What could wake up the Dollar (from its coma)?

The coming week will be quite busy in terms of events and economic reports, with the FOMC meeting and the Euro area flash CPI reading on Wednesday, the NFP report on Friday and some Q1 GDP first estimates (UK on Tuesday, Spain and US on Wednesday).

As we said in our previous research (see below, at the end of the article), the 80 level has acted like a resistance for the past few weeks and the US Dollar index is now trading at 79.70 (it recovered a bit from its overnight losses after it fell down to 79.55 during the Asian session). We believe that the market is now waiting for some ‘action’ after all these policymakers’ talks; the next move should come from BoJ and/or ECB officials within the next couple of months according to economists, where both of the central banks target to increase the money supply by applying some unconventional monetary policies.

Technicals on USD index: If we have a quick look at the chart below, we can see that the upper and lower bands (Green lines) of the Bollinger Bands Indicator (20 days, 2-sigma) have acted like dynamic resistance and support for the past couple of weeks. The USD index has been trading below its 20-daily SMA (red line) since the beginning of the month (April 8th) and seems on its way to re-test its strong support area at 79.25-79.30 (which is considered as a good buying opportunity). The resistance zone on the topside stands at 80.45 – 80.60.


(Source: Reuters)

The question we are asking myself at the moment is: Will the $10bn cut in the QE program in addition of a strong NFP report be enough to rebuild confidence in the US Dollar this week?

Firstly, economic data in the US have showed some improvements (retail sales, ISM Mfg PMI, U. of Michigan confidence and Pending Home sales all came in higher than expected this month); therefore we think that the market has already priced in a $10bn cut from the Fed officials and this meeting could be a non-event. The Fed’s balance sheet will continue to expand for the five coming months at least and the Fed Funds rate will remain at a historical low for another year, pushing preferences for the British pound and the single currency at the moment.

However, a strong NFP report on Friday (expected to come in a 210K) could potentially push the US yields back to levels we saw in March and bring traders’ interest to the US Dollar. The 10-year US yield has been oscillating mainly between 2.60% and 2.80% since the beginning of February and is currently trading at 2.6750%. We think that a print above 200K (helped with a low EZ inflation on Wednesday) could bring the US Dollar index above the 80.00 level. The unemployment on its side is expected to edge down by 0.1% to 6.6% and approach its ‘once-to-be’ forward guidance threshold, but won’t have an important impact as Fed’s officials have switched to a qualitative guidance and will take into account a wider range of economic variables according to Yellen’s first monetary policy speech at the Economic Club of New York.

Article wrote on April 16, 2014 (see graph):

The Ukrainian crisis in addition to the on-going Chinese economic slowdown episode haven’t trigged risk-off sentiment yet. The US Dollar strengthened against the Dollar-bloc currencies (see our last article What’s next for the Dollar-Bloc currencies) and the yen, but remains weak against the Euro and the British pound. We saw that fundamentals in the US continued to expand this week, with industrial production and retail sales both coming in better-than-expected. The only disappointment was the housing starts and Permits data that grew 946K and 990K in March (vs 973K and 1,008K expected).

This evening, new Fed chair Janet Yellen emphasized the importance of the ‘qualitative guidance’ during her first monetary policy speech at the Economic Club of New York, a new guidance that ‘relies on wide range of information’. She sounded quite confident on the outlook of the US economy; however, she mentioned that ‘the goal has not been achieved at this point’. In our opinion, she eased early rate hike speculation, and the 2-year US yield is now trading at 37.5bps, 10 bps lower compare to last week’s high.

Hence, we are trying to figure out if tomorrow’s initial claims report is going to be an non-event based on what we have read and heard from US policymakers, or could a good print boost the value of the US Dollar? Last week, according to the Labour Department, the number of Americans filing new applications for unemployment benefits fell to a 7-year low of 300K (seasonally adjusted, smashing expectations of 320K), signalling a strengthening economy after the ‘weather episode’. However, it didn’t have a major impact on the financial markets and on the US Dollar. Therefore, with tomorrow’s claims expected to edge up by 15K to 315K, we don’t see any significant move from the greenback coming from that macroeconomic indicator.

Quick review on the US Dollar index: As you can see in on the chart below, the US Dollar index eventually found support slightly above 79.30 last Thursday, but it seems that the 79.85 – 79.90 is causing a problem. Low volatility combined with preferences for the Euro and the Sterling have enabled the US Dollar index to reach the psychological 80.00 level. We still remain bullish on the US Dollar in the medium (against most of the currencies), but we think some updates on BoJ stimulus combined with more ECB jawboning remarks on the Euro strength will help the US Dollar to climb above 80.00.


(Source: Reuters)

FOMC minutes review, what’s next for the Dollar-Bloc currencies?

Yesterday, the Fed released its minutes of the last FOMC meeting (March 18-19) and we saw that the US policymakers were less hawkish than expected, easing rate hike speculation. Despite the last two NFP good prints and unemployment rate standing slightly above the ‘once-to-be’ 6.5-percent threshold (6.7% in March), the recovery is still fragile according to Fed officials who surprised traders and investors by showing that the central bank was more supportive of keeping its Fed Funds rate at low levels (0-0.25%).The US Dollar index broke its support at 79.75 and is now trading at 79.40, boosting most of the currencies.

As you can see it below, the US 10-year yield (orange) eased by 7 bps to trade at 2.65%, pushing the price of Gold (purple) back to 1,320 and helping the Yen (green) to continue its ‘strengthening episode’. Since last Friday’s high of 104.12, USDJPY has depreciated by 2.4% and seems on its way to test its support at 101.20. At the same time, the 10-year yield is down 15bps from 2.80%.


(Source: Reuters)

Is there more room on the upside for the Dollar-Bloc currencies?

AUD: The Aussie continues its positive momentum with Australian March employment report smashing expectations of a 5K increase to print at 18,100 (Jobless rate edged down by 0.2% to 5.8%). The Australian Dollar is now trading above 0.9400, levels we saw back in October. We believe that the inflation figures coming up at the end of the month (April 23rd) will determine the stance of monetary policy and if Governor Stevens could threaten the market once again of a rate cut if he judges that the Aussie is ‘uncomfortably high’. If we have a look at the chart below, the last ‘Aussie recovery’ was stopped after a 10% increase when it hit its 200-Daily SMA at around 0.9750 with the RSI indicator (14 days, 30-70) showing an overbought signal. In the second recovery episode, the pair is up 9.3% since the end of January and seems on its way to test the 0.9500 level. However, the overbought RSI may have been perceived by traders as a good time to start shorting the pair.


(Source: Reuters)

NZD: The Kiwi also appreciated sharply against the greenback and is up 8.65% since the end of January, trading at 0.8700 (August 2011 level). The Reserve Bank of New Zealand raised its Official Cash Rate (OCR) by 0.25% at its last meeting in March after holding it at a historical low of 2.5% for three years. Traders have been looking at the Kiwi as an interesting buying opportunity after Governor Graeme Wheeler announced that he expected to ‘raise the benchmark interest rate to about 4.5% in the next two years’ in order to curb inflation. Moreover, the unemployment rate declined to a 5-year low of 6.0% in the last quarter of 2013, while the economy expanded by 3.1% (down from 3.5% in Q3) and NZ’s current account deficit narrowed to NZD 7.55bn (or 3.4% as a share of GDP) through the twelve months through December (lowest ratio since Q1 2012).

The RBNZ will probably leave its OCR unchanged on April 23rd, which could hurt the Kiwi in the short term as some traders will start considering to take profit after the sharp appreciation. We would stay aside of the Kiwi at the moment and wait for further reaction from RBNZ policymakers on the strong exchange rate. The next resistance on the topside stands at 0.8840, which is the pair’s all-time high (Aug 1st 2011).


(Source: Reuters)

CAD: The surprise came from Canadian macroeconomic figures that completely reverse the bearish trend on the Loonie against the greenback. In its last meeting back in January, Bank of Canada lowered its inflation forecast stating that it expected the total inflation rate to remain at 0.9% in the first half of 2014, down from its previous forecast of 1.2%. As policymakers stated that they expected inflation to remain ‘well below target’, Governor Poloz turned the monetary policy to a dovish stance and the market was starting to price in a rate cut in one of the following meetings (currently at 1% since September 2010). However, the sudden increase in CPI (from 0.7% in October to 1.5% in January, then 1.1% in February) in addition to the better-than-expected indicators (GDP figures, Retail sales, Trade balance, Employment report…) brought back traders’ interest on the Loonie.

However, We think that the bearish trend on USDCAD is coming to its end and we will see 1.0800 as a good level to start buying the pair for a bounce back towards 1.1000 at first. USDCAD broke it 100-daily SMA yesterday (1.0900) and found support at 1.0850; technical indictors RSI is starting to show some oversold signals therefore some investors will see the 1.0800 – 1.0850 range as a buying opportunity.


(Source: Reuters)

How long with the Risk-ON?

It seems that the low volatility in the FX market in addition to a strong risk sentiment both brought back carry traders’ interests for the past couple of weeks.

If we have a look at the graph below, we can see that the AUDJPY broke it 96.00 resistance to trade at 96.50 on Friday afternoon (up 7% since March 1st at that time), before edging down a bit. At the same time, the equity market (S&P500 – red line) reached a new record high at 1,897.28 and is now trading 40 points lower.


(Source: Reuters)

Is the risk-on trend going to continue in the coming days?

Firstly, this week started with an agitated session in Asia despite the Shanghai Composite was closed for a market holiday. After it reached a lower March high of 15,164.39 on Friday, the Nikkei index was down 1.7% with USDJPY down 100 pips and finding support slightly above the 103.00 level on Monday UK/US trading sessions.

This morning, the US Dollar remained under pressure against most of the currencies, with the USD index trading back below the 80 level. Although the US March employment report came in line with expectations last Friday (192K vs con. 200K) and February’s job creation was increased 22K to 197K, demand for the greenback is still weak as traders and investors have been guided to look at a ‘wide range’ of variables. As you can see it on the chart, the index managed to find support around 79.75; a level that the market seem to consider as a buying opportunity.


(Source: Reuters)

Tomorrow, the Fed will release the minutes of the March FOMC meeting (18th-19th) and should give us more details on the ‘qualitative’ guidance.

Euro: The ECB policymakers’ threat of unconventional action didn’t manage to push the Euro to lower levels, and the single currency found support at the high of the support band 1.3640 – 1.3680. EURUSD soared 50 pips this morning and is now trading around 1.3800. It mainly came from a Dollar weakness, which pushed the single currency to the high of the 1.3300 – 1.3800 range as the Dollar index is heavily weighted towards the Euro (57.6%).

Sterling: After underperforming a bit last week, Cable (Purple bar) surged 100 pips this morning boosted from strong Feb Manufacturing (1.0% MoM vs. 0.3% exp.) and Industrial (0.9% MoM vs. 0.3% exp.) production data. The pair is now trading at 1.6750; the next resistance on the topside stands at 1.6770. The 2-year UK-US yield, one indicator that we like to watch quite a bit (orange line), is up 5 bps since Friday’s low of 0.219%.


(Source: Reuters)

Yen: As expected, the BoJ kept their monetary policy unchanged at the conclusion of its 2-day meeting despite a series of missed indicators (PMI, GDP, Industrial production…). According to BoJ policymakers, the Japanese economy can ‘swallow’ a sales tax hike that started on April 1st without adding more stimulus on the table. As a reminder, the BoJ 2014 Monetary Base Target stands at 270tr Yen (which was decided to be kept steady unanimously overnight) and was double after the central bank introduced its Quantitative Qualitative Monetary Easing (QQME) last year (April 4). However, the policymakers’ decision to increase the monetary base target will depend on the level of the inflation rate which has been constantly rising to higher levels (Overall Nationwide CPI printed at 1.5% in February).

USDJPY is one of the biggest movers, down 2% since Friday high of 104.12. The pair is now trading at 102.20, testing its support band of 102.00 – 102.20. The next support on the downside stands at 101.75.


 (Source: Reuters)