By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
- Euro: How it Became the Worst Quarter Ever
- Great Quarter for the Dollar
- USD/CAD Range Intact Thanks to Stronger GDP
- NZD: Dairy Auction Tomorrow
- AUD: New Home Sales Growth Slows
- GBP Recovery Hinges on PMIs
Euro: How it Became the Worst Quarter Ever
It has been a rough few months for the EUR/USD. Since the beginning of December the currency pair has fallen more than 14% from 1.25 down to 1.05 with the majority of the losses (10%) incurred in the first quarter of 2015. This weak performance was caused by 3 key factors that continue to plague the currency:
- ECB Quantitative Easing
- Greek Debt Troubles
- US Dollar Strength
The European Central Bank’s 18-month Quantitative Easing program only began in March and to this day, Greece is a ticking time bomb for the Eurozone. Even though a deal was reached with their creditors back in February, Greece could still be pushed out of the monetary union and this risk is weighing heavily on the currency. At the same time, the U.S. dollar has performed extremely well on the back of growing expectations for Fed tightening. What is important about these drivers is that to this day, they pose an ongoing risk for the EUR/USD. On Monday we wrote about how the EUR/USD could resume its slide sooner than some investors anticipated and with the 10- and 20-day SMA broken, the currency pair is on its way back toward 1.05. Even better-than-expected German retail sales and unemployment report failed to help the currency. The next catalyst for the EUR/USD are the ECB minutes. On Thursday, the ECB will release the minutes from their March 4-5 monetary policy meeting. Earlier this month, the EUR/USD fell to 11.5-year lows after the March meeting when the central bank said they would buy bonds with negative yields. Considering that the central bank is willing to go that far to stimulate the economy and keep interest rates low, the minutes will most likely be dovish, adding pressure on the currency.
Great Quarter for the Dollar
While it has been a terrible quarter for the euro, it was a great quarter for the U.S. dollar. The greenback traded higher against all of the major currencies with the exception of the Swiss franc. USD/JPY only saw a small extension but what is important is that it held its Q3 and Q4 gains. Today’s better than expected economic reports kept rate hike expectations intact. According to S&P CaseShiller, house prices increased in January and after a harsh winter, consumer confidence rebounded strongly in the month of March with the Conference Board’s sentiment index rising to 101.3 from 98.8. While the Chicago PMI index fell short of expectations, the index still increased from the previous month, a sign of improving manufacturing activity. Unfortunately we fear that the incremental rise will not be enough to offset the steep decline in the Empire State and Philadelphia Fed surveys. As such, Wednesday’s ISM manufacturing report could still disappoint. Whether USD/JPY manages to hold 120 will then hinge on the ADP report. Since this is non-farm payrolls week, the health of the labor market will be in focus. If ADP rises like economists anticipate, it would help to offset any disappointment in ISM. Federal Reserve officials continue to vocally support a 2015 rate hike and if the March labor market numbers support this view, we could see a strong move in the dollar.
USD/CAD Range Intact Thanks to Stronger GDP
Stronger than expected Canadian GDP growth in the month of January helped to keep the 1.24 to 1.28 USD/CAD range intact. Despite Bank of Canada Governor Poloz’s warning about an atrocious quarter, the Canadian economy contracted only -0.1% compared to the market’s -0.2% forecast. Negative GDP growth is never viewed as positive for the economy but given the sharp decline in oil prices, growth could have been a lot worse. This latest report should keep the central bank on hold and allow traders to keep fading moves up to 1.28 and buying dips down to 1.24 in USD/CAD. The Australian and New Zealand dollars also extended their losses. Australian new home sales rose at a weaker pace in February while New Zealand business confidence increased. Tonight, Australian manufacturing numbers are scheduled for release and in the morning, there will be another Global Dairy Trade auction in New Zealand. At the last auction on March 17, dairy prices dropped 8.8%, sending the New Zealand dollar sharply lower. If prices fall again it could take NZD/USD below 0.74.
GBP Recovery Hinges on PMIs
An upward revision to fourth quarter GDP growth helped to lift the British pound Tuesday but the recovery will hinge on Wednesday’s PMI report, one of the most important and up to date pieces of data for the U.K. economy. Unfortunately with the Confederation of British Industry’s Total Trends Index falling sharply, chances are the data will be weak, keeping GBP/USD under pressure and trapped within its 1.4635 to 1.50 range.