By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
It was another active day in the foreign-exchange market with the greenback, sterling and Canadian dollar experiencing wild intraday swings. Before discussing those opportunities, the Reserve Bank of New Zealand left interest rates unchanged Wednesday afternoon. NZD soared on the back of the rate decision because the central bank did not seem overly concerned about a strong currency. Instead, it said the lower currency would help rebalance growth. RBNZ also believes that the growth outlook remains positive as it is supported by monetary policy, population growth and budget changes. Overall, the outlook for the RBNZ is positive and its lack of concern for the strong currency translated into a strong rally that could take NZD/USD back above 73 cents.
It was also a tough day for the Canadian and Australian dollars. The loonie was trading well at the start of the NY session but turned sharply lower after the weekly oil inventory report. According to the U.S. Energy Information Association, crude supplies fell for the second week in a row by 2.5 million barrels. While a number of analysts anticipated a decline, the fall was larger than anticipated causing oil prices to hit a 10-month low. USD/CAD shot higher in response and we are now looking for a move to 1.3380, where the 20- and 100-day SMAs converge. Further gains beyond that would be difficult with the Bank of Canada’s recent hawkishness. Looking ahead, Thursday is a big day for CAD with retail sales scheduled for release. The sharp rise in employment followed by the larger-than-anticipated increase in wholesale sales point to stronger consumption. So selling USD/CAD with a stop above 1.34 could be a worthwhile trade.
Tuesday night’s stronger leading indicator and skilled vacancies report failed to help AUD, which dropped to its lowest level in 5 trading days. This weakness could be attributed to the recent downgrade by Moody’s of 4 major financial institutions along with the lower levels of gold, copper and iron ore prices. Technically, having fallen below the 1st standard deviation Bollinger® Band, we now expect AUD/USD to slip down to 75 cents.
Wednesday's most active currency was sterling, which see-sawed throughout the NY trading session. Cable struggled at the start of the day, falling below 1.26. The sell-off was driven by growing concerns about Prime Minister May’s ability to remain in power as her party tries to form a coalition government with the Democratic Unionist Party. May put forth a scaled-down legislative program that did not include a series of Conservative priorities as she focuses on the country’s exit from the European Union. The problem for sterling is that it is being pulled in 2 different directions. Politically, there are plenty of reasons for concern with Brexit posing a significant risk to the economy. At the same time, the Bank of England surprised the market with unexpected hawkishness this month. Although BoE Governor Carney doesn’t seem to be on board with the idea of tightening, monetary policy committee member Haldane, who spoke Wednesday morning, said he favors withdrawing some stimulus in the second half of the year and he feels that a 25bp hike would only reverse some of the August stimulus. His comments sent GBP/USD soaring above 1.27 but the pair settled well off its highs. We still think sterling has another leg lower and prefer selling into rallies.
Meanwhile, there was very little consistency in USD's performance. The greenback traded higher versus the commodity currencies but drifted lower versus the Japanese yen and European currencies. Stronger existing home sales failed to help the greenback, which took its cue from yields. U.S. rates weaved in and out of positive AND negative territory, causing USD/JPY to trade between 111.07 and 111.74. Although it looks like the 100-day SMA at 111.85 is capping gains in USD/JPY, there’s also quite a bit of support at 110.70. Considering there are no major U.S. economic reports scheduled for release this week, USD/JPY should remain confined with this range.
Last but surely not least, euro rebounded against the U.S. dollar on the back of lower U.S. rates. No Eurozone economic reports were released overnight and nothing significant is expected Thursday. Traders will have to wait for Friday’s PMI reports to get more insight into how the Eurozone economy is performing. In the meantime, losses in EUR/USD should be limited to the 1-month low near 1.1110.