Due to lower liquidity, trading over the holidays is never easy. However less participation does not always mean consolidation, especially during these times when the market is particularly vulnerable to news bombs. For the past few weeks, front page news dictated currency flows with investors taking in headlines on big stories like the U.S. attack on Syria to the bombing in Afghanistan and President Trump’s currency comments. Of course the U.S. is not only the source of trouble as there’s also been terrorist attacks across Europe, Brexit and next weekend, we have the first round of the Presidential election in France. So it should not be a surprise that the main theme in the forex market right now is risk aversion and that explains why the Japanese yen traded higher against all of the major currencies this past week.
The U.S. dollar struggled on Friday, on the back of softer U.S. data. Despite stronger wages and higher consumer confidence, retail sales dropped for the second month in a row by -0.2%. Spending in February was revised down to -0.3% from 0.1%. Excluding autos and gas, spending rose 0.1%, less than the market’s 0.3% forecast. Consumer prices also fell for the first time in more than a year by -0.3%. This pushed the year-over-year rate down to 2.4% from 2.7%. Friday’s reports pretty much guarantee that the next Fed move will be in September and not June as the weakness of spending will weigh on first quarter GDP growth. Fed fund futures are currently pricing in a 56.7% chance of a rate hike in June and a 76.3% chance of a hike in September. With that in mind, this coming week’s Beige Book could still report general improvements in the U.S. economy as that is the overall trend.
One of the biggest stories this past week was President Trump’s U.S. dollar comments. He described the greenback as too strong and credited himself for part of the currency’s performance. While important, we are much more interested in his views on U.S. rates and China’s currency manipulation. He eliminated any guessing by confirming that the Treasury would not be labeling China a currency manipulator in their upcoming report because it would hurt talks on North Korea. He also indicated that he likes a low interest rate policy. Considering that the Treasury is “very close” to filling the open seats at the Fed according to Mnuchin, chances are he’ll be nominating doves, which is the only legitimate reason for the dollar’s negative reaction. Bringing in more doves means at most we’ll see 2 more rate hikes this year. So while the dollar could recover in the coming week from oversold levels, rallies in USD/JPY will attract sellers for the rest of the month. Aside from the Beige Book, manufacturing and housing market reports are also scheduled for release in the coming week.
Of course, the main focus will be on the French Presidential election and the euro. Incoming polls will have a direct impact on how the euro trades and will overshadow the April PMI reports, which are normally the most important pieces of data released from the Eurozone each month. We expect the euro to trade with a heavy bias as the recent terrorist attacks boost the popularity of far right leader Marine Le Pen. The polls have been tightening ahead of the first round vote. She is expected to do well but fall behind in the second round. If Le Pen gains more votes than Macron, the EUR/USD will make a run for 1.05. Even if she has fewer votes but strong support, investors will immediately worry about a Trump-style victory by a candidate who is anti-immigration and has called for a EU referendum within 6 months of her victory. While the latest German ZEW survey showed an uptick in investor confidence, if taken today we believe sentiment will be weaker. The path of least resistance for the euro should be lower this coming week, ahead of the French election with the single currency underperforming most of its peers.
While European currencies have struggled, the commodity currencies performed well. The outlook for the Australian dollar completely shifted with the surprisingly strong labor market report. Australian companies added 3 times more jobs than economists anticipated. The 60.9k increase was the largest since October 2015 as full-time work rose by the most in two decades. Combined with a greater than expected Chinese trade surplus that was driven by the largest single month increase in exports in two years, the trend of AUD/USD completely changed. Instead of being at risk of failing below the 100-day SMA at 75 cents, AUD/USD took out the 200-day SMA at 0.7550 and should hold onto those gains as long as risk aversion doesn’t seep through the markets again. The minutes from the last Reserve Bank of Australia monetary policy meeting is the only piece of data scheduled for release from Australia in the week ahead, but Sunday trade kicks off with China’s first quarter GDP, retail sales and industrial production reports – data that will undoubtedly cause big moves for AUD and NZD. Although the New Zealand dollar followed the Australian dollar higher it was also supported by the fastest pace of manufacturing sector growth in 14 months.
Despite an end of week recovery, the Canadian dollar performed well this past week, thanks to the Bank of Canada who upgraded their economic forecasts. The central bank raised its 2017 GDP forecast to 2.6% from 2.1% and brought forward their forecast for closing the output gap to the first half of 2018. Although they downgraded their forecast for 2018 growth and expressed concern about wage growth, investment weakness and the labor market, investors interpreted the announcement to mean that the central bank is easing away from their bias to lower interest rates. Governor Poloz made it clear that a rate cut isn’t on the table at this time as “data has been much more positive on balance” and that “recent Toronto home price gains are unsustainable.” But with the BoC rate decision behind us, investors will be watching oil. Saudi Arabia called for an extension to OPEC production cuts and more talk of that could reverse this past week’s gains. USD/CAD appears to have found near-term support at the 200-day SMA near 1.3220. In the coming week, Canadian existing home sales and consumer prices are scheduled for release.
Lastly, stronger than expected economic data took GBP/USD from a low of 1.2366 to a high of 1.2575. According to the latest reports, inflation is on the rise and wages are up with the employment rate reaching its highest level on record. The market remains complacent about Brexit negotiations and generally upbeat about UK economic prospects, but this sentiment could change quickly, as soon as data begins to sour. But until that happens, losses in sterling could be limited relative to other currencies. U.K. retail sales are scheduled for release in the week ahead and while the uptick in wages points to a potential upside surprise, the British Retail Consortium reported weaker spending and after last month’s healthy rise, a pullback is expected. There’s significant resistance for GBP/USD between 1.25 and 1.2630.
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