By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
We are finally beginning to see some two-way action in currencies. Investors are no longer buying dollars against everything else. And as USD/JPY and USD/CHF continued to move higher, the dollar ended Tuesday well off its highs against the commodity currencies. And that led many investors to wonder if the Canadian, Australian and New Zealand dollars hit a bottom because reversals are happening after extended moves AND at key technical levels. USD/CAD, for example, broke 1.30 but failed to close above the psychologically significant level that coincides with the 50-day SMA. AUD/USD broke the 100-day SMA and a key Fib retracement but is now trading back above 0.7335 -- even as NZD's decline stopped right at the 100-day SMA.
There’s no doubt that the commodity currencies have fallen quickly and aggressively over the past month but the weekly and monthly charts show plenty of room to the downside. Although the bounce in commodity prices -- especially oil -- is likely to be short-lived, the rise in stocks and broader recovery in risk appetite could have more room to go, which would encourage a further recovery in commodity currencies. However Chinese demand is still a problem, not all speculative long AUD or CAD positions have been unwound, 2-year yield spreads point to further losses and the RBA, RBNZ and BoC are all likely to be considering more rate cuts. Saudi Arabia also said it will boost output ahead of state-owned Aramco’s IPO, which should cap gains in oil. Inventories are scheduled for release on Wednesday but the impact should be limited. So while we could see a further recovery in commodity currencies, we have yet to see a bottom as all 3 remain sell on rallies. If 1.2900 is broken, we like buying USD/CAD near 1.2800, AUD/USD near 0.7450 and NZD/USD between 0.6800 and 0.6850.
The short covering in USD/JPY continued, driving the currency pair above 109.00. The latest move was driven by fresh yen comments from Japanese officials. Finance Minister Aso reiterated that sharp forex moves are unwelcome and warned they could intervene to stabilize currencies if needed. The Japan Post Bank (T:7182) said it sees 108.00 as fair value for USD/JPY. While we are surprised that more Japanese officials are talking up the currency at 108-109 than at 106-107, this could be a strategic move to give speculators reason to cover their shorts at a time when the USD/JPY was struggling to extend its losses below 106. USD/JPY had been trying to bottom for a few days before policymakers stepped in to confirm that they don’t want to see a stronger currency. We are looking for further gains in USD/JPY -- but 110 could be an attractive place to sell.
Weaker-than-expected German industrial production numbers drove the euro lower for the sixth consecutive trading day. The country’s trade and current account balances improved significantly thanks to stronger exports, but IP dropped for the second straight month at a pace that was 7 times faster than February. French IP also fell -0.3% against forecasts for a 0.7% rise. These numbers highlight the vulnerabilities in the Eurozone’s two largest economies. However for the time being, the uptrend in EUR/USD remains intact -- as long as the pair remains above 1.1300.
Sterling, on the other hand, finally bounced after 5 days without a rally. Monday’s decline stopped at the 100-day SMA and Tuesday’s recovery was driven by better-than-expected trade numbers. However even with the upside surprise, the U.K. trade deficit hit its highest level in 8 years, signaling weaker first-quarter GDP. The shortfall in goods alone reached the highest level on record. Of course there’s no reason for sterling traders to look as far as GDP with the Bank of England meeting and Quarterly Inflation Report scheduled for Thursday. Growth is obviously a problem in the U.K. right now but inflation had been on the rise in February and March and is likely to have moved even higher in April with oil prices rising more than 15% last month. So while the Bank of England could lower its GDP forecast, it may raise its inflation projections. If it chooses to do so, it could drive sterling higher instead of lower. However if it leaves its inflation projections unchanged -- and only cuts GDP -- the pound will fall, especially if it emphasizes Brexit risks.