Next 24 Hours: 3 of the Top 6 Key FX Event Risks

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Daily FX Market Roundup 04-22-14

Next 24 Hours – 3 of the Top 6 Key FX Event Risks

AUD in Play with Australian CPI and Chinese PMI

CAD: Potential for Upside Surprise in Retail Sales

Euro: Holding Steady Ahead of PMIs

Sterling Bulls Refuse to Give Up

Yen Crosses Supported by Rally in High Beta Currencies

Next 24 Hours – 3 of the Top 6 Key FX Event Risks

Buckle up because if volatility in the forex market is poised to increase, it should happen over the next 24 hours because 3 of this week’s top 6 event risks are scheduled for release before the NY trading session. If you don’t know already, the 6 most important event risks on the calendar this week are in the order of release – Australian CPI, Chinese PMI, Eurozone PMIs, the RBNZ Rate Decision, speech from ECB President Draghi and UK Retail sales. Tonight Australian consumer prices are scheduled for release along with Chinese manufacturing PMI and the Eurozone’s Flash PMI reports.

#1 Australian CPI – The Australian dollar is trading very well ahead of its inflation report because annualized CPI growth is expected to top the central bank’s 2 to 3% target range. An increase in inflation would reinforce the central bank’s neutral monetary policy bias and alleviate their concerns about a strong currency. If CPI growth beats expectations, we could find AUD/USD trading back above 94 cents.

#2 HSBC China Manufacturing PMI – China’s initial manufacturing PMI report for the month of April will also affect the Australian dollar along with other risk currencies. While there is no question that the Chinese economy is slowing, data hasn’t been as weak as economists anticipated. Currently the market is looking for a small uptick in the manufacturing PMI index that could accelerate gains in the Australian dollar along with other high beta currencies and also help support the rally in equities.

#3 Eurozone Flash PMIs – For the past 6 trading days, there has been very little movement in the euro with the currency pair trapped within a 90 pip trading range. Tomorrow’s Eurozone PMI report has the potential to trigger a breakout in the pair because it provides investors with the most up to date information on how the Eurozone economy is performing. Based on the decline in the German ZEW survey and drop in industrial production, the odds favor a slowdown in manufacturing and service sector activity. Economists are also looking for a pullback from elevated levels, which make EUR/USD vulnerable to a sell-off on the back of PMIs.

The Bank of England minutes and Canadian retail sales reports due on the same day are also important but compared to some of the other event risks this week, they should be less market moving. However with the jump in wholesale sales and rebound in job growth in Canada, there’s scope for an upside surprise in retail sales that could reverse part of the gains in USD/CAD.

Dollar Receives No Boost from Stronger Data

The price action in the foreign exchange market today was driven primarily by risk appetite as the gains in U.S. equities helped to lift all risk currencies. USD/JPY held on to its recent gains but failed to extend higher as 10 year Treasury yields ended the day unchanged. Once again, better than expected U.S. data failed to provide much support to the greenback. Investors continued to ignore the improvements in the U.S. economy, knowing that they will not push the Federal Reserve to accelerate unwinding of QE. Nonetheless its worthwhile to mention that manufacturing activity in the Richmond region returned to expansion after contracting for 2 straight months. Existing home sales declined by far less than economists anticipated with rising prices offsetting the 0.2% drop. New home sales are scheduled for release tomorrow and a rebound is expected after a harsh winter crimped sales in February. Unfortunately we don’t expect this report to have much impact on the greenback as investors focus on more market moving events abroad.

Euro: Holding Steady Ahead of PMIs

The euro traded slightly higher against the U.S. dollar today ahead one of the most important event risks this week – Eurozone PMIs. As we mentioned in yesterday’s note, the top priority for any major central bank is growth and inflation. Last week, we learned that inflationary conditions in the Eurozone improved and this week we will get more information on activity. If the PMI reports show acceleration in manufacturing and service sector activity, it would ease the need for further easing and lend support to the euro. Unfortunately economists are looking of the Eurozone PMI composite to retreat from elevated levels due to the slowing in emerging markets and turmoil in Ukraine and if they are right, the euro could accelerate its losses. ECB officials have made it clear that they are prepared to do more to support the economy but the bar for additional stimulus remains high because the economy is still growing. However if tomorrow’s report shows a slowdown in economic activity, concerns about a strong currency and weaker growth could push the central bank into action and drive EUR/USD below 1.37. Of course, if there is very little change in PMIs, EUR/USD will remain trapped with a 1.37 to 1.39 trading range.

Sterling Bulls Refuse to Give Up

The British pound traded within a whisker of its 4-year high against the U.S. dollar today. Despite very little chance of increased hawkishness by the central bank, sterling bulls refuse to abandon their long positions. According to the latest CFTC data, speculators added to what were already extremely stretched positioning. The last time we saw this much long exposure to the British pound was in 2007. Clearly despite the unevenness of U.K. data, investors believe the Bank of England will move to a more hawkish posture and be the next to raise interest rates. However with inflation growing slowly and average wage growth falling short of expectations last month, we do not believe the central bank moved closer to tightening monetary policy. Back in March, the Bank of England minutes contained very little new information aside from concerns about the negative impact of sterling strength on inflation. Given the continued rise in the currency, we expect the central bank to express these same frustrations. We would not be surprised if sterling bulls found an unchanged statement satisfactory but the chance of a more hawkish statement is slim and the risk of a correction is high.

Yen Crosses Supported by Rally in High Beta Currencies

The Japanese Yen traded lower against all of the major currencies today except for the U.S. dollar. While USD/JPY struggled to extend its gains on the back of the overnight sell-off in the Nikkei, the Yen crosses benefitted from the rise in high beta currencies and rally in U.S. equities. The only piece of economic data released from Japan overnight was final leading indicators, which was revised slightly higher. Japan’s Government Pension Investment Fund (GPIF) also appointed 6 new members to its investment committee, 3 of whom supported the planned restructuring of the fund. As the world’s largest pension fund their plans to increase exposure to domestic equities will not only provide underlying support to Japanese equities but could also transform how foreigners feel about Japanese assets. For the time being, the rally in USD/JPY remains intact. Bank of Japan Deputy Governor Nakaso is scheduled to speak this evening and like many of his peers, he will most likely express an optimistic outlook on Japans economy. It should only be a matter of time before USD/JPY touches 103.

Kathy Lien
Managing Director

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