New economic data, central bank policies, and the impending fallout from the Cyprus bailout have major currency pairs like the EURUSD, USDCAD, and AUDUSD all approaching or testing important support/resistance levels.
After big moves in the EURUSD on Monday, the currency pair traded in a narrow range on Tuesday. There were no major Eurozone reports on the economic calendar, leaving traders watching the headlines for fresh news out of Cyprus.
Four things we do know at this stage are: 1) Cypriot banks will remain closed until Thursday; 2) Capital controls will remain in place for "weeks" (likely months); 3) Fitch is on the brink of downgrading Cyprus after putting the country on credit watch negative; and 4)The Bank of Cyprus (the country's largest bank) has refused to accept the resignation of its chairman and four directors.
None of these developments are particularly surprising, as the deal that Cyprus made will be one that the country continues to pay for in the years to come. What the government and markets are worried about now is how ugly things will get when banks reopen on Thursday.
Local banks have contracted G4S, the world's largest security firm, to replenish and guard bank machines. We don't expect widespread chaos, but at bare minimum, we expect the EURUSD to remain under pressure until Thursday.
The 1.2880 level once stood as key EURUSD support, but now that it has been broken, this level has turned into resistance. For the technicians wondering why this is an important level, it is where the 200-day simple moving average (SMA) and the 50% Fibonacci retracement of the July 2012 and January 2013 rally converge. If the EURUSD fails to recapture this level in a meaningful way, it could be on its way to support at the November low of 1.2660.
In the near term, all eyes are on Eurozone data. German consumer confidence numbers are scheduled for release on Wednesday along with Eurozone sentiment indicators. Between Italy's failed election in February and Cyprus' problems in March, there are plenty of reasons why business and consumers may have grown more pessimistic.
Aside from recent deterioration in Germany, the labor market in France remains weak, leading to anemic growth in the region's second-largest economy. The combination of weaker economic data and continued uncertainty could put additional pressure on the EURUSD, driving it down to its next support level.
See also: All-New Headlines Dragging Down the Euro
4 Fed Presidents to Speak on Wednesday
Tuesday was another mixed day for the US dollar (USD). While stocks resumed their rise, the greenback strengthened against the Japanese yen (JPY) and British pound (GBP) but weakened against the euro and commodity dollars. The economic calendar was heavy with US data and there were both surprises and disappointments.
For the Federal Reserve, the lack of consistent improvements in the economy is one of the main reasons why weaning off QE is a long-term discussion. Thinking about the exit is the right thing for the Fed to do, but they are still miles away from acting on it.
Of all the economic reports released Tuesday, consumer confidence is the most important, and unfortunately, the Conference Board's index dropped from 68 to 59.7 in the month of March. This decline was consistent with the deterioration reported by the University of Michigan and Investor’s Business Daily, both of which cited concerns about labor market conditions and the sequester. Weaker confidence could weigh on consumer spending at the end of the first quarter.
New home sales also dropped 4.6% in February, but this decline represents a correction after the sharp 13.1% rise in January. The beginning of the year was a strong time for the labor market, with housing prices rising 1.02%, according to the S&P/Case-Shiller housing price index. That was the strongest increase in the index since June 2006.
Durable goods orders also jumped 5.7% in the month of February. This increase was more than anticipated and driven largely by a 95.3% rise in commercial aircraft orders. Demand for autos also rose 3.8%, but excluding transportation orders, durable goods fell 0.5%. Durable goods can be extremely volatile, and therefore, we caution traders against reading too much into these numbers because the changes this month mostly reflect a payback from last month.
Pending home sales are due for release on Wednesday along with comments from Fed Presidents Eric Rosengren, Sandra Pianalto, Simon Potter, and Narayana Kocherlakota. Of these four central bank officials, Rosengren is the only Federal Open Market Committee (FOMC) voter, and his comments are usually dovish.
British Pound Hit by Surprise Data Disappointment
The British pound (GBP) traded lower against the US dollar and euro after the Confederation of British Industry released a disappointing retail sales report for the month of March. Economists were looking for a sharp improvement in spending, but the index of annual sales growth dropped from 8 to 0. This is the weakest reading in seven months and bodes poorly for the broader retail sales index.
The only silver lining was in expectations: retailers expect sales volume to pick up significantly in April. Unfortunately, based on this report, we are worried that the 2.1% increase in retail sales last month will not be sustained in March.
Fourth quarter current account and final GDP numbers are due for release on Wednesday. No growth revisions are expected, but the current account deficit could shrink to -12.5 billion from -12.8 billion.
3 Reasons for the Canadian Dollar (CAD) Rally
For the fifth consecutive trading day, the Canadian (CAD), New Zealand (NZD), and Australian (AUD) dollars all powered higher against the greenback. The CAD benefitted from three distinct factors: 1) an unexplained 1.4% increase in oil prices; 2) changing risk appetite; and 3) expectations for a stronger inflation report on Wednesday. Economists are looking for consumer prices to jump 0.7% after growing a mere 0.1% the prior month. We agree that price pressures in Canada have increased, and if the data validates everyone's views, USDCAD could drop to 1.0120, the 50-day SMA.
The AUDUSD tested 1.05 but has so far failed to break above this level, although we think it is only a matter of time before a break occurs. Reserve Bank of Australia (RBA) Governor Glenn Stevens spoke this week, but made no particular comments about monetary policy. The RBA's half-yearly Financial Stability Review was due Tuesday evening as well, which could be a trigger for a break above 1.05 as long as the central bank does not sound overly cautious or warn about the negative consequences of a strong currency.
The New Zealand dollar, on the other hand, rose to a one-month high against the US dollar on the back of stronger trade numbers. The country turned a 414 million trade surplus after reporting a -287 million deficit in January. Exports increased sharply while imports declined slightly. Business confidence numbers were due for release Tuesday evening, and we expect the data will continue to support gains for the NZDUSD.
Finally, Some Help from BoJ Governor Kuroda
Japanese yen (JPY) crosses received a boost from the rally in US equities and overnight comments from Bank of Japan (BoJ) Governor Haruhiko Kuroda. During his Parliamentary testimony, Kuroda sounded optimistic about the economy and committed to easier monetary policy. He said the economy has stopped weakening and showed positive signs of improvement.
The weaker yen helped to boost corporate and household sentiment, but uncertainties are high for Japan's economy, and therefore, the BoJ will need to do whatever it takes to end deflation. More specifically, the central bank plans to discuss different ways to lower the yield curve, including extending bond maturities in their asset fund along with increasing purchases of long-term bonds. Kuroda expects to achieve the 2% inflation goal in two years but admitted that Japan may not be able to accomplish this goal through monetary policy alone.
No Japanese economic data is scheduled for immediate release, but we learned recently that small business confidence increased in March, while inflationary pressures ticked higher in February. Unfortunately, neither of these reports lent much support to the yen.
See related: 3 Reasons for Near-Term USD/JPY Losses
By Kathy Lien of BK Asset Management