FX: US Data Won’t Faze Fed, Behind EUR Resilience

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This action packed week in the forex market may have started off slowly for the EUR/USD and USD/JPY with Chinese and Japanese markets closed overnight but rest assured, volatility should increase as the week progresses. Of all the major currencies, the greenback is actually the worst performer, weakening against all major currencies on the back of disappointing economic data. Personal income growth slowed from 1.1% to 0.2% in the month of March while personal spending growth slowed to 0.2% from 0.7%. Pending home sales increased 1.5% but any enthusiasm from the rise was offset by a large downward revision to the prior month’s report. For the Federal Reserve who meets later this week, today’s economic data confirm that the U.S. recovered lost momentum at the end of the first quarter. However without seeing this week’s ISM numbers or the all important non-farm payrolls report, the Fed won’t rush to any judgments. As a result, we do not expect any major changes to the central bank’s monetary policy stance. Yet this week’s ISM and payroll reports will go a long way in shaping the market’s expectations for Fed policy in the month to come.

Therefore non-farm payrolls will be the number to watch for the U.S. dollar but given that its at the very end of the week, country specific factors rather than risk on / risk off sentiment should drive currency flows for most of the week. The 4 main events on the calendar are the Chinese manufacturing PMI report Tuesday evening, the FOMC rate decision on Wednesday, ECB rate announcement on Thursday and Friday’s non-farm payrolls report.

The euro is trading well despite further weakness in Eurozone data and the prospect of a rate cut by the European Central bank later this week. Forex traders may be wondering how given these expectations, the euro can be so resilient. Part of its strength has to do with the formation of a new government in Italy but also the skepticism about how much of an impact a rate cut would actually have on the economy. First and foremost, of the 70 economists surveyed by Bloomberg, 62.8% expect the central bank to lower interest rates. This is hardly an overwhelming majority. The eonia or (Euro OverNight Index Average) rate has already been trading near zero for the past 9 months so a rate cut can’t drive rates much lower unless the central bank is willing to accept negative interest rates. We are not ruling out this possibility but the euro is trading like it needs more aggressive action from the ECB besides a rate cut to break below 1.2950.

Kathy Lien
Managing Director

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