After failing to overcome key price levels last week, currency traders will be keenly watching this week’s data to see if the EURUSD and USDJPY rallies will continue or top out at the current levels.
Last week was a very good time to be long stocks and high-carry currencies, but disappointing US data snapped the rallies. FX traders took profits on their long USDJPY, AUDUSD, and NZDUSD trades, while the EURUSD and GBPUSD—two currency pairs that did not see as much demand over the past month—quietly consolidated.
We needed unambiguously positive US economic data for investors to be willing to take on more risk and drive the EURUSD and USDJPY higher, but the data did not deliver. With these two currency pairs failing at key levels (1.3150 for EURUSD and 100 for USDJPY) and stocks possibly turning lower this week off of Friday's data, many traders are now wondering whether this marks a top in both pairs.
Taking a look at this week's economic calendar, there is a lot of data scheduled for release, but only a couple data points can trigger big moves in EURUSD and USDJPY. Reports such as consumer prices, housing starts, industrial production, and the Philly Fed survey are interesting, but not game changers for the US dollar.
Instead, the main release that we are watching is the Fed’s Beige Book, which may provide additional clues on whether the labor market and consumer spending has become a fresh headache for the Fed. We will also be listening to all of the speeches delivered by US policymakers to see if they share St. Louis Fed President James Bullard's nonchalant attitude about the latest jobs number.
If concerns created by the decline in retail sales and the slowdown in job growth are not reflected in the Beige Book or Fed speeches, the optimism could renew the rallies in the EURUSD and USDJPY. However, we doubt that Fed officials will be unilaterally optimistic, and as such, we believe that more consolidation and profit taking could occur in these pairs before key levels are broken.
Aside from US data, the German ZEW survey is also worth watching, along with Sunday's Chinese Q1 GDP numbers. Strong growth in the first quarter could boost risk appetite.
Friday’s US retail sales report highlights how much of a challenge it has been for the Federal Reserve to stimulate the economy. Despite their “no-holds-barred” quantitative easing (QE) program, the sustainability of the recovery has come into question given this month's abysmal retail sales and non-farm payrolls (NFP) reports.
While many Fed officials maintain a glass-half-full view of the recovery and believe that the jobs number will be revised higher, the new data shows that despite record-breaking levels in stocks, weak job growth and high unemployment have constrained consumer spending. This means the Federal Reserve will need to postpone their plans to taper asset purchases.
At this point, we don't expect the central bank to make any announcements on reducing the size of their monthly purchases until September, at the earliest. In the month of March, retail sales fell by 0.4%, the largest decline since June 2012. Excluding autos, spending also dropped by the same amount. According to the details of the report, Americans spent less on electronics, sporting goods, general merchandise, and autos. With oil prices plunging at the end of February, gas station receipts dropped 2.2%. Lower energy costs also drove producer prices down 0.6% last month.
Finally, the University of Michigan consumer confidence report also fell short of expectations, as the index fell to a nine-month low of 72.3 from 78.6. It is clear that the deterioration in the labor market and the higher payroll tax completely overshadowed the rise in stock prices and property values.
EUR/USD Remains Capped Below 1.3150
It has been a tough week for anyone looking to trade a breakout or extension in the EURUSD. For most of the week, the currency pair was trapped in a 100-pip (or one-cent) range that extended from 1.3040 to 1.3140.
A stronger-than-expected Eurozone industrial production report for the month of February was offset by a downward revision to the prior month's report and a decline in German wholesale prices. What really did the euro in during the European session, however, were reports that the Eurozone finance ministers will cap the Cyprus bailout at EUR 10 billion.
The weaker US retail sales report initially led to a risk-off move in the euro, but the currency pair quickly recovered as euro traders saw no major reaction in US markets and European bond yields turned lower.
We continue to stress that there's quite a bit of resistance right above current EURUSD levels, and that has prevented the pair from extending higher. Right now, the 100-day simple moving average (SMA) at 1.3150 is the level to watch.
In the week ahead, there is not much in the way of Eurozone data. The most important release is the German ZEW survey. Beyond that, the euro will be subject to headline risk and the market's reaction to Chinese and US data.
Action-Packed Week for British Pound (GBP)
The British pound quietly edged higher against the US dollar and stayed largely unchanged against the euro last week, but that’s likely to change this week when UK new economic data comes into focus. It will be a very busy data week in the UK, with key events due for release on Tuesday, Wednesday, and Thursday. These key reports include consumer and producer prices, retail sales, employment, and the minutes from the most recent Bank of England (BoE) meeting.
Overall, we know that the pace of UK economic recovery has been uneven and may even require additional stimulus to regain momentum. However, the BoE has expressed concerns about inflation, and all of these issues will be addressed with this week's releases.
We will get a chance to see if consumer prices have increased and whether the strength in retail sales in February extended to March. If the data is good, the breakout in GBPUSD could finally gain some momentum, but if the data is weak, the currency pair could fall sharply. As for the BoE minutes, we don't expect any major change in views, as data has been mixed.
Commodity Currencies Dropping Like Rocks
The performance of the commodity currencies showed that what has risen the fastest can also fall the hardest. Next to the Japanese yen pairs, Friday’s worst-performing currency pair was the NZDUSD.
While there were a few pieces of New Zealand data released, the reports were not significant enough to cause this type of move in the currency. Instead, it is unwinding of longs accumulated throughout the past month that has driven NZDUSD sharply lower.
The currency pair appreciated nearly 7% over a very short period of time, and a correction is only natural. The latest report on food prices indicates that inflationary pressures have declined, which will be important to this week's CPI reading.
The NZDUSD rally can only continue if it has the blessing of the central bank, and if CPI declines for another month, the Reserve Bank of New Zealand (RBNZ) may want to curtail the rally because a strong currency decreases price pressures further. Thankfully, even with the drop in food prices over the past two months, prices are still higher now than in Q4.
The Australian and Canadian dollars also came under selling pressure. While no noteworthy economic reports were released from either country, the week ahead will be a busy one both in Australia and Canada, with the Reserve Bank of Australia (RBA) minutes scheduled for release and the Bank of Canada (BoC) holding a monetary policy meeting.
There are also a number of Chinese reports on the calendar, including Q1 GDP, industrial production, and retail sales, all of which will undoubtedly affect the AUD.
Bank of Japan (BoJ) Finally Disappoints
The Japanese yen traded higher against all major currencies on Friday. Data out of Japan has been improving as the country reaps the benefits of abundant liquidity and a weak currency.
The Tertiary Industry index jumped 1.1% in the month of March, an improvement that is consistent with other non-manufacturing business activity measures. However, the Cabinet did not change its economic assessment, which isn't too much of a concern, as it had just been upgraded it in March. The Japanese government currently sees the economy as "showing movements of picking up recently," but "weakness can be seen in some areas."
This week's trade and consumer confidence numbers should show further improvement. The big story, however, was weak Japanese government bond (JGB) purchases. After the bold and aggressive easing measures announced by the Bank of Japan (BoJ), the market expected to see a nice decline in bond yields, but weak demand left some yields higher than pre-BoJ-announcement levels. Between Japanese foreign bond purchases and JGB yields, we have yet to see the behaviors that should occur after such an aggressive move by the central bank.
By Kathy Lien of BK Asset Management