Top 3 Opportunities in FX this Week

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With Australian and European markets closed for Easter Monday, we’ve had a quiet start to a busy week in the forex market. Between Monday evening and Friday morning, there is no shortage of market moving event risks for our readers who are thirsting for volatility. In addition to the U.S. non-farm payrolls report, there will be 4 major central banks making monetary policy announcements, 8 Federal Reserve Presidents delivering speeches and Chinese PMI numbers on the calendar. Some of these event risks are more important than others but there are 3 key opportunities that we are watching very closely as they could cause the biggest moves in the FX market this week.

Top 3 Opportunities in FX this Week

The Top 3 opportunities in the FX market this week are the Bank of Japan and European Central Bank monetary policy announcements along with the U.S. non-farm payrolls report. Throughout the week, we’ll look at each of these event risks in further detail but here is why we believe you should start thinking about these events now.

1) Bank of Japan Meeting – Expect Kuroda to Come Out of the Gate Swinging (Wed Eve, Thurs AM in Japan)

This month, there are 2 BoJ meetings on the calendar – one at the beginning of the month and one at the end. There’s a 60-40 chance that the BoJ will ease this week. The central bank has been very vocal about their commitment to increase stimulus up and until their 2% inflation target is achieved. The only question is how quickly the new members of the Bank of Japan are willing to act. They passed on an emergency meeting and could hold off until the end of the month, especially if they are worried about import prices. Given how crowded the short Yen trade is, if the BoJ disappoints and fails to ease this week, USD/JPY could slip down to 92.50.

With this in mind, we believe that BoJ Governor Kuroda will come out of the gate swinging at his first central bank meeting. He has a lot to prove and a lot to get done in a very short period of time. As a result, we believe the BoJ will increase and extend the maturity of JGB purchases this week with a commitment to do even more over the next few months, which should be enough to renew the rally in the USD/JPY.

2) ECB Meeting – Beware of More Caution from Draghi (Thursday)

In contrast to the BoJ, the European Central Bank is expected to keep monetary policy unchanged. However with German data weakening and Cyprus requiring a bailout, the ECB could be warming to the idea of additional stimulus. There’s a very good chance Mario Draghi will sound more cautious at this week’s ECB meeting, which would be negative for the euro. The EUR/USD could drop to fresh year to date lows if Draghi even hints that a rate cut is possible. Unfortunately the chance of that happening is extremely likely. The cracks are showing in Germany and Cyprus could be the first of many weaker southern European nations such as Slovenia seeking emergency funding from the ECB. To preempt some of the difficulties, Draghi may want to ease and when the ECB plans to change monetary policy, they usually like to prepare the market for the move by dropping hints early. However if we are wrong and Draghi sounds very calm and unconcerned about the recent deterioration in economic data and the problems in Cyprus and Italy, it could be just what the EUR/USD needs to stage a stronger recovery towards 1.30.

3) U.S. Non-Farm Payrolls Report (Friday)

This week’s non-farm payrolls report could have a larger impact on the U.S. dollar than some of the other recent releases because economists are looking for slower job growth. Last month, U.S. companies added 236K workers, which was much stronger than anticipated. The dollar soared against the JPY and EUR but the gains were not extended because investors knew that one month of improvement was not enough for the Federal Reserve to get more serious about tapering asset purchases. Yet at this critical juncture in the global recovery where there is renewed weakness in Europe, bad news could resonate more than good news. As a result, if NFPs surprise to the downside and increase a mere 200k, USD/JPY could fall sharply. However given the improvements in jobless claims last month, the chance of an upside surprise is also reasonable. We’ll have to wait for the rest of this week’s labor market reports for more clarity on the current state of the labor market. Either way, given the divergence between what economists anticipate and the level of jobless claims, NFPs should be a big mover for the USD this week.

Important but Less Market Moving…

While these are the 3 trading opportunities that we are watching most closely, the Reserve Bank of Australia and Bank of England monetary policy announcements should not be ignored along with the Chinese PMI numbers. Both the RBA and the BoE are expected to leave monetary policy unchanged but the RBA’s tone will determine whether the AUD breaks above 1.05. As for Chinese data, stronger economic activity could keep the AUD/USD bid while weaker numbers would extend the recent correction in the pair. Seven Federal Reserve officials are scheduled to speak this week but only half are FOMC voters. Fed Presidents Evans, Bullard and George will be speaking on the economy or monetary policy and while Bernanke will also be touching on the same topic, his “brief remarks” are prerecorded and unlikely to be market moving.

Kathy Lien
Managing Director

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