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%.

USYields

(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.

AUD-10-APr

(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).

Kiwi

(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.

USDCAD

(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.

AUDJPY-SP

(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.

USDX

(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%.

CAbrr

(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.

USDJPY

 (Source: Reuters)