By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
Compared to the last 2 weeks when there were a number of central bank rate decisions and other key events, this SHOULD be a quieter period for the foreign-exchange market. The key word, however, is SHOULD because low volatility hinges on the U.K. delaying Brexit for another week. There also can’t be any market-moving comments from global policy makers, which of course is hard to predict. Without these external risks, the main focus is be on UK data, Eurozone PMIs and the Reserve Bank of New Zealand’s monetary policy announcement. But we don’t live in a vacuum and for this reason forex traders need to be aware of this week’s potential political and economic risks. Along these lines, here are the 5 things to watch this week:
Taking a look at each of these in further detail, the number-one most important event risk is the Article-50 trigger, which Prime Minister May confirmed will happen before the end of the month. The only question is whether it happens this week or next, but when it does, it will be a struggle between fear and relief. There will be fear that the U.K. will be embroiled in exit talks for the next few years causing businesses to defer investment and spending while the relief will come from knowing that England is finally moving forward with a process that will take years to finalize. In the meantime, the government will keep fiscal and monetary stimulus easy to support the economy. The first phase will be uncertainty, which is generally negative for the currency -- especially since the EU doesn’t seem to want to make the exit easy for the U.K. Last week, for example, May said trade talks would not happen until a Brexit payment deal was struck. So as sterling marks its time ahead of Tuesday’s consumer price report and Thursday’s retail sales report, which we think will be positive for GBP/USD as it is likely to show a rise in inflation, traders will also be cautious about bidding the currency pair up too aggressively before Article 50 is triggered.
Meanwhile, with no major U.S. economic reports scheduled for release this week the dollar struggled to rally. Speeches from U.S. policymakers will be in focus this week and in many ways these comments could have a more significant impact on the dollar than data because minor changes in U.S. economic reports won’t significantly alter the market’s expectations for tightening whereas the views from FOMC voters could. After last week’s Federal Reserve rate decision, the market is divided on the timing of the next rate hike and the tone of the comments made by Fed Chair Janet Yellen and FOMC voters Evans, Dudley, Kaplan and Kashkari could go along way in setting expectations. We know that Kashkari will be dovish since he voted against a rate hike this month but if the other policymakers are all hawkish and sound eager to raise rates again quickly, USD/JPY will find its way back above 114. However if they all sound non-committal, then USD/JPY could extend its slide to 112.00. It will be important to pay attention to these speeches as they will be primarily drivers of USD/JPY.
The Australian and New Zealand dollars traded higher against the greenback while the Canadian dollar remained under pressure. The minutes from the last Reserve Bank of Australia were due Monay evening followed by Canada’s retail sales report on Tuesday. Although there were pockets of weakness in Australia’s economy between the last 2 monetary policy meetings, the RBA remained optimistic when it met in March and that optimism should be reflected in the latest report. If not, then AUD/USD, which has been very strong, could fall quickly and aggressively below 77 cents. For USD/CAD, we believe that the risk is to the downside because of the drop in oil prices and the recent improvements in the labor market that should pave the way for a rebound in spending. With that in mind, USD/CAD continues to hold above the 100-day SMA near 1.33, which is an important support level for the currency. The most important event risks for the universe of commodity currencies this week will be the Reserve Bank of New Zealand’s monetary policy announcement. We will discuss this event in further detail before the rate decision but we think they will attempt to talk down the currency because of recent deterioration in the economy. If the RBNZ is the only major central bank talking about more rate cuts, NZD could tank.
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