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The Best Currency for Growth and Safety

By Boris Schlossberg
06 March 2013 20:07 GMT

Favorable US data has given the dollar even more traction against counterparts like the euro and Canadian dollar, and Thursday’s ECB meeting could give way to an important EURUSD price move.

The US dollar (USD) continued to gain ground in midday North American trade as a better-than-expected ADP employment report added to the positive sentiment towards the greenback that has been building for several days. The ADP report showed a gain of 192K versus 178K expected, providing yet another upside surprise to the US economic calendar this week.

US data has been remarkably resilient since the start of the year despite the contractionary impact of higher payroll taxes and budget sequester cuts. The ADP report showed that US businesses continued to hire in the face of these macro obstacles, and if this accurately forecasts Friday’s non-farm payrolls (NFP) report, then investor sentiment towards US assets is likely to turn even more positive.

It is becoming more evident by the day that the US economy is pulling away from the rest of the G-3, and the dollar, which typically used to attract only safe-harbor flows, is now increasingly viewed as a “growth” currency.

Loonie Loses as Data, Central Bank Disappoints

The contrast could not have been sharper earlier in the trading session, when the latest economic data from Canada and the Bank of Canada (BOC) statement were released. Although Canadian economic performance remains positive, it is clearly lagging US results. Today's Ivey PMI disappointed with a 51.1 read versus 56.2 expected, but the true blow to the Canadian dollar (CAD) came from the BOC statement, which noted "Current policy will likely remain appropriate for a period of time."

With lackluster growth and little price pressures, the BOC appears to be in no hurry to tighten monetary policy anytime soon. The loonie swooned in the aftermath of the announcement, with USDCAD hitting a high of 1.0338. The pair faces some resistance near the 1.0350 level, but if Friday's employment reports show that the divergence in labor demand between Canada and the US continues to widen, the pair could break through the 1.0400 level and target 1.0500 in the near term as flows move south of the border.

Thursday’s ECB Meeting Is Pivotal for Euro

Meanwhile, the EURUSD tumbled below the 1.3000 level on persistent dollar strength, but the pair remains supported ahead of the key 1.2950 level. However, tomorrow's European Central Bank (ECB) meeting could prove pivotal. Although few investors are anticipating any policy change, the pressure on European monetary authorities is increasing by the day.

Italy remains a quagmire, while growth in the rest of the union is likely to be negative for the sixth quarter in a row. With France now deep in contractionary territory, only Germany is generating any growth in the region. That's why some analysts believe that the ECB would be wise to lower rates another 25 basis points, especially in light of the fact that price pressures within the Eurozone are actually decreasing.

If ECB President Mario Draghi were to surprise the market in this fashion, EURUSD would very likely pierce the 1.2950 support and target longer-term lows near the 1.2700 level.

By Boris Schlossberg of BK Asset Management

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06 March 2013 20:07 GMT