• How to Trade AUD over the Next 24 hours

  • CAD – IVEY PMI Index Plunges

  • NZD – Average Hourly Earnings Due

  • EUR Drops after Draghi Confirms they are Ready to Ease if Needed 

  • Dollar Extends Gains as Stocks Hit New Highs

  • GBP – Still Unable to Break 1.56

  • USD/JPY – What Could Drive a Break of 100?

 


How to Trade AUD over the Next 24 hours


 


Tonight is an extremely busy night in Australia and this means that the Aussie dollar will be in play.  We start the day off with the country’s PMI Construction report, which will be followed by the trade balance and house price index.  While the housing market most likely saw steady growth in the first quarter, trade and construction sector activity should have suffered from weaker economic activity.  However disappointing economic data may not move the AUD much ahead of the main event tonight – the Reserve Bank of Australia’s monetary policy decision. The consensus forecast is for steady rates but according to the futures market, investors are pricing in a 55% chance of a rate cut tonight.  Whether the AUD holds above 1.02 or drops to fresh 2 month lows will hinge upon the tone and action of the RBA.  Given the potential for a rate cut and the significance of this event, the risk is to the downside in the AUD/USD but it is best to wait for the monetary policy decision to pass before taking a trade.  When it comes to the Australian dollar, after the initial knee jerk move, there tends to be a period of consolidation and sometimes even a short term reversal during late Asia. This allows traders to jump into the move in direction of the event risk surprise for a continuation of the knee jerk reaction during European and North American hours.  The reason why there is this opportunity is because there is less liquidity in Asia and when Europe joins the fray, they take a look at overnight developments and respond more aggressively.


 


Since the last monetary policy meeting, we have seen a significant slowdown in manufacturing and service sector activity in Australia along with a decline in retail sales and lower inflationary pressures.  The country’s number one trading partner, China also experienced slower growth.  Yet the main reason why most economists do not expect the RBA to ease is because they believe that demand hasn’t contracted enough to warrant a major change in monetary policy and they also believe that the pullback in China will be limited to what we have seen already. We can’t see the RBA having anything positive to say about current conditions so even if they do not lower rates, we expect more caution and dovishness which is bearish for AUD. The last time the RBA met, they said they could cut interest rates if the currency remains a drag on the economy but right now that is not the one of their problems because the AUD/USD declined in value since the last meeting, which automatically provides stimulus from the economy.  Therefore the RBA could still hold rates steady and so the rate decision is best traded reactively.


 


EUR Drops after Draghi Confirms they are Ready to Ease if Needed 


 


The euro came under selling pressure today after European Central Bank President Draghi made it clear that they are prepared to ease again if economic data worsens.  At the end of last week, conflicting comments from European policymakers created a bit of confusion in the markets.  Some members of the central bank said investors may have over interpreted Draghi’s comment on keeping an open mind about negative deposit rates and clearly Draghi wanted to make sure the market understood that he stands behind his commitment to increase stimulus if necessary.  While we believe the bar for negative deposit rates is high, the main takeaway from Draghi’s comment and Nowotny’s retraction on Friday is that the central bank wants everyone to know that they have a bias to ease and wont hesitate to take some type of action if economic data continues to worsen.  Thankfully this morning’s reports were better than expected with service sector activity numbers revised higher.  Eurozone retail sales continued to decline in March but the pace has slowed. However German factory orders are scheduled for release tomorrow and given the recent disappointment in the PMI manufacturing report, we are weary that orders will decline by a larger amount in March.  Overall, we believe that the EUR/USD is headed lower.  The 1.30 level may appear to be rock solid support right now but between the ECB’s bias to ease and the risk of more disappointments in the coming month, it should only be a matter of time before this level is broken.


 


Dollar Extends Gains as Stocks Hit New Highs


 


While there was no U.S. data on the calendar, the U.S. dollar traded lower against all of the major currencies.  The optimism from Friday’s non-farm payrolls report continued to affect currency and equity flows as U.S. stocks climbed to fresh record highs and the dollar extended its gains against the Yen.  Friday’s rally in risk currencies should have also been sustained but the comments from ECB President Draghi and the disappointments in Chinese and Australian economic data deterred demand for those currencies.  In the long run, improvements in the U.S. economy should support growth in other countries but right now, we are still in an environment where some countries are enjoying healthier growth and others are falling victim to deeper recessions.  As a result, country specific factors are having a more significant impact on FX flows than risk on risk off.  For the dollar in particular, this means that the recent data improvements and optimism from the Federal Reserve should keep the greenback more attractive relative to other currencies.  Tomorrow should be another quiet day for the U.S. dollar with no major U.S. data scheduled for release. Traders need to keep an eye on U.S. stocks and Treasury yields because further gains in equities and continued rallies in Treasury yields could drive USD/JPY closer to 100.


 


GBP – Still Unable to Break 1.56


 


It was a mixed day for the British pound, which traded slightly lower against the U.S. dollar and slightly higher against the euro.  With European Central Bank officials taking every opportunity to remind investors that they stand prepared to do more, the U.K.’s steady monetary policy is expected to boost the attractiveness of sterling.  No economic data was released today but last week we learned that manufacturing, service and construction sector activity improved, allowing the Bank of England to breathe a sigh of relief.  The BoE meets this week and they are widely expected to leave monetary policy unchanged.  For the most part, the stronger PMIs point to potential upside surprises in U.K. data this week.  The 1.56 level continues to be key resistance for the GBP/USD – given recent economic surprises we are looking for an eventual break which could accelerate a move up to 1.58.


 


USD/JPY – What Could Drive a Break of 100?


 


The Japanese Yen traded lower against most of the major currencies today even though Japanese markets were closed for a holiday. The extension in U.S. equities helped to sustain the risk on mood in currencies, which lent support to the Yen crosses.  There was no Japanese or U.S. data released today but many traders have their eye on USD/JPY, which is inching its way towards 100.  Since the Bank of Japan eased monetary policy at the beginning of April, investors and economists around the world have been looking for USD/JPY to break 100.  However the hope began to fade as USD/JPY struggled below 100 for the next month but now the enthusiasm has returned and investors are hoping that this key level will be broken sometime this week.  While we believe that a break of 100 for USD/JPY is inevitable and given the proximity of this level a test is possible but we are skeptical about whether a sustained break can occur this week.  There’s very little U.S. economic data on the calendar and 80% of S&P 500 companies have already reported their earnings.  The only potential catalyst from the U.S. side would be the speeches from Federal Reserve officials (Bernanke included) but most of them are not scheduled until Friday. Therefore if USD/JPY were to break 100, it would have to be caused by Japanese data.  The 2 main event risks for the Yen this week are the country’s current account numbers on Thursday and the Ministry of Finance’s weekly flow of funds report.  In order for USD/JPY to rally, we need to see Japanese investors finally diversify into foreign bonds.  However with Japanese markets closed 2 days last week and last night as well, this week’s report may not show much diversification.  


break 100.