Don’t Bet on a Bottom Yet in EURO

It’s a new trading week and investors are selling US dollars across the board. The greenback traded lower against all of the major currencies and the softer durable goods was only partly to blame. Friday’s US jobs report was far from impressive and while the greenback bounced after non-farm payrolls, the broader market is finally beginning to share our concerns. More than 190K jobs were created in March but the revisions to February were minimal and most importantly, wage growth slowed. The labor market has been the strongest part of the US economy but if the Federal Reserve is right, the economy and in turn hiring should start to slow. What’s interesting though is that the greenback declined despite the pullback in US stocks. Over the past few weeks, the dollar benefitted from risk aversion but that was not the case today. The primary reason is because currencies like the euro are deeply oversold leading to profit taking during this lighter trading week. The consumer price report and FOMC minutes are the most important event risks for the dollar – the recent rise in oil prices should boost inflation but the central bank’s concerns about growth and global uncertainty will ring loud and clear in the minutes.

The focus this week will be on Europe. The European Central Bank has a monetary policy announcement on Wednesday and even though investors bid up EUR/USD today, the risk is to the downside. Growth in the region is weak and the ongoing risk of Brexit, US-China and EU auto tariff disruptions prevents the central bank from being optimistic. Germany’s trade surplus increased last month but the improvement masks declines in imports and exports. The only reason why the euro is up today is because its deeply oversold – it tried to break 1.12 three times and failed. At the last ECB meeting, Mario Draghi sent the currency tumbling from 1.13 to 1.1176 when he talked about the need for policy accommodation the downside risks related to global factors, and protectionist threats. Nothing changed since then and for this reason we believe that if the euro rallies to 1.13, it would be a great place to sell.

This is also important week for Britain. The European Union’s April 12th deadline is Friday and while Prime Minister May has requested for an extension to June 30th, there are reports that France, Spain and Belgium are prepared for a no deal Brexit. Merkel and May will be meeting tomorrow ahead of Wednesday’s EU Summit. May’s team is supposed to hold “technical talks” with the Labour Party tonight but according to Corbyn, the government isn’t moving its red lines which means little progress has been made. June 30th was the original extension that May requested and rejected by the EU. They refused to grant a longer extension unless the Withdrawal Agreement was accepted or Britain made significant changes. The UK’s willingness to participate in European Parliament elections could be enough but its not clear whether the French feel the same way. European Council President Tusk also proposed the idea of a “flextension” that would give the UK a year to approve a deal with the option to leave early if the agreement is ratified. This would avoid repeated extensions or a disorderly exit yet still give the UK the flexibility to leave sooner if they want. Nothing is more important this week than the EU’s response to May’s request. Friday is the deadline, so sterling traders should be watching for every Brexit headline. If the EU approves a flextension, sterling should rally. If they force the UK into a no deal exit, GBP/USD will drop as hard as a rock.

All 3 of the commodity currencies traded strongly today led by gains in the Canadian dollar. Canadian housing starts and building missed expectations but none of that mattered as oil prices climbed to its highest level since October. Crude prices are up more than 38% year to date and the 90% uptick in Western Canada Select is even more remarkable. This will go a long way in boosting the energy sector and provide a more lasting recovery in IVEY PMI. Having fallen below the 100-day SMA, USD/CAD is at risk of further losses.