By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
- EUR: Is the Parity Party Over?
- Dollar Receives No Support from US Data
- GBP: 1.50 Break Hinges on Retail Sales
- NZD Hit by Weaker Trade Data
- CAD: Oil Prices Stabilize
EUR: Is the Parity Party Over?
Less than one week ago when the EUR/USD dipped below 1.05, everyone jumped onto the parity party bus. Some banks like Goldman Sachs (NYSE:GS) even issued bold forecasts calling for the EUR/USD to fall to 80 cents by 2017. Now that euro has climbed back to 1.10 two days in a row, and many traders are wondering if all of these forecasts are wrong and the EUR/USD has bottomed. A 5-cent or 500 pip recovery in less than a week will surely cause many market participants to reevaluate their positions and while we have been saying that a move to 1.12 is possible, in the next 3 to 6 months, we still expect the EUR/USD to revisit 1.05. When everyone crowds into the same trade, we almost always see a countermove in the currency, which shakes out positions before continuation. In the case of the euro, short covering was the main catalyst for the currency pair's recovery as some investors offloaded their long dollar positions after the March FOMC meeting on the basis that there could be a few weeks of consolidation before U.S. data or the Fed gives the market a fresh reason to buy dollars.
EUR/USD short positions were near 2.5-year highs going into FOMC, so when the central bank lowered its outlook for inflation and growth, investors took that as a reason to take profits and unwind their positions. While the path of the EUR/USD hinges on the outlook for the Eurozone and the U.S., the market's appetite for dollars should drive the pair's flows because Quantitative Easing and the weak euro should slowly bolster EZ data. We have already seen evidence with the PMIs and German IFO report surprising to the upside. According to Wednesday morning's release, businesses grew more optimistic about current and future activity with the business climate index rising to its strongest level since July. The only potential catalyst for a EUR/USD correction from Europe in the near term is Greece, which is still struggling to convince its creditors that it will stick to its reforms. According to Reuters, which quotes a source familiar with the situation, Greece could run out of cash if it does not secure additional funding by April 20. From the U.S., next week's non-farm payrolls report, the ISM numbers and the April FOMC meeting are the main potential catalysts for dollar weakness. Between now and then, we do not expect a deep sell-off in the EUR/USD.
Dollar Receives No Support from US Data
The U.S. dollar traded lower against all most of the major currencies Wednesday. With the market doubtful of an early rate hike by the central bank, weaker U.S. data gave investors another reason to stay out of dollars. Durable goods orders fell 1.4% in February compared to a 0.2% forecast. While a large part of the decline was due to transportation orders, the data in general was weak. The unexpected decline could slow U.S. GDP growth and weigh on the dollar, especially if it translates into a lower ISM manufacturing number next week. Thursday's jobless claims and PMI numbers are not expected to lend much support to the greenback. The dollar was also driven lower by comments from Federal Reserve President Evans who said there is no hurry to raise rates and that the Fed should take its time to assess the data before tightening. As one of the most dovish members of the FOMC, his views are consistent with his overall bias. Bullard, Lockhart and Yellen are speaking later this week and they will most likely reiterate their view that normalization should begin this year. Unfortunately, that may not help the dollar because similar comments were made on Monday and Tuesday and the greenback failed to budge. At the same time, however, the losses in the dollar have been limited because dollar bulls are waiting for next week's Tier-1 economic reports before getting back into the greenback.
GBP: 1.50 Break Hinges on Retail Sales
The 1.50 level continues to be formidable resistance for the British pound as the currency pair came close to but failed to break above that level in each of the last 5 trading days. Even an increase in loans for house purchases failed to take GBP/USD above 1.50 and now the retail sales report will decide whether the currency pair breaks below 1.48 or moves above 1.50. Consumer spending is extremely important, especially since the Bank of England is obsessed with wage growth. The main reason why wages are important is because it is a leading indicator of retail sales. If wages are rising, the hope is that it will translate into stronger spending. So far wage growth in the U.K. has been muted and in January spending contracted 0.3%. In February, however, spending is expected to bounce by 0.4% and a stronger number could reinvigorate sterling's rally. Unfortunately even with the uptick in retail sales that was reported by the British Retail Consortium, more U.K. economic reports have surprised to the downside. A softer number would further delay rate-hike expectations and reinforce the downtrend in the currency, leading to a break of 1.48 in GBP/USD.
NZD Hit by Weaker Trade Data
All three of the commodity currencies traded lower against the greenback despite steady oil and gold prices. New Zealand was the only country with economic data and their trade surplus came in much weaker than expected. Economists were looking for the surplus to balloon to 350M but instead it shrank to 50M. Imports increased while exports declined, reflecting the pain of a strong currency. While the New Zealand dollar saw losses against the greenback, it hit a record high against the Australian dollar this month. It is this dynamic that led the Reserve Bank of New Zealand to move to a neutral policy stance in 2015. The prospect of more stimulus from China should keep AUD and NZD bid while the Canadian dollar remains trapped between a 1.24 and 1.28 trading range.