By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
- Where to Sell the British Pound
- Euro Traders Brace for PMIs
- USD/JPY Ticks Up on US Data
- AUD Soars on CPI, Chinese PMI Next
- CAD: Oil Prices Edge Lower
- NZD: Consumer Confidence Numbers Next
Where to Sell the British Pound
The British pound traded sharply higher against all of the major currencies today on the back of this month's Bank of England minutes. According to the report, the decision to keep monetary policy unchanged was unanimous. However sterling soared because policymakers expressed concerns that recent moves in the currency could cause inflation to rise faster. All members of the central bank also agreed that the next move in interest rates will be a rate hike. While there was concern about slow wage growth, sterling strength hitting exports and a disorderly reaction to Greece, investors overlooked all of these risks, focusing instead on the positive outlook for inflation. The sharp 14bp rise in 10 year Gilt yields also confirms the market's shifting outlook for U.K. monetary policy. However we believe that the market is underestimating the risk of the U.K. election. Opinion polls show that the general election is too close to call. Labour and Conservatives are neck to neck and some say that Scotland's National Party could play a deciding role in the election. In all likelihood, no one will win the election, which could spell big trouble for sterling.
It may be tempting to sell GBP/USD above 1.50 but with the U.K. retail sales report scheduled for release tomorrow, you may want to wait. Based on how GBP/USD traded leading up to the 2010 election, we could see further consolidation and possibly strength before a crash. Back in 2010, GBP/USD trended higher and consolidated before settling on a decline starting April 27th. In the run up to the election, GBP/USD dropped 300 pips. On election day it dropped 400 pips and then another 500 pips in the 2 weeks that followed. So if you share our view that sterling will fall ahead of and on the back of the May election, then the best place to sell GBP/USD would be between the 100-day and 50-day SMA shown in the chart below. We may have this opportunity to sell into the rally if U.K. retail sales are good.
Euro Traders Brace for PMIs
The back and forth in the EUR/USD reflects the inconsistency of comments from Greek officials. Yesterday Greek Finance Minister Varoufakis said there are clear signs of convergence, paving the way for Greece, and its EU/IMF lenders to reach a deal. Today however Greek State Minister Pappas said they don't want just any deal with their lenders. There is no question that the EU/IMF feel the same way, which is why the chance of an announcement after Friday's Eurozone Finance Ministers meeting is slim. However between now and then we have the Eurozone PMI and German IFO reports scheduled for release. Investor sentiment may have weakened but these are activity indicators that should benefit from a weaker euro and Quantitative Easing. Tomorrow's Eurozone PMI numbers are especially important as traders are looking for an excuse to take profit on their short positions. Everyone is worried that the short term bottom in the EUR/USD could turn into long term support. There was also a lot of action in the Swiss Franc. The Swissie fell hard versus the U.S. dollar and euro on the back of central bank comments. The Swiss National Bank released a press release today that said there would be "Fewer exemptions from negative interest on sight deposit accounts at SNB." The central bank "has completed its review of exemptions, and has considerably reduced the group of sight deposit account holders that are exempt from negative interest. Specifically, negative interest will now also apply to the sight deposit accounts held at the SNB by enterprises associated with the Confederation, including PUBLICA, the pension fund of the Confederation." Today's comments reflect the central bank's commitment to maintaining ultra easy monetary policy.
USD/JPY Ticks Up on US Data
The U.S. dollar traded higher against the Japanese Yen on the back of stronger U.S. housing market numbers. Existing home sales jumped 6.1% in the month of March, nearly doubling expectations with solid increases also reported in mortgage applications and the FHFA House Price Index. Ten year Treasury yields also rose 7bp helping to fuel the rise in the currency. However the strength of the greenback was limited to the Yen and Franc as the dollar either held steady or traded lower against other major currencies. We previously said that this week would not be about the dollar and today's price action is a perfect example of that. While USD/JPY continues to crawl upwards recent improvements in Japanese data is slowing the ascent of the currency. According to latest trade numbers, Japan turned a surplus for the first time since 2002. The balance was 5 times larger than anticipated. Exports jumped 8.5% while imports dropped 14.5% on the back of lower oil prices. At the beginning of 2015, many market watchers believed that Japan would increase stimulus again but gradual improvements in data and less dovish comments from policymakers has removed that possibility. Jobless claims and new home sales are scheduled for release tomorrow.
AUD Soars on CPI, Chinese PMI Next
Whether the Australian dollar can hold onto its gains hinges on tonight's HSBC (LONDON:HSBA) Flash Chinese PMI report. Chinese data has been soft and a disappointing release will keep AUD/USD trapped below 79 cents. However today, AUD/USD went on a tear after AU CPI data proved slightly hotter than expected rising by 0.2% versus 0.1% eyed. According to our colleague Boris Schlossberg, "the trimmed mean CPI came in as forecast at 0.6%. In and of itself the inflation data was not significant and price pressures Down Under remain subdued, but the slightly elevated reading lowered the chances of an RBA rate cut in May prompting a short covering rally in Aussie.
Prior the CPI release the futures markets were suggesting 65%-35% odds that RBA would cut in May. After last night news the chances were reduced to 50% -50%."