AUD: Breakout Expected but Not On RBA

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Daily FX Market Roundup 05-05-14

AUD: Breakout Expected but Not On RBA

NZD: Beware of Dairy Auction Results

CAD: IVEY PMI and Trade Data Poses Risk to Loonie

US Rates Keep Pressure on the Dollar

New Highs in Sterling Hinges on PMI

EUR: Unfazed by Lower GDP Forecast from European Commission

JPY: Another Holiday for Japan

AUD: Breakout Expected this Week but Not On RBA

Having fluctuated within a narrow 1-cent range for the past 8 trading sessions, the Australian dollar is prime for a breakout against the greenback. There is certainly enough Tier 1 economic reports on the calendar this week to drive up the currency pair’s volatility but we don’t expect tonight’s Reserve Bank of Australia monetary policy decision to expand AUD/USD’s trading range significantly. While central bank announcements are typically big movers for a currency, its reaction to the RBA meeting could be limited. The last time we heard from the central bank, they had nothing new to say about the economy or monetary policy. They maintained a neutral monetary policy bias, did not mention that the exchange rate was uncomfortably high and only described it as high by historical standards. The main reason why we don’t expect earth-shattering comments from the central bank tonight is because there has been very little consistency in the changes in Australia and China’s economy since the last monetary policy meeting. Taking a look at the table below, there’s been slightly more weakness than improvement in Australia’s economy since April. Manufacturing and service sector activity slowed but inflation accelerated, particularly on the consumer level which will deter the central bank from talking down the currency. At the same time, China’s economy is showing initial signs of bottoming, which is positive for AUD/USD but the shallow recovery means the impact should be nominal. Instead this week’s retail sales, employment, and Chinese trade data should be the catalysts for a breakout in AUD/USD.

The Australian dollar is not the only currency pair in play over the next 24 hours. New Zealand has a bimonthly dairy auction and if you recall, the last 2 auctions triggered a 130 to 150 pip sell-off in NZD/USD. Canada’s IVEY PMI report and trade balance are also scheduled for release and given Bank of Canada Governor Poloz’s dovishness we expect softer results.

US Rates Keep Pressure on the Dollar

Although the U.S. dollar ended the North American session unchanged against most of the major currencies, it did not start the day that way. The dollar had come under broad based pressure from the slide in U.S. yields while weaker data from China and tensions in Ukraine drove U.S. equities sharply lower at the open. By the end of the day however, the Dow Jones Industrial Average and 10 year Treasury yields turned positive thanks in large part to the non-manufacturing ISM index, which jumped to 55.2 from 53.1. After the stronger than expected non-farm payrolls report on Friday, a pickup in service sector activity was widely expected but investors were happy to see activity expand by its fastest pace in 8 months. The ISM report is the most important piece of U.S data on the calendar this week and now that it is behind us, the focus will be on all of the Federal Reserve officials scheduled to speak. This includes, Stein, Yellen, Plosser, Evans, Tarullo, Bullard, Kocherlakota and Lockhart. Five of these policymakers are voting members of the FOMC this year. The recent slide in U.S. rates is keeping pressure on the dollar but if most Fed officials are more optimistic, it could reverse the trend in yields, lending support to the greenback. However with labor force participation declining in a low inflation environment, the central bank probably has no real interest in driving yields higher.

New Highs in Sterling Hinges on PMI

With U.K. markets closed for May Day, there was very little volatility in the British pound. Sterling held onto its recent gains ahead of the PMI services report, which is the biggest event risk for the GBP this week. Despite slower growth in construction activity during the month of April, an expansion in the manufacturing sector leaves investors optimistic about the economy. If service sector accelerated last month alongside manufacturing, GBP/USD could take out last week’s high and make a run for 1.70. However if the past performance of GBP/USD can be a guide of future activity, it will most likely be a slow dribble higher rather than a sharp rally because traders are already long sterling. The Bank of England also has a monetary policy announcement this week but they are widely expected to leave policy unchanged, which makes it a nonevent for the British pound. Instead industrial production could be more important because investors will be looking to see how much of this past month’s increase will be reversed. At the same time, dovish comments from Fed officials could also drive GBP/USD higher.

EUR: Unfazed by Lower GDP Forecast from European Commission

Like the British pound, euro ended the day unchanged against the U.S. dollar but what makes the move in EUR/USD different is its resilience to the European Commission’s lower growth forecasts and complaints about the euro. The commission cut its 2015 GDP forecast from 1.8% to 1.7% on weaker growth in France. While the EC maintained its forecasts for Germany and Italy and raised its forecasts for Spain, they reduced their growth forecast for France to 1.5% from 1.7%. Concerns about growth were attributed to low inflation and a strong euro that has negatively impacted external demand. External tensions such as the Russian/Ukraine conflict and a renewed loss of confidence are seen as the greatest risks for the region. Meanwhile the consolidative price action in the EUR/USD over the past 2 weeks reflects the market’s expectation that there won’t be any surprises from the ECB or the Fed in the near future. Both central banks are comfortable with their current course of monetary policy even though the ECB has been talking about doing more. The focus will shift from the U.S. dollar to the euro this week with inflation, spending, industrial production and trade data scheduled for release. Of course the biggest event risk on the calendar is the European Central Bank’s monetary policy decision. While no changes are expected from the ECB, Mario Draghi’s press conference always has the potential to trigger a big move in EUR/USD. In an attempt to talk down the euro last month, Draghi outlined all of the ways the central bank could loosen monetary policy. If Draghi intensifies his criticism about the strength of the euro, it could send the currency tumbling. However the words need to be very strong to send a clear message to the market. Draghi has never called the euro move “brutal” but if he adopts the language used by his predecessor Trichet, it would do the trick.

JPY: Another Holiday for Japan

With Japanese markets closed on Monday for Children’s Day and Tuesday for Greenery Day, trading in Tokyo should be very quiet. There’s not much in the way of market moving data on Japan’s calendar this week. The most important economic reports are the BoJ minutes, trade balance, PMI services report and Eco Watchers survey and generally speaking, these are not big movers for the Yen. However don’t expect this to be a quiet week for the Yen pairs. With a significant amount of Tier 1 economic reports scheduled for release from other parts of the world, Japan’s currency won’t be dormant for long.

Kathy Lien
Managing Director

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