Forex Outlook – 5 Things to Watch This Week

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Daily FX Market Roundup 03.09.15

Forex Outlook – 5 Things to Watch This Week

EUR Steadies as Quantitative Easing Begins

CAD: Hit by Weaker Canadian Data

AUD: Construction Sector Activity Slows

NZD: All Eyes on RBNZ and Chinese Data

GBP/USD – Closing in on 1.50

Forex Outlook – 5 Things to Watch This Week

Last week was a great week to be long dollars and while we continue to look for further gains in the greenback, it is not unusual to see a pullback particularly given the lack of U.S. data. The dollar traded lower against all of the major currencies today with the exception of the Japanese Yen. The slide in the dollar along with the retracement in U.S. yields and rebound in equities confirms that today’s move reflects an adjustment after last week’s sharp gains. Thursday’s retail sales report is the only important piece of U.S. data on the calendar and chances are it will reinforce the market’s optimistic outlook for the U.S. economy and the U.S. dollar. The Federal Reserve is gearing up to raise interest rates and regardless of whether they choose to do so in June or September, there is a strong possibility that they take the first step towards tightening by changing forward guidance next week. However the lack of U.S. data does not mean a lack of volatility in the Forex market this week because there are a lot of economic reports scheduled for release from other countries. These pieces of data will be measured against their implications on monetary policy and its divergence from U.S. data. Aside from retail sales, the most important event risks on the calendar will be the Reserve Bank of New Zealand’s monetary policy announcement, employment reports from Australia and Canada and a number of speeches from global policymakers. Meanwhile the crosses may have more opportunities than dollar denominated pairs this week as conflicting signals from data and central bankers lead certain currencies to underperform others.

Here are the Top 5 things to watch this week in order of release:

1. Reserve Bank of New Zealand monetary policy announcement

2. Australian Employment Report

3. US Retail Sales Report

4. Canadian Employment Report

5. Central Bank Speak

EUR Steadies as Quantitative Easing Begins

The European Central Bank started buying bonds today as part of its EUR 1.1 trillion program to stimulate the Eurozone economy. The impact on the euro was nominal because the program was announced back in January with the start date set last Thursday. European stocks did not react either but bond prices moved higher. While there are a handful of second tier Eurozone economic reports scheduled for release and policymakers including Mario Draghi set to speak, we know where EZ monetary policy stands and where it is headed for the next 18 months. Even though Germany’s trade surplus narrowed in January due to a decline in exports, eventually the weaker euro and additional stimulus will help turn things around, particularly for the export sector. Meanwhile, Greece is back in focus with Eurozone Finance Ministers meeting today to discuss the country’s proposal. No statement was published but Eurogroup chairman Dijsselbloem called on Greece to “stop wasting time” because “little has been done since the last Eurogroup meeting 2 weeks ago in terms of talks and implementation.” According to EU Commission Chief Juncker, there will never be a “Grexit” but the release of bailout funds could be delayed if progress is not made bas the proposal was only a starting point to releasing the frozen funds. Technical reform talks between Greece, the EU, ECB and IMF will begin on Wednesday, so expect Greece and its debt troubles to remain in the headlines.

CAD: Shrugs Off Rebound in Oil Prices

The Canadian dollar ended the day slightly higher against the greenback while the Australian and New Zealand dollars were unchanged. There was no economic reports released from Canada but a rebound in oil prices helped to lift the currency. AUD and NZD on the other hand were kept under pressure by weaker data. Australian job advertisements rose at a slower pace in the month of February while New Zealand manufacturing activity fell -0.7% marking the third consecutive quarterly decline. Tonight, New Zealand credit card spending and Australian business confidence numbers will be released. While the RBA left monetary policy unchanged this month, they said further easing could be necessary and if this week’s business confidence and employment reports surprise to the downside, it would reinforce their dovish bias and the market’s view that rates cut be lowered by another 25bp this year. Recent data from China also failed to help the commodity currencies. Even though China’s trade surplus hit record levels in the month of February, imports plunged 20%, which is far more important to Australia and New Zealand’s economy than exports. Chinese inflation numbers are scheduled for release this evening followed by industrial production and retail sales numbers later this week.

Sterling Snaps Back

The British pound rebounded against the U.S. dollar and euro today ahead a busy week for central bank speak. Over the next 5 days, we will hear from Bank of England Governor Carney, MPC members Fisher, McCafferty, Weale, Shafik and Haldane. Most U.K. policymakers believe that rates will need to rise and their views should have been hardened by last week’s economic reports. As we indicated on Friday, sterling had previously weakened on the belief that the Federal Reserve will raise interest rates before the Bank of England. While we agree with this wholeheartedly, the BoE should not be far behind. Unfortunately this week’s U.K. industrial production and trade balance reports won’t have a significant impact on U.K. rate hike expectations so in all likelihood, sterling’s performance will continue to be driven by the market’s appetite for euros and U.S. dollars but central bank speak could also affect the currency.

Kathy Lien
Managing Director

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