Today’s Eurozone data may be enough to facilitate a EURUSD break of 1.30, while the USDJPY continues to hover just below the key 100 level, though foreign bond flows into Japan may help the pair to rally.
With no major US or European data on the economic calendar on Monday, currency pairs including the EURUSD and USDJPY failed to break key levels. For EURUSD, traders are itching for a reason to take the currency pair below 1.30, and in the case of USDJPY, some are wondering whether the key 100 resistance level is an impenetrable barrier.
As outlined later in the yen portion of our commentary, we continue to think that it is only a matter of time before this resistance level is broken. As for the euro and the EURUSD pair, a break of 1.30 hinges upon Tuesday's Eurozone PMI numbers.
The euro completely shrugged off the news that Italy has re-elected Giorgio Napolitano as President, which should have been positive for the currency. However, fears that the central bank could be preparing the market for more stimulus overshadowed elimination of a near-term political risk for the currency.
See also: Great Euro News Many Have Overlooked
European Central Bank (ECB) officials are beginning to gather support around the idea of a rate cut or some form of additional easing from the central bank. As we mentioned last week, the ECB has a history of preparing the market for major changes in monetary policy by way of a consistent shift in tone by
policymakers. Bundesbank President Jens Weidmann said the central bank could cut interest rates if new information warrants it, and over the weekend, ECB member Jorg Asmussen also said "the effectiveness of rate cuts is limited, but it’s still possible to do this if data justified it."
ECB member Klaas Knot repeated a sentiment shared by ECB President Mario Draghi at the last monetary policy meeting. He said "latest round of forecasts of the data coming in have shown that the risks are on the downside." As a result, this week's Eurozone PMI and German IFO reports will play a central role in setting expectations for ECB policy, as well as help decide whether the EURUSD maintains a break below 1.30.
Meanwhile, it is important to discuss Italy's political situation, as the decision on a President removes a major short-term destabilization risk for the euro. The Democratic Party now needs to nominate a new leader who will likely be more amenable to working with Napolitano.
In fact, local papers are saying that Napolitano agreed to a second term on the condition that the parties will work on forming a government. The re-election of Napolitano and the departure of Pier LuigiBersani gets Italy one step closer to resolving its political fiasco, which should be great news for the euro.
A Miserable Month for US Economic Data
The currency and equity markets were unfazed by another disappointment in US data on Monday. Existing home sales dropped 0.6% in March, while sales growth for the prior month was revised lower, to 0.2% from 0.8%.
This latest economic report shows just how difficult the month of March was for the US economy. Aside from lower demand for housing, job growth and consumer spending were also very weak. However, the impact of the existing home sales report on the dollar was nominal because last week's Federal Reserve Beige Book showed that the weakness in March did not necessarily extend into April, but we will have to wait for next month's payrolls and retail sales reports to be sure.
Compared to other countries, the US economic calendar is light on market-moving data outside of Friday's first quarter GDP report. Currencies could take their cue from equities, but stocks haven't budged much since last Thursday.
New home sales are scheduled for release on Tuesday, and a small increase is expected after a sharp slide in February. The house price index and Richmond Fed manufacturing surveys are also on the calendar, but the second-tier economic reports are not expected to have a large impact on the US dollar.
Band of England (BoE) Eyes Major FLS Extention
With no UK economic data on the calendar Monday, the British pound (GBP) ended higher against the US dollar and euro. The strength of the GBP can be attributed to expectations for stronger public sector finances, as well as hopes that the Bank of England (BoE) and the UK Treasury Department will extend the Funding for Lending Scheme (FLS).
According to the Financial Times, the government is working on plans to give other financial institutions such as asset-based lenders, invoice finance houses, and leasing firms access to FLS. The hope is that this would encourage more lending, but banks are skeptical because they attribute the lack of demand to the cautious behavior of UK businesses and households.
The key data point in the UK this week will be first quarter GDP numbers, and unfortunately, unless GDP growth increases by 0.5% or more, we don't expect a rebound in growth to remove the risk of further stimulus. In addition, the potential for a contraction in GDP should cap gains for sterling this week.
Downside Risks Piling up for New Zealand Dollar (NZD)
The New Zealand dollar (NZD) weakened ahead of the upcoming monetary policy announcement. While the Reserve Bank of New Zealand (RBNZ) is widely expected to keep interest rates unchanged at 2.5%, comments from the central bank could sound cautious.
The NZDUSD is not far from its one-year high, and as an export-dependent country, the last thing the central bank wants is to encourage further strength in its currency, especially after the recent decline in commodity prices. Also, the worst drought in seven decades may finally be over, but the damage to the dairy industry and overall economic output has been done, and this could lead to a lower growth forecast that could put added pressure on the NZD.
On top of that, recent disappointments in Australian and Chinese data are additional reasons why the RBNZ could be more dovish than hawkish. Overall, the risk for the NZDUSD ahead of the RBNZ rate decision is to the downside.
The Australian (AUD) and Canadian dollars (CAD), on the other hand, ended the day unchanged. Australian leading indicators and China's HSBC flash manufacturing PMI index were due for release Monday evening. Slightly weaker Chinese growth could extend the losses in the AUDUSD. The same is true for Tuesday’s Canadian retail sales report, where weaker consumer demand could drive USDCAD to 1.03
Will the Yen Finally Break 100 This Week?
The Japanese yen (JPY) traded higher against the US dollar and most major currencies after having gapped higher at the Sunday open following the G-20 statement, which basically validated Japan's policies. The G-20 did not call on Japan to avoid competitive devaluation and instead said the country's policies are aimed at ending deflation and supporting demand.
With the G-20's support, we continue to believe that it will only be a matter of time before USDJPY breaks 100, yet the currency pair's second test of this level has been another failure.
As we wrote here on Friday, three things need to happen for USDJPY to finally clear 100:
- US Treasury yields need to stop falling and start rising;
- The Nikkei needs to extend its gains, and;
- Japanese investors need to start buying foreign bonds
According to our colleague Boris Schlossberg, this foreign bond flow could be coming after a weekend report from The Wall Street Journal noted that Japan's insurance sector, which holds more than 3 trillion dollars in assets, may begin to shift part of its portfolios into foreign bonds as they seek higher returns than the ultra-low-yielding Japanese government bonds. As Boris wrote, “with the new fiscal year starting April 1, even a 1% shift in the composition of those assets could produce significant capital outflows and drive USDJPY higher as result."
This week's Bank of Japan (BoJ) monetary policy meeting, the semi-annual outlook report, and the weekly flow of funds data could all be potential catalysts for a break above 100 by satisfying items #2 and #3 from our list.
See related: USD/JPY: 3 Must-Have Catalysts for a Break of 100
By Kathy Lien of BK Asset Management