By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
There was no shortage of big events and big moves in the forex market this week with commodity currencies soaring to new highs, then correcting as euro seesawed on the the ECB meeting. Trading next week will be even more intense with 3 central-bank meetings, GDP reports from the U.S., Eurozone, U.K. and Canada along with other key releases such as Australian consumer prices and German unemployment. One of the biggest distinctions between last week’s price action and next week’s will be the dollar's dominance. With no major U.S. economic reports released over the past week, the dollar contributed very little to the overall direction of the market. Investors focused more on domestic issues and risk appetite. But in the coming week, the market’s appetite for U.S. dollars will have a greater impact on the overall direction of currencies as investors position for FOMC and adjust their exposures thereafter.
In light of the recent performance of the U.S. economy, the Federal Reserve is in no position to make any changes to monetary policy, so this won’t be a groundbreaking meeting. Still, the tone of the FOMC statement will play a major role in setting expectations for June. The Fed tells us it could still raise rates. Guess what? The market doesn’t believe it. Economic data has taken a turn for the worse with retail sales falling, manufacturing activity slowing and consumer prices growing at a slower pace. However nearly all of the Federal Reserve presidents, dove and hawks alike, feel that the market is under-pricing the risk of tightening and they have taken every opportunity to express their view that rates will rise this year. Which makes editing the FOMC statement this month difficult because while they may be forced to acknowledge data, they will also want to preserve expectations for tightening -- and their area of emphasis will determine how the dollar behaves in the minutes, hours, days and possibly even weeks to follow. Aside from FOMC, first-quarter GDP numbers are also scheduled for release from the U.S. The dollar finished the week with a slightly softer tone against every major currency except the Japanese yen.
The yen traded sharply lower against all of the major currencies on Friday, taking USD/JPY above 110 for the first time in more than 2 weeks. The move was driven entirely by expectations for next week’s Bank of Japan meeting. There are now reports that the BoJ could introduce negative lending rates to complement negative deposit rates. With the Japanese economy struggling under the weight of a strong yen and slower global growth -- and speculators holding a record amount of long yen positions -- the chance of easing by the BoJ is high. It avoided intervening in the currency market when USD/JPY dipped below 108 because it prefers monetary intervention and its next opportunity to help the economy comes next week. With traders so aggressively short USD/JPY, this news could lead to more aggressive short covering ahead of next week’s BoJ rate decision.
A surprise increase in Canadian retail sales and consumer prices revived the uptrend in the Canadian dollar. Although wholesale sales fell by the largest amount since 2008, retail sales rose 0.4% against expectations for -0.8% decline. Consumer prices increased 0.6% while core prices rose 0.7%, which was the strongest increase since February 2014. These numbers validates the Bank of Canada’s optimism and reduces the chance of easing by the central bank. The Australian and New Zealand dollars turned lower ahead of their long weekend holiday. The RBNZ is not expected to lower rates but could leave the door. Australia’s CPI report is also scheduled for release next week but for the commodity currencies, outside of a surprise by the RBNZ, the main drivers will be risk appetite, commodity prices and the U.S. dollar.
Euro has been relatively quiet since the European Central Bank’s monetary policy meeting. Mostly softer Eurozone PMI numbers kept the currency under pressure. Even though manufacturing activity in Germany accelerated -- it slowed in the region as a whole and the drag from services took the overall composite index down to 53 from 53.1. Although the leading driver of EUR/USD next week will be the U.S. dollar, there’s still a few pieces of Eurozone data worth watching -- namely Monday’s German IFO report, Thursday’s German unemployment numbers and Friday’s first-quarter GDP release. This is the first release of GDP, making it exceptionally important.
Day in and day out we say the same thing about sterling -- its resilience has been remarkable. Weaker jobs, wages and consumption failed to curb gains in the currency. GBP continued to press higher versus euro and U.S. dollar with EUR/GBP falling to its lowest level this month as the upside momentum in the currency continued. The main release for the U.K. next week is GDP. And while slower growth is expected, it's hard to say how much impact it will have on the currency considering that employment and spending numbers failed to affect the pound.