Daily FX Market Roundup 09.04.15
By Kathy Lien, Managing Director of FX Strategy for BK Asset Management
How to Trade the Dollar Pre-FOMC
CAD Shrugs Off Stronger Employment and IVEY
NZD: RBNZ Meets Next Week
AUD: Watch Chinese Data
Euro Bounces but Downtrend Intact
GBP: 9 Days Without a Rally
How to Trade the Dollar Pre-FOMC
Based on the performance of the U.S. economy, the Federal Reserve should raise interest rates this month. Job growth in the month of August failed to live up to expectations but the unemployment rate dropped to its lowest level since 2008, average hourly earnings increased by 0.3% and the labor force participation rate held steady at 62.6%. A creation of 173K jobs is disappointing but August payrolls tend to be revised upwards. In fact positive revisions were seen in 17 out of the last 20 years with August payrolls revised by an average of 90K over the last 4 years. So chances are next month, we’ll learn that payrolls were not as weak as initially reported. The labor market overall continues to recover and according to the G20 statement, policymakers are worried about inflation. This morning FOMC voter Lacker said, “it is time to align monetary policy with the economy” and the “August jobs report is unlikely to materially alter the picture” that “exceptionally low rates are no longer warranted by the job market.” Clearly he is one of the more hawkish members of the FOMC and despite the headline miss in payrolls, he believes that the August report was a good one. However the Fed does not operate in a vacuum and between the volatility in equities, the dovishness of the ECB, and the dovish bias of other central banks, it will be difficult for Janet Yellen to pull the trigger. We now expect USD/JPY to range trade ahead of the FOMC meeting with a bias to the downside. We believe the lack of market moving U.S. data next week could lead to a post NFP bounce in the dollar but the greenback should sell-off the following week ahead of FOMC as traders square their positions before this key event. Therefore, we like buying USD/JPY between 118 and 119.50 with a take profit between 120 and 121. EUR/USD on the other hand should be sold on rallies up to 1.13 for a move down to 1.10 as the ECB’s dovishness seals the weak fate of the euro.
CAD & NZD Rate Decisions
Between Chinese trade and inflation reports and monetary policy announcements from the Bank of Canada and the Reserve Bank of New Zealand, commodity currencies will be in play next week. The volatility in Chinese markets and the vulnerability of the economy will concern both central banks but the recent recovery in oil prices could ease some of the BoC’s worries. Also Canada added jobs in the month of August against expectations for job losses. Full time employment was particularly strong, rising 54K last month. Manufacturing activity also accelerated according to IVEY PMI. Yet the rise in the unemployment rate and the residual impact of lower oil prices could still concern the central bank. We believe that the decline in commodity prices this year puts both countries at risk of a significant slowdown in growth but as we have seen in some of the past week’s reports, economic data has not been overwhelmingly negative as weaker currencies lend support to their economies. With this in mind, we believe that both central banks have reasons to be dovish, especially the RBNZ because dairy prices have not seen the same recovery as oil prices. The Australian dollar will also be in play because in addition to the impact of Chinese data on risk appetite, Australia will release its employment report. RBA members Ellis, Lowe and Debelle are also scheduled to speak and if they discuss their outlook for the economy or monetary policy, the Australian dollar will react. For many reasons, our focus will be on the commodity currencies next week.
Euro Bounces but Downtrend Intact
Euro rebounded against the U.S. dollar on Friday but the downtrend remains intact after investors sold euros aggressively following the ECB rate decision. The central bank lowered its growth and inflation forecasts, a sign that they now expect the economy to expand at a slower pace in 2015, 2016 and 2017. Growth is not expected to exceed 2% in the next 2 years. Their inflation forecasts were also lowered which implies that monetary policy will remain easy. Most importantly, Draghi said that asset purchases can be adjusted in terms of size and duration as needed. Given his concerns about the downside risks and international developments this implies the central bank could step up QE even though Draghi said they did not discuss increasing QE at the latest meeting. However the possibility of full implementation of QE indicates that the central bank has grown more dovish which has and should continue to pressure the euro. Between the ECB’s bias and the healthy labor market in the U.S., we are looking for additional losses in EUR/USD. Technically, the decline in EUR/USD stopped right at the 50-day SMA. If the moving average is broken, there is no support until the psychologically significant 1.10 mark. On the upside, there is resistance at Tuesday and Wednesday’s high of 1.1331. Selling anywhere between 1.12 and 1.1350 for a move down to 1.10 is an attractive trade.
GBP: 9 Days Without a Rally
Nine days have now passed without a rally in GBP/USD. The recent weakness in the currency pair comes at a time when traders are avoiding the dollar, which tells us that the move is driven primarily by sterling weakness. There has been a series of misses in U.K. data but most importantly international concerns have reduced the market’s expectations for BoE tightening. If the Fed delays tightening to December, then the Bank of England will most likely push out their first rate hike as well. At this stage we are looking at a late 2016 increase at best. The BoE also has a monetary policy announcement this week and the new protocol involves releasing the minutes at the same time as the rate decision. This means that Thursday will be a big day for the British pound and chances are, the central bank will validate the market’s negative outlook for sterling with a more dovish bias.
