By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
- Euro Could Pop on Greek Bailout Request
- Dollar Receives No Support from Fed Minutes
- GBP Soars on Stronger Data and Hawkish Minutes
- CAD Slips Despite Stronger Data on Oil
- AUD Supported by Leading Indicators
- NZD Turns Positive After Fed Minutes
Euro Could Pop on Greek Bailout Request
For the past 8 trading days, euro has been fluctuating in a very tight range against the U.S. dollar, waiting for some big news from Greece. So far we have received nothing but two-way news flow with Greece and her creditors blaming each other for the lack of progress. However there are now reports that Greece will formally ask for an extension to their bailout on Thursday. Investors have been waiting for this request for weeks and when one is made, we expect the euro to pop. However a request in of itself is not enough because it needs to be approved by EU officials -- and that’s where part of the problem could lie. According to a draft of the bailout extension request obtained by the Financial Times, most of the terms presented are the same ones already been rejected. So while the euro could jump when an initial extension request is made, its gains may be unsustainable unless there is a quick approval by European officials. Of course, it is in Europe’s interest to ensure that a deal is done to avoid the havoc that a Grexit would have on the financial markets and the perception of the irreversibility of the euro. Their desire to reach an agreement is part of the reason why the ECB extended its Emergency Liquidity Assistance to Greece for another 2 weeks. We remain optimistic and so when a request is made -- and in turn approved -- a short squeeze could drive EUR/USD up to 1.15.
Dollar Receives No Support from Fed Minutes
Investors may have to wait longer for the Federal Reserve to raise interest rates according to the latest Fed minutes, which focused more on the risks that the U.S. economy faces than the improvements enjoyed over the past few months. Federal Reserve officials expressed concerns about the strain that weakness and uncertainties in China, Greece and Ukraine could have on the U.S. economy, along with the negative impact of a stronger dollar on exports and tepid wage growth. While the U.S. dollar ended Wednesday weaker against some currencies and stronger against others, it traded lower on the back of the minutes as Treasuries yields gave up nearly all of Tuesday’s gains. Ten-Year yields fell 6bp while 5-Year yields fell 10bp -- the largest 1-day decline since October. The Fed’s concerns about international developments hurt the dollar but what really triggered the currency-pair’s decline was the fact that “many Fed officials” wanted rates to stay at zero for longer. They chose not to drop the word “patient” from the last statement because they feared that it may lead to a date focus when the timing for a policy change is still contingent on data. While we have not given up on our long-dollar bias and our overall view that the Fed will raise rates this year, we acknowledge that the less-dovish minutes and Wednesday’s weaker economic reports will shift the market’s expectations for tightening. The dollar will adjust in response, which means that we could see a deeper pullback in USD/JPY before it's time to buy again.
GBP Soars on Stronger Data and Hawkish Minutes
The best-performing currency Wednesday was the British pound, which traded higher on the back of better-than-expected UK data, dollar weakness and slightly more hawkish Bank of England minutes. We had been looking for sterling to outperform on Wednesday’s reports and this strength should carry through to the end of the week, especially on Friday when we expect retail sales to surprise to the upside. The U.K. and U.S. are the only two countries expected to raise interest rates this year and unlike the U.S. where data is refuting a near-term rate hike, U.K. data is confirming it. Jobless claims dropped 38.6k in January from -35.8k the previous month. Not only was this more than expected but the unemployment rate also dropped to 5.7% from 5.8%. The icing on the cake was average hourly earnings, which rose 2.1% versus a forecast of 1.7%. This increase comes as policymakers expressed their expectations for stronger earnings this year and for a rise in inflation once oil prices stabilize. Although the committee voted 9-0 to leave rates unchanged, two members said the decision was “finely balanced” while two others felt “there may well be a case” for raising rates in 2015. EUR/GBP dropped to fresh 7-year lows on the back of the reports and we believe that further losses are likely. At the same time, it won’t be long before GBP/USD breaks above 1.55.
CAD Slips as Oil Drops 3%
With oil prices moving lower, the Canadian dollar lost value versus the Canadian dollar despite better-than-expected economic reports. In Canada, wholesale sales rose 2.5%, which was much stronger than the market’s 0.3% estimate. This number receives very little focus from FX traders but we watch it closely because it has a strong correlation with Canadian retail sales due at the end of the week. The surprisingly large increase in employment last month could have also contributed to the pickup in end-of-year spending. However, nothing is more important to the Canadian dollar in the near-term than oil prices and Wednesday’s 2% decline weighed heavily on the currency. Meanwhile the Australian dollar shrugged off stronger leading indicators. Both the Conference board leading index and Westpac leading Index increased according to the latest reports. The news that Japan Post may buy Australia’s Toll Holdings (ASX:TOL) for approximately AU$6 billion also did not provide much support for the currency. Finally, the New Zealand dollar did not react to producer prices, which fell in the fourth quarter -- but at an improved pace from Q3. That decline should not be a major surprise considering that commodity prices fell sharply toward the end of the year.