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The Top 3 Trade Opportunities in FX this Week

Kathy Lien

Currency traders will likely find the most compelling trade opportunities following this week’s Bank of Japan (BoJ) and European Central Bank (ECB) meetings, as well as Friday’s US non-farm payrolls (NFP) report.

With Australian and European markets closed for Easter Monday, we've had a quiet start to a busy week in the forex market. Between Monday evening and Friday morning, however, there will be no shortage of market-moving event risks for those thirsting for volatility.

In addition to the US non-farm payrolls (NFP) report on Friday, there will be four major central bank monetary policy announcements, seven Federal Reserve presidents delivering speeches, and Chinese PMI numbers on the economic calendar.

Some of these event risks are more important than others, and we’ll cover each one in greater detail throughout the week, but there are three in particular that could cause the biggest moves in the FX market. Those events are:

1) Bank of Japan (BoJ) Meeting - Wednesday and Thursday

This month, there are two Bank of Japan (BoJ) meetings on the calendar; one at the beginning of the month, and one at the end.

There's a 60/40 chance that the BoJ will ease monetary policy this week. The central bank has been very vocal about their commitment to increase stimulus until the 2% inflation target is achieved. The only question is how quickly the new members of the Bank of Japan are willing to act.

They passed on an emergency meeting and could hold off until the end of the month, especially if they are worried about import prices. Given how crowded the short yen trade is, if the BoJ disappoints and fails to ease this week, USDJPY could slip down to 92.50.

With this in mind, we believe that newly appointed BoJ Governor Haruhiko Kuroda will come out of the gate swinging at his first central bank meeting. Kuroda has a lot to prove and a lot to get done in a very short period of time. As a result, we believe the BoJ will increase and extend the maturity of Japanese government bond purchases this week with a commitment to do even more over the next few months, which should be enough to renew the rally in the USDJPY.

2) European Central Bank (ECB) Meeting - Thursday

In contrast to the BoJ, the European Central Bank (ECB) is expected to keep monetary policy unchanged following its meeting this week. However, with German data weakening and Cyprus requiring a bailout, the ECB could be warming to the idea of additional stimulus.

There's a very good chance ECB President Mario Draghi will sound more cautious at this week's meeting, which would be negative for the euro. The EURUSD could drop to fresh year-to-date lows if Draghi even hints that a rate cut is possible, and the chances of that happening are extremely likely.

The cracks in Germany’s economic armor are becoming more apparent, and Cyprus could be just the first of many weaker southern European nations to seek emergency funding from the ECB. To preempt some of the difficulties, Draghi may want to ease, and when the ECB plans to change monetary policy, they usually like to prepare the market for the move by dropping hints early.

See also: The New Epicenter for Eurozone Problems

If we are wrong, however, and Draghi sounds very calm and unconcerned about the recent deterioration in economic data and the problems in Cyprus and Italy, it could be just what the EURUSD needs to stage a stronger recovery towards 1.30.

3) US Non-Farm Payrolls (NFP) Report - Friday

This week's US non-farm payrolls (NFP) report could have a larger impact on the US dollar (USD) than some of the other recent releases because economists are looking for slower job growth. Last month, US companies added 236K workers, which was much stronger than anticipated. The dollar subsequently soared against the Japanese yen (JPY) and euro, but the gains were not extended because investors knew that one month of improvement was not enough for the Federal Reserve to get more serious about tapering asset purchases.

Now, at this critical juncture in the global recovery where there is renewed weakness in Europe, bad news could resonate more than good news. As a result, if NFPs surprise to the downside and increase a mere 200k, USDJPY could fall sharply.

Given the improvements in jobless claims last month, however, the chances of an upside surprise are also reasonable. We'll have to wait for the rest of this week's labor market reports for more clarity on the current state of the labor market, but either way, given the divergence between what economists anticipate and the level of jobless claims, NFPs should be a big mover for the USD this week.

Other Event Risks to Watch Closely This Week

While the above trading opportunities are the three that we are watching most closely, the ReserveBank of Australia (RBA) and Bank of England (BoE) monetary policy announcements should not be ignored, and neither Chinese PMI numbers.

Both the RBA and BoE are expected to leave monetary policy unchanged, but the RBA's tone will determine whether the Australian dollar (AUD) breaks above 1.05 versus the US dollar.

As for Chinese data, stronger economic activity could keep the AUDUSD bid, while weaker numbers would extend the recent correction in the pair.

Seven Federal Reserve officials are scheduled to speak this week, but only some are Federal Open Market Committee (FOMC) voters. Fed Presidents Charles Evans (Chicago), James Bullard (St. Louis), and Esther George (Kansas City) will be speaking on the economy and monetary policy, and while Fed Chairman Ben Bernanke will also be touching on the same topics, his "brief remarks" are pre-recorded and unlikely to be market-moving.

By Kathy Lien of BK Asset Management

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