By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
There may not be much in the way of market-moving U.S. data this week but that doesn’t mean there won’t be opportunities in currencies. The main event is Janet Yellen’s speech at Jackson Hole on Friday and chances are she’ll echo the hawkish views shared by Fed Presidents Dudley and Fischer. Last week’s Fed minutes showed a divided central bank but policy is driven by the Fed’s leadership and the message from 2 out of the 3 main members has been consistent and clear. Last week, Dudley said rates could rise in September -- unlikely, but it does reflect his hawkish bias -- while over the weekend, Vice-Chairman Fischer said the market is underappreciating job gains and that he sees growth picking up in the coming quarters as he indicated the central bank is close to reaching its targets for the economy. It is important to realize that all of these comments were made after disappointing retail sales, which means policymakers are not worried about spending slowing down and instead expect consumption to be supported by the improvement in the labor market and wage growth. Janet Yellen is likely to share this positive outlook, which will help the U.S. dollar but investors are still skeptical on whether they are hawkish enough to raise rates this year. So the best way to trade the dollar is to be patient and buy near key support levels. For USD/JPY, that means looking for entries around 100.00; for EUR/USD, closer to 1.1400. USD/JPY should also receive a boost from Sunday night’s Kuroda comments. The BoJ Governor said technically there is room to further lower rates.
The second main opportunity is in the Canadian dollar. After an extended uptrend, oil is due for a pullback to $45 a barrel with Monday’s move taking the commodity back in that direction. The drop in oil was fueled by a few different factors -- China increased exports of refined oil products, Iraq and Nigeria remain defiant about working with OPEC and possibly halting production of oil. US added oil rigs for an 8th consecutive week. Monday’s loss snapped a previous 7-day streak of upward price pressure for oil. Last week’s Canadian economic reports support a bottom in USD/CAD and put the pair on track to test and potentially break 1.30. Retail sales and consumer prices declined, adding pressure on the Bank of Canada to keep monetary policy easy. Traders should look to sell shallow retraces in the Canadian dollar versus the greenback, euro and AUD.
The third opportunity is in the New Zealand dollar. Reserve Bank of New Zealand Governor Wheeler was slated to speak at a private event Monday evening on the topic of “Monetary Policy Changes in Turbulent Times.” According to Bloomberg, the speech was due to be released at 9 am local time, about 5 pm NY Time, or shortly after the U.S. close. NZD/USD is trading around the same levels it was after the last RBNZ meeting on August 10, yet is approximately 2% higher versus the Australian dollar. This is extremely problematic because the value of AUD/NZD is more important than NZD/USD. We know that the strong currency was one of the main reasons for a rate cut earlier this month. Even though dairy prices are on the rise and labor-market activity has been strong, we believe that Wheeler will take the opportunity to cap the rise in the currency by reminding everyone that rates will probably need to come down further. The Australian dollar ended the day virtually unchanged after slipping lower when markets opened on Sunday. Despite the rise in AUD/USD, its inability to recapture Friday’s high still leaves the bias to the downside.
Meanwhile, this is a busy week for euro. Even though the currency ended the day virtually unchanged against the U.S. dollar, the action should heat up with Tuesday’s PMI reports. So far, data from the Eurozone has been relatively healthy and regional officials believe the impact of Brexit on their local economies will be limited. Considering that U.K. PMIs took a nosedive recently, investors will be watching the Eurozone PMIs carefully. EUR/USD enjoyed a very strong rally this past week and there’s no major resistance until the pre-Brexit high of 1.1425. However if the currency pair finds itself back below 1.13, a deeper correction to 1.12 is likely. Lastly, sterling extended its gains versus the euro and U.S. dollar. The U.K. calendar is light this week, which means Brexit headlines could have a greater effect on the pound. Monday's only headline was reports from Countrywide that house prices will fall further. The lack of data has prompted more short covering in the currency.