By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
Now that U.S. and European investors are back from their Easter holidays, we get a true sense of how they feel heading into the second quarter. The sharp sell-off in U.S. stocks on Monday was halted by a recovery on Tuesday. There was no specific catalyst but after last month’s steep declines, it is no surprise to see relief rallies across the financial markets. USD/JPY bounced alongside the Dow but the greenback’s gains were limited to the yen, Swiss franc and euro. April tends to be a good month for stocks and a challenging one for the U.S. dollar. So while it appears that USD/JPY wants to make a run for 107, it may be reluctant to do so before Wednesday’s ISM non-manufacturing report. Nonfarm payrolls is the most important release on this week’s calendar and ISM will play a big role in shaping expectations. Improvements are expected in the unemployment rate and average hourly earnings but job growth is expected to be much weaker with a forecast of 185K against an increase of 313K the previous month. Aside from NFPs, the U.K.’s composite PMI report and Canada’s labor-market numbers could also have a significant impact on those currencies. It is also worth noting that San Francisco President John Williams has been named NY Fed President, William Dudley’s successor. This is a permanent role that wields significant power and while he comes with extensive experience, he’s more hawkish than Dudley.
In fact the commodity currencies were the day’s biggest movers with the Canadian dollar leading the gains. USD/CAD dropped to a one-month low of 1.2782. Higher Canadian bond yields, an increase in oil prices and reports that President Trump is eager to get a NAFTA deal done as early as next week helped lift the loonie. But USD/CAD ended the NY trading session not far from 1.28, a key support level, which suggests that there may be an opportunity to sell the pair closer to 1.2850.
The New Zealand dollar was supported by an uptick in milk prices. The global dairy trade index fell for the fourth auction in a row but at -0.6%, the decline was mild and not as significant as the previous month. Technically, .7150 is proving to be significant support for NZD/USD and while there’s a descending triangle, we believe there’s a better chance that the pair will break resistance and head above 73 cents than sink below support, ushering in a new wave of weakness.
The Australian dollar also traded higher against the greenback but AUD/USD trailed behind CAD and NZD. As expected, the Reserve Bank of Australian left interest rates unchanged Monday night. The tone was neutral with a tinge of optimism. While the RBA expressed concerns about the uncertainty in household consumption and the possibility of a stronger A$ weighing on inflation and the economy, for the time being, they see faster growth in 2018 and inflation picking up gradually as the economy strengthens. AUD/USD bounced on the back of this report and a sharp rise in the manufacturing PMI index. According to Australia’s Industry Group, manufacturing activity expanded at its fastest pace ever thanks to new orders, deliveries, employment and wages. Building approvals and retail sales were due Tuesday evening. If consumer spending also beats expectations, AUD/USD will make its way up toward 78 cents.
Stronger-than-expected manufacturing activity in the U.K. did not help or hurt sterling because the change was extremely modest with the difference made up by a downward revision to last month’s report. There’s a lot of U.K. data scheduled for release week and investors will be watching these numbers closely to see if they validate the Bank of England’s hawkishness. If you recall, the monetary policy committee voted 7 to 2 to leave rates unchanged last month with McCafferty and Saunders favoring an immediate rate rise. This led investors to believe that the BoE will be the next major central bank to raise interest rates as interest-rate futures show a 78% chance of a hike in May. Thursday’s PMI services and composite reports will go a long way in supporting or resetting policy expectations.
Last but certainly not least, the euro was one of the few currencies to end the day lower against the greenback. Unlike Australia or the U.K., data continues to surprise to the downside. Retail sales in Germany were expected to rise by 0.7% but instead declined by the same amount, driving the year-over-year growth rate down to 1.3% from 2.5%. Manufacturing activity in Germany was also revised lower. The Eurozone’s latest CPI report is due for release Wednesday along with the February unemployment rate. The inflation number tends to have a greater impact on the euro than the labor-market release. Although economists are looking for CPI growth to accelerate, a slowdown in German CPI and the ECB’s cautiousness puts the risk to the downside for EUR/USD.