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Next 24 Hours: 3 of the Top 6 Key FX Event Risks
Buckle up because if volatility in the forex market is poised to increase, it should happen over the next 24 hours because 3 of this week's top 6 event risks are scheduled for release before the NY trading session. If you don't know already, the 6 most important event risks on the calendar this week are in the order of release -- Australian CPI, Chinese PMI, Eurozone PMIs, the RBNZ Rate Decision, speech from ECB President Draghi and UK Retail sales. Australian consumer prices Were scheduled for release Tuesday night along with Chinese manufacturing PMI and the Eurozone's Flash PMI reports.
The Bank of England minutes and Canadian retail sales reports due on the same day are also important but compared to some of the other event risks this week, they should be less market moving. However with the jump in wholesale sales and rebound in job growth in Canada, there's scope for an upside surprise in retail sales that could reverse part of the gains in USD/CAD.
Dollar Receives No Boost from Stronger Data
The price action in the foreign exchange market Tuesday was driven primarily by risk appetite as the gains in U.S. equities helped to lift all risk currencies. USD/JPY held on to its recent gains but failed to extend higher as 10 year Treasury yields ended the day unchanged. Once again, better than expected U.S. data failed to provide much support to the greenback. Investors continued to ignore the improvements in the U.S. economy, knowing that they will not push the Federal Reserve to accelerate unwinding of QE. Nonetheless its worthwhile to mention that manufacturing activity in the Richmond region returned to expansion after contracting for 2 straight months. Existing home sales declined by far less than economists anticipated with rising prices offsetting the 0.2% drop. New home sales are scheduled for release tomorrow and a rebound is expected after a harsh winter crimped sales in February. Unfortunately we don't expect this report to have much impact on the greenback as investors focus on more market moving events abroad.
Euro: Holding Steady Ahead of PMIs
The euro traded slightly higher against the U.S. dollar Tuesday ahead one of the most important event risks this week - Eurozone PMIs. As we mentioned in yesterday's note, the top priority for any major central bank is growth and inflation. Last week, we learned that inflationary conditions in the Eurozone improved and this week we will get more information on activity. If the PMI reports show acceleration in manufacturing and service sector activity, it would ease the need for further easing and lend support to the euro. Unfortunately economists are looking of the Eurozone PMI composite to retreat from elevated levels due to the slowing in emerging markets and turmoil in Ukraine and if they are right, the euro could accelerate its losses. ECB officials have made it clear that they are prepared to do more to support the economy but the bar for additional stimulus remains high because the economy is still growing. However if tomorrow's report shows a slowdown in economic activity, concerns about a strong currency and weaker growth could push the central bank into action and drive EUR/USD below 1.37. Of course, if there is very little change in PMIs, EUR/USD will remain trapped with a 1.37 to 1.39 trading range.
Sterling Bulls Refuse to Give Up
The British pound traded within a whisker of its 4-year high against the U.S. dollar Tuesday. Despite very little chance of increased hawkishness by the central bank, sterling bulls refuse to abandon their long positions. According to the latest CFTC data, speculators added to what were already extremely stretched positioning. The last time we saw this much long exposure to the British pound was in 2007. Clearly despite the unevenness of U.K. data, investors believe the Bank of England will move to a more hawkish posture and be the next to raise interest rates. However with inflation growing slowly and average wage growth falling short of expectations last month, we do not believe the central bank moved closer to tightening monetary policy. Back in March, the Bank of England minutes contained very little new information aside from concerns about the negative impact of sterling strength on inflation. Given the continued rise in the currency, we expect the central bank to express these same frustrations. We would not be surprised if sterling bulls found an unchanged statement satisfactory but the chance of a more hawkish statement is slim and the risk of a correction is high.
Yen Crosses Supported by Rally in High Beta Currencies
The Japanese Yen traded lower against all of the major currencies Tuesday except for the U.S. dollar. While USD/JPY struggled to extend its gains on the back of the overnight sell-off in the Nikkei, the Yen crosses benefitted from the rise in high beta currencies and rally in U.S. equities. The only piece of economic data released from Japan overnight was final leading indicators, which was revised slightly higher. Japan's Government Pension Investment Fund (GPIF) also appointed 6 new members to its investment committee, 3 of whom supported the planned restructuring of the fund. As the world's largest pension fund their plans to increase exposure to domestic equities will not only provide underlying support to Japanese equities but could also transform how foreigners feel about Japanese assets. For the time being, the rally in USD/JPY remains intact. Bank of Japan Deputy Governor Nakaso was scheduled to speak Tuesday evening and like many of his peers, he was expected to express an optimistic outlook on Japan's economy. It should only be a matter of time before USD/JPY touches 103.
Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
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