formation in EUR/USD and the double-bottom formation in USD/JPY point to more gains ahead for both currency pairs.
EUR/USD Crashes Despite Positive News flow
The euro traded sharply lower against the U.S. dollar despite mostly better-than-expected economic data and a broad-based rally in European equities. While the Eurozone’s service and composite PMI numbers were revised slightly lower for March, economic activity improved last month with weaker growth in France offset by stronger growth in Germany, Spain and Italy. Thanks to the weak euro and the initial impact of Quantitative Easing, the employment component of the PMI index also climbed to it’s strongest level in 4 years. In the long term, these 2 drivers should continue to lend support to growth and inflation but in the short term, Greek headline risk and the divergence in Eurozone and U.S. monetary policy will continue to weigh on the currency. According to all parties involved, Greece is on track to make its April 9 IMF payment but with the Eurogroup meeting on Wednesday and Thursday, negative headlines could still affect the currency. In addition, consumer spending in Germany and France was very weak in February, which should translate into a decline in Wednesday’s Eurozone retail sales index. Tuesday’s decline has found support above 1.08 but a break below that level should take the pair down to the March 31 low of 1.0713.
AUD Soars After RBA Leaves Rates Steady
The Australian dollar was the only currency that outperformed the U.S. dollar Tuesday, all thanks to the RBA. The Reserve Bank of Australia left interest rates on hold for the second month in a row at 2.25%. The market had priced in an 80% chance of a rate cut and despite plunging iron ore prices, a number of weaker economic reports along with slower growth in China convinced the central bank that it was too soon to pull the trigger. With investors leaning so heavily in one direction, AUD ripped higher on the back of the RBA’s decision. The strongest moves were seen in the crosses. While the RBA is not done cutting interest rates, we could still see additional follow through after Tuesday’s decision. The next rate cut will probably be in May. Further easing may be appropriate because according to the central bank, growth is below trend, domestic demand is weak, capital expenditure has fallen and the exchange rate is too high. The only explanation is retail sales, which rose 0.7% in February. But given the drop in service-sector activity in March, that improvement may not have lasted. Meanwhile the Canadian and New Zealand dollars traded lower. No data was released from either country but oil prices rose another 3%. In the past 2 days alone, crude prices increased more than 10% and since the beginning of the month it is up close to 15%. If this becomes a definitive bottom, the lower end of USD/CAD’s 1.2385 to 1.2835 range could break.
GBP: UK Economy Gains Momentum
The British pound traded lower against the U.S. dollar despite stronger service-sector activity. The PMI services index rose to 58.9 in March from 56.7, the strongest reading in 7 months. The U.K. economy in general gained momentum with activity expanding at its fastest pace in 10 months. The Bank of England, which meets on Thursday will be encouraged to see this latest release (especially after relatively benign manufacturing and construction sector PMI reports), but with the Election looming and Eurozone growth still on shaky footing, they are in no position to raise interest rates. While sterling reacted positively versus the euro, dollar strength drove GBP/USD lower. The currency pair is now approaching the bottom of its 12-day range and chances are that 1.48 will break.