By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
Dollar bulls are in control as Monday's greenback traded higher against all of the major currencies. Their demand took USD/JPY above 113 and caused EUR/USD to reject 1.10. There were no U.S. economic reports released but investors are still trading off last week’s healthy labor-market report. The optimism is also shared by equity and bond traders who took the S&P 500 to fresh record levels and bond yields higher. Federal Reserve officials are happy with the latest jobs report as they see personal income rising as the labor market and confidence improve. Since the NFP, we’ve heard from a number of U.S. policymakers and while most of them are non-voting members of the FOMC, all with the exception of Yellen and Fischer — who refrained from talking about the economy or policy — have a positive view on the economy. Mester, who spoke on Monday, said she doesn’t “subscribe to a wait-and-see attitude on rates,” while Bullard said that while he doesn’t condone a 200bp rate hike, “near-term policy moves are ok.” Evans was the only voting member to touch on the economy on Friday and even he, who tends to have a dovish tilt, believes that that the fundamentals for the economy are good. With that in mind, USD/JPY’s break of 113 is not fully convincing — the currency pair is still holding below the 100-week SMA at 113.25. USD/JPY needs to rise above 113.40 to make the break meaningful. U.S. rates and Fed speak will be the main USD drivers in the front of the week as Friday’s retail-sales report is the only major piece of data on the U.S. calendar.
Although Emmanuel Macron defeated Marine Le Pen with a wide margin to become the next president of France, the euro failed to extend its initial gains above 1.10. Instead, it breached this key level, then fell swiftly beneath the round number. Investors bought the rumor and took profits on the news even as his victory removes one of the greatest near-term risks for the currency. Now it seems that the dollar is driving the pair because euro traders completely ignored stronger-than-expected German factory orders. Even the ECB had to acknowledge the recent improvements in Eurozone data and for this reason, the euro could still hold support between 1.0830-1.0850. USD/CHF had an unusually strong day with the currency pair rising more than 1% as investors unwound their Le Pen hedges. The euro and Swiss Franc will remain in focus Tuesday with Switzerland’s unemployment report scheduled for release along with Germany’s industrial production, trade balance and trade surplus reports.
The Canadian and Australian dollars also came under selling pressure but they have been sold aggressively over the past few weeks and hence saw only limited losses on Monay. The correction in USD/CAD did not continue but we still believe that a near-term top is in place. OPEC said it is looking at extending its production cuts and oil is up. With that in mind, the forces are still against the loonie as Canada’s economy struggles under the weight of falling oil prices. The latest housing-market report was weaker than expected and renegotiation of NAFTA still poses a major risk to the economy. But for the time being, USD/CAD will take its cue from oil and that’s what we should all be watching. The Australian dollar is at the cusp of falling to a fresh 3-month low and whether that happens will depend on Monday night’s retail-sales report. Consumer spending was expected to rebound in March, which we expect given the surge in job growth that month and the rise in the sales component of the service-sector report. However the currency came under selling pressure Monday because building approvals plunged and Chinese export growth slowed. In particular, its refined copper imports dropped to 6-month lows. Support in AUD/USD is at 0.7360 — the pair is not trading far from that level and a strong retail sales report is needed to prevent a further move to the downside. In contrast, the New Zealand dollar held up extremely well, ending the day unchanged against the greenback. NZD is holding firm ahead of the RBNZ meeting as recent improvements in the economy should make for a less-dovish central bank.
Finally, this may be a big week for the British pound and while GBP/USD hase its eye on 1.30, investors may refrain from taking the pair above this level until after the Bank of England’s monetary policy announcement. Aside from the BoE rate decision, the Quarterly Inflation Report is also scheduled for release and in many ways, that's more important. Economic forecasts will be updated and Governor Carney typically speaks after the report is released. If major changes were to be made, it would generally be during this time of the year when the latest economic projections are completed. The BoE’s job isn’t easy because while there have been improvements in the economy as evidenced by last week’s stronger manufacturing, service and construction PMIs, next month’s snap elections and the ongoing process of Brexit poses risks for the economy.