By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
The biggest story in the foreign-exchange market this week was the USD/JPY collapse. But if we take a step back, it was not a terrible week for the U.S. dollar. The greenback held steady versus the euro and Swiss franc and traded higher against sterling and commodity currencies. Instead, the overriding theme was risk aversion as the decline in global equities drove investors out of risky assets into safe havens like the U.S. dollar and Japanese yen. In the coming week, China’s trade balance and first-quarter GDP numbers will play an important role in shaping the outlook for commodity currencies. Exports are expected to rebound sharply but GDP growth will slow -- the question is by how much. Chinese data also matters to the U.S. because the Fed’s primary concern right now is global uncertainty. If China’s economic reports surprise to the upside (this includes industrial production and retail sales), not only would commodity currencies rally in relief but USD/JPY would bounce as well. Of course if they disappoint, currencies and equities could come crashing down.
USD/JPY traders will also be watching U.S. data but the impact on the greenback will be limited by the data’s influence on Fed policy. Retail sales, consumer prices, the Beige Book report, Empire State survey and the University of Michigan Consumer Sentiment index are important releases but even a sharp increase in consumer spending won’t change the Fed’s mind about keeping interest rates unchanged in April. In fact the central bank would need to see 2 strong months of retail sales and wage growth to be convinced that a rate hike would be appropriate in June. So while positive U.S. and/or Chinese data could provide a boost for the greenback, it won’t provide the catalyst for the big reversal that USD/JPY traders want to see. There are also seven Federal Reserve Presidents scheduled to speak but only one (Powell) is a voting member. So while the U.S. has a very busy week ahead, we don’t expect any game changers for the dollar.
Instead we are far more interested in the Bank of England and Bank of Canada’s monetary policy meetings. Sterling fell sharply this past week testing 1.4000 in the process. Most of the major central banks have grown less hawkish or more dovish and it will be interesting to see if the BoE changes its tone -- after Friday morning’s surprise drop in industrial production. The last time the central bank met in March, they warned about the impact of Brexit on spending but spent more of their monetary-policy statement talking about looser financial conditions, strong spending and their concerns about second-round CPI effect on wages. Since then spending growth pulled back and inflation held steady. If the BoE grows less hawkish and more dovish, 1.4000 will give easily in GBP/USD.
The last time we heard from the Bank of Canada, they expressed very little concern about the strength of the currency. After leaving interest rates unchanged, the BoC said the Canadian dollar and oil were averaging close to levels assumed in their Monetary Policy Report. Since then, oil prices have recovered and the CAD is trading near the same levels. However economic data has been mixed with manufacturing-activity growth slowing significantly according to IVEY PMI. Friday morning’s employment report on the other hand showed very strong job growth. Over 40K jobs were created in March, nearly all of which were full time. This was the largest amount of growth in 5 months and it helped to drive the unemployment rate down to 7.1%, when economists had anticipated a steady reading. The participation rate held steady, rounding out the strong report.
In contrast, there’s not much on the Eurozone calendar. This week, ECB President Draghi avoided talking down the currency because he wants more time to see how the latest stimulus program affects the economy. EUR/USD remains bid thanks to a larger-than-anticipated trade balance driven by an increase in exports. We believe euro is still a buy for a move to 1.15 -- next week the outlook for the currency will hinge on risk appetite. Eurozone industrial production, consumer prices and trade data are the only market moving reports on the calendar and these second-tier releases are not expected to have a significant impact on euro.
The Australian and New Zealand dollars will primarily key off of Chinese data but Australia also has labor-market numbers scheduled for release. This month’s report is tough to call because the sharp rise in the employment component of manufacturing PMI was offset by the sharp drop in the construction sector. Services saw little change. On a fundamental and technical basis, we are beginning to see signs of a top in AUD/USD.