It’s a Pivotal Week for the Dollar

Daily FX Market Roundup 03.28.16

This is a pivotal week for the U.S. dollar because Janet Yellen’s speech on Tuesday and the U.S. labor market report on Friday will go a long way in setting expectations for the June FOMC meeting. Right now the market is pricing in 6% chance of a rate hike in April and 36% chance of a move in June. While expectations for June may seem high, the numbers show that investors are not looking for rate hike in the second quarter. Yet everything policymakers have been saying suggests that the next round tightening could be right around the corner. The FOMC dot plot shows 2 rate hikes in 2016 and a few Fed Presidents have confirmed that there could be case for raising interest rates in April. So while Janet Yellen sounded less hawkish at the last FOMC meeting, she may sound less dovish tomorrow before the Economic Club on NY. Friday’s labor market report could also breathe new life into the dollar if earnings rebound after last month’s surprise decline. However if Yellen remains dovish and the payrolls report is weak then investors will punish the dollar and rule out any chance of June tightening. This morning’s trade balance, personal spending and PCE reports highlight the U.S. economy’s ongoing challenges. While personal incomes rose more than expected, spending growth increased a meager 0.1%. This reading would not have been as discouraging if not for the sharp downward revision to last month’s report from 0.5% to 0.1%. The PCE deflator also eased with core prices growing only 0.1%, a sign that inflationary pressures remain low. Pending home sales however rose strongly as manufacturing activity continues to improve with the Dallas Fed index rising from -31.8 to -13.6 in March.

This is also an important week for euro with German inflation, unemployment and spending numbers scheduled for release along with revisions to manufacturing PMI reports. EUR/USD has done a great job of holding above its former breakout level of 1.1050. Eurozone and U.S. monetary policies will continue to diverge but until investors are convinced that another rate hike from the Fed is looming, euro will continue to receive support from Mario Draghi’s comment that rates are at its lower bound. In other words, the ECB is done easing for now and any improvements in Eurozone data will only encourage the rally in EUR/USD. Although less dovish comments from Yellen could drive EUR/USD back to 1.11, we expect 1.1050 to hold and the EUR/USD to eventually test 1.13.

The best performing currency today was the British pound. European markets were closed for Easter Monday but that did not stop investors from bidding up the currency pair after last week’s sharp decline. The price action of is clearly reflective of the inherent volatility of sterling, which tends to have exaggerated moves to the up and downside. The only piece of U.K. data worth watching this week will be Friday’s PMI manufacturing report but between Mark Carney’s speech on Thursday and the ongoing focus on Brexit uncertainty, the rally in sterling should run out of steam. The first level of resistance is today’s high of 1.4270, which coincides with the 50-day SMA and then 1.44, a former breakout level.

The Japanese Yen will also be in focus this week with the heavy economic calendar that includes spending and employment reports. However the main release will be the forward looking Tankan survey of manufacturer expectations. Given the slowdown in capital expenditures, sluggish exports and the recent strength of the Yen, the Tankan report should add pressure on the currency.

Meanwhile all three of the commodity currencies traded higher against the greenback today. Considering that Australian and New Zealand markets were closed for Easter the strength of AUD and NZD can be largely attributed to slightly higher commodity prices and a weaker U.S. dollar. New Zealand has its global dairy auction tomorrow and an increase in prices would contribute to the positive momentum in the currency. For Australia, the most important event risks this week will be Australian and Chinese PMIs. For the time being, Australia appears to be weathering the slowdown in China well and the RBA’s lack of major concern about the level of the currency will leave the U.S. dollar as the primary driver of AUD/USD flows.

USD/CAD shrugged off the slide in oil prices. We are definitely seeing signs of a top in crude but whether oil steadies or turns lower from here will depend on the April meeting of oil producers. If they decide to freeze production, oil will rise to new highs. If they resist restrictions, it could mark a top in the commodity. In the meantime, we expect USD/CAD to find support and move higher as short sellers take profits in the currency. GDP numbers are scheduled for release later this week but the greater mover should come from oil and oil inventories.

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