The focus of the forex markets turned back to global central banks policy divergence after the Greek risk finally subsided. Sterling ended the week as the strongest major currencies as boosted by hawkish comments from BoE governor Mark Carney in two separate occasions during the week. On the other hand, dollar followed closely as Fed chair Janet Yellen sounded upbeat in her testimony to Congress. While Greece finally got the new three year bailout from Eurozone, which could be formalized as soon as during the weekend, the common currency ended as the weakest one. New Zealand dollar was the second weakest as markets are starting to pricing in another 25bps rate cut from RBNZ this week. Canadian dollar followed as BoC lowered interest rate by 25bps last week. Aussie also stayed under pressure as markets perceived that rate cut by BoC and RBNZ could force RBA's hand again.
Let's have a quick summary on the central bank activities. Fed chair Janet Yellen reiterated that "if the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target." Meanwhile, she expected economic recovery to "to strengthen over the remainder of this year and the unemployment rate to decline gradually." And, she's optimistic that "the U.S. economy also might snap back more quickly as the transitory influences holding down first-half growth fade and the boost to consumer spending from low oil prices shows through more definitively." Fed funds futures were pricing in over 30% change of rate hike from Fed this September, that's a bounce back fro near 0% a while ago. Meanwhile, it's pricing in 70% of hike by year end.
The ECB announced to raise the ELA ceiling by 900M euro with the haircuts on collateral unchanged. At the press conference, President Mario Draghi suggested that it is 'not controversial' that a debt relief to Greece is 'necessary'. This echoed IMF's demand earlier this week that the lender threatened to withdraw support for the bailout unless Greece's European leaders agree to substantial debt relief. On monetary policy (conventional and unconventional), the ECB, as widely expected, left the main refi rate unchanged and reiterated that commitment to continue its asset purchase of 60B euro per month at least until September 2016. More in ECB Lifted ELA Cap On Greece, Draghi Called For Debt Relief.
BoE governor Mark Carney told the parliament that "the point at which interest rates may begin to rise is moving closer given the performance of the economy". He noted that "wages are beginning to grow" and he urged households to "begin to manage their finances" assuming there will be "upward adjustment in interest rates". Later in the week, Carney said that "the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year." And, "the need for bank rate to rise reflects the momentum in the economy and a gradual firming of underlying inflationary pressures. A firming that will become more apparent as the effects of past commodity price falls drop out of the annual inflation rate around the end of the year." Markets are currently pricing in the first hike from BoE in May 2016, slightly ahead of prior week's pricing of August 2016.
BoJ kept policies unchanged as widely expected. The central bank will continue to expand the monetary base by JPY 80T annually. Interest rate was held near to zero level. Growth projection for the current fiscal year to March 2016 was lowered to 1.7%, down from prior forecast of 2.0%. Growth is expected to slow to 1.5% in fiscal 2016, and 0.2% in fiscal 2017. CPI projection for same period was lowered to 0.7%, down from 0.8%. For 2016 fiscal year, CPI forecast was lowered to 1.9%, down from 2.0%. That for fiscal 2017 was lowered to 1.8%, down from 1.9%.
The Bank of Canada reduced the overnight rate by -25 bps to 0.5%, the lowest level since June 2010. It noted that headline inflation remained weak and was mainly pressured by low energy prices. On economic developments, the central bank acknowledged that the slowdown in growth in 1Q15 was driven by a scaling back in energy investment and weaker than expected non-energy investment. Yet, it expected growth would remain weak in the second quarter. As such, the BOC revised "significantly downgraded" its GDP growth forecasts. We expect the rate cut would provide only limited addition stimulus to the economy. More in BOC Cut Overnight Rate to 0.5%, Downgraded Growth Forecast "Significantly".
Overall, it should be noted that markets seemed to have taken BoE Carney's comments quite serious. There were even talks on whether BoE or Fed would raise interest rate first. Nonetheless, it should be noted that it's still generally expected that Fed will hike first. Also, BoE's tightening would still likely be a "mini" version of Fed's, that is, at a slower pace. The technical picture in GBP/USD is relatively unclear though. Upside momentum is clearly diminishing with bearish divergence condition in daily MACD. But the pair is holding resiliently above 1.5169 support, thus giving no confirmation of near term trend reversal. We'd probably see the pair gyrate in range in near term until the path of Fed is getting clearer.
Talking the dollar, the break of 97.77 resistance in dollar index last week is seen as a near term bullish development rebound from 93.13 has resumed. Further rise will be in favor as long as 95.45 support holds, for a test on 100.39 high. However, we're not seeing decisive momentum for a range breakout and up trend resumption yet. That is, we'd be cautious on strong resistance from 100.39 to bring reversal for another leg of the consolidation pattern. That would also correspond to a test on 1.0461 support in EUR/USD.
Regarding trading strategies, our AUD/USD is still running well. We'll keep our stop at 0.7600 and target next long term fibonacci level at 0.7182. We might start to consider exiting the short position below there. On the other hand, our view on Euro strength on positive Greek news was incorrect. However, our strategy of buying EUR/CAD on break of 1.4253 wasn't entered as the cross was kept below this resistance. We'll cancel the order first. It should be noted that after having a view on buying or selling a currency, it's equally important to choose a weak or strong currency to buy or sell against. That is, which our bullish view on Euro was wrong, the bearish view on Canadian dollar was correct. Thus, even though we were not right, we didn't lose on the strategy. And, comparing the relatively strength of different major currencies and their respective performance in crosses to get a strategy with better odds is what this last part of the weekly report aims at.
As for other trades, we'll expect central bank outlook to continue to drive the forex markets and thus, dollar and sterling will likely stay strong. We'll tend to avoid the Japanese yen for the moment as US stocks will be heading for a test on historical high this week and there is no clear momentum for a breakout yet. Commodity currency would like stay among the weakest currencies this week. We already have AUD/USD on hand. USD/CAD and GBP/CAD both look overbought in near term and thus we'll keep our hands off these two pairs first. We'll revisit long opportunities there later. We're left with Euro as the choice to considering shorting. Near term outlook in EUR/USD is bearish but the structure of the fall from 1.1436 is having a corrective look and thus it could be just a leg of the correction pattern from 1.0461. And that's right, price actions would be rather unpredictable in the middle of a sideway pattern. Thus, we'll avoid selling EUR/USD. Also, we're long dollar in the AUD/USD short already. On the other hand, EUR/GBP has just resumed the larger down trend and is gathering some downside momentum. 0.7 psychological level was cleared too which now gives it some room for medium term decline to long term fibonacci level at 0.6652. Hence we'll sell EUR/GBP this week on a recovery.
To conclude, we'll stay short in AUD/USD with stop at 0.7600, targeting 0.7182 first. We'll sell EUR/GBP at 0.7000 with stop at 0.7100, targeting 0.6652.