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Boris and Kathy Forex Weekly 3/4/2017

Posted on: 03 April 2017 , by: Boris & Kathy , category: Market Review

The first quarter has come to an end and it was a tough one for the U.S. dollar. Even a rate hike by the Federal Reserve failed to stem the slide in the greenback, which lost approximately 5% of its value against the Japanese yen and Australian dollar.

The lack of urgency among U.S. policymakers to follow up the March hike in June was the main cause of the weakness but the failed health care bill, tax reform uncertainty and mixed data also contributed to the move. As we head into the first week of the second quarter, the dollar faces continued risks with the prospect of slower payroll growth. Here are the top 5 events forex traders need to watch this week:

  1. U.S. Non-Farm Payrolls
  2. FOMC Minutes
  3. RBA Rate Decision
  4. UK PMIs
  5. Canadian Employment

Spot Returns Month to Date 3/4/17

US DOLLAR

Data Review

  • Advanced Goods Trade Balance -$64.8b vs. -$66.4b Expected
  • Wholesale Inventories 0.4% vs. 0.2% Expected
  • Consumer Confidence 125.6 vs. 114.0 Expected
  • Pending Home Sales 5.5% vs. 2.5% Expected
  • GDP (Annualized) 2.1% vs. 2.0% Expected
  • Personal Consumption 3.5% vs. 3.0% Expected
  • Core PCE 1.3% vs. 1.2% Expected
  • Personal Income 0.4% vs. 0.4% Expected
  • Personal Spending 0.1% vs. 0.2% Expected
  • PCE Deflator 0.1% vs. 0.1% Expected
  • PCE Core 0.2% vs. 0.2% Expected
  • Chicago PMI 57.7 vs. 56.9 Expected
  • U. of Mich. Confidence 96.9 vs. 97.6 Expected
  • U. of Mich. Current Conditions 113.2 vs. 114.5 Prior
  • U. of Mich. Expectations 86.5 vs. 86.7 Prior

Data Preview

  • U.S. Manufacturing, Composite PMI and ISM Manufacturing- Potential for downside surprise given weaker Empire State & Philadelphia Fed index but stronger Chicago puts this at level 2 confidence
  • Trade Balance- Will update after ISM manufacturing report
  • Factory and Durable Goods Orders- Can be market moving but durable goods is very volatile and difficult to predict
  • ADP Employment Change- Will be market moving but hard to predict
  • Services and ISM Non-Manufacturing Composite- Likely to be weaker but have to see ISM manufacturing
  • FOMC Minutes- We do not trade minutes but likely optimistic
  • Non-Farm Payrolls- Weaker job growth expected

Key Levels - USD/JPY

  • Support 110.00
  • Resistance 112.50

The first quarter has come to an end and it was a tough one for the U.S. dollar. Even a rate hike by the Federal Reserve failed to stem the slide in the greenback, which lost approximately 5% of its value against the Japanese yen and Australian dollar. The lack of urgency among U.S. policymakers to follow up the March hike in June was the main cause of the weakness but the failed health care bill, tax reform uncertainty and mixed data also contributed to the move. On Friday we learned that personal income and spending growth slowed in the month of February with inflationary pressures easing according to core PCE. Manufacturing activity in the Chicago region accelerated which along with healthier data Monday to Thursday helped USD/JPY end the week higher. This included stronger GDP growth, narrower trade deficit and a sharp rise in the Conference Board’s consumer sentiment index. Its also worth noting that the greenback managed to shrug off a report that President Trump is studying ways to “penalize currency manipulators” as part of his goal to fight unfair trade. These measures would be aimed at pressuring other countries to strengthen the value of their currencies at the expense of the U.S. dollar.

Looking ahead USDJPY has resistance at 112 and support at 111. It will be a big week for the U.S. dollar with ISM reports, minutes from the most recent FOMC meeting and nonfarm payrolls scheduled for release. If the minutes confirm that the Fed is in no rush to raise interest rates again, the dollar could retreat but if they contain a general tone of optimism, we could see 113 in USD/JPY. With that in mind, NFPs is the most important piece of data to watch because economists are looking for slower job growth. If they are right, it could be a nail in the coffin for the dollar, leading to lower trading in the next few weeks.


BRITISH POUND

Data Review

  • Net Consumer Credit 1.4b vs. 1.3b Expected
  • Net Lending Sec. on Dwellings 3.5b vs. 2.5b Expected
  • Mortgage Approvals 68.3k vs. 69.1k Expected
  • Article 50 Enacted
  • GfK Consumer Confidence Survey -6 vs. -7 Expected
  • Current Account Balance -12.1b vs. -16.0b Expected
  • GDP 0.7% vs. 0.7% Expected
  • Index of Services -0.1% vs. 0.2% Expected

Data Preview

  • PMI Manufacturing- Potential for upside surprise given stronger CBI industrial trends survey
  • Services and Composite PMI- Will update after PMI services. GfK consumer sentiment index steady
  • Industrial and Manufacturing Production and Trade Balance- Will have to see how PMI manufacturing index fares

Key Levels - GBP/USD

  • Support 1.2400
  • Resistance 1.2600

The British government invoked Article 50 of the Lisbon Treaty, the E.U. responded and sterling did not experience an ugly demise. Instead, U.K. financial markets acted quite orderly with GBP/USD ending the week within 50 pips of where it started. There were intraweek swings but given the historical significance of this week’s developments, the swings could have been far greater. We knew this day would come but its inevitability does not minimize its significance, the U.K. is leaving the European Union and investors, businesses and individuals are bracing for the fall-out. So far, the pain has been minimal with GBP/USD recovering part of its recent losses. Friday morning, the EU submitted its response to the Article 50 and they gave the U.K. 1 year after they leave the Union to work on a trade deal and only if they settle their financial commitments. It’s not the worst case scenario because they are willing to talk trade but it’s not the best case scenario because Britain needs to first "show sufficient progress" on their settlement of the Brexit bill, a payment they have previously refused to pay. Scotland also officially requested a referendum. While we believe that all of these developments are negative for GBP, the currency is trading well and we have to respect the price action as a result. Sterling traders are taking the Article 50 trigger, EU response and Scotland’s call for a referendum in stride and if that continues GBP/USD could squeeze up to 1.26. U.K. fundamentals will return to focus this week with the March PMIs scheduled for release. The recent hawkishness dissent in the Bank of England leads many to believe that the economy continued to improve last month.


EURO

Data Review

  • GE IFO Business Climate 112.3 vs. 111.1 Expected
  • GE IFO Expectations 105.7 vs. 104.3 Expected
  • GE IFO Current Assessment 119.3 vs. 118.3 Expected
  • Import Price 0.7% vs. 0.4% Expected
  • EZ Economic Confidence 107.9 vs. 108.3 Expected
  • EZ Business Climate Indicator 0.82 vs. 0.87 Expected
  • EZ Industrial Confidence 1.2 vs. 1.4 Expected
  • EZ Services Confidence 12.7 vs. 14 Expected
  • EZ Consumer Confidence -5 vs. -5 Expected
  • GE CPI 0.2% vs. 0.4% Expected
  • GE Retail Sales 1.8% vs. 0.7% Expected
  • GE Unemployment Change -30k vs. -10k Expected
  • EZ CPI Estimate 1.5% vs. 1.8% Expected
  • EZ CPI Core Estimate 0.7% vs. 0.8% Expected

Data Preview

  • EZ PPI and Unemployment Rate- Potential for downside surprise given lower French and German PPI
  • EZ Retail Sales- Weak French spending, offset by strong spending in Germany
  • GE and EZ Services and Composite PMI Revision- Revisions are hard to predict but can be market moving
  • ECB Account of Monetary Policy- We do not trade minutes but likely positive
  • GE Industrial Production, Trade and Current Account Balance- Will update after factory orders but PMI manufacturing was stronger so likely good data

Key Levels - EUR/USD

  • Support 1.0600
  • Resistance 1.0800

It was a tough week for the euro. Although more than 30K people fell off German unemployment rolls and retail sales in the Eurozone’s largest economy grew strongly according to the most recent reports, inflation is moving in the wrong direction with CPI growth slowing to 1.5% from 2%. A number of ECB officials have talked about the possibility of a rate hike but we think that will be very difficult until inflation starts to rise. The first round of the French election will be a key focus in the month of April and so far it appears that Emmanuel Macron holds a comfortable lead over Marine Le Pen. As April 23rd nears, the euro’s sensitivity to the polls will increase significantly. In the meantime, the account of the most recent ECB meeting, German industrial production and trade along with U.S. data will drive EUR/USD flows. Technically EUR/USD appears weak but there is also support near 1.0650.


AUD, NZD, CAD

Data Review

Australia

  • HIA New Home Sales 0.2% vs. -2.2% Prior
  • CNY Manufacturing PMI 51.8 vs. 51.7 Expected
  • CNY Non-Manufacturing PMI 55.1 vs. 54.2 Prior

New Zealand

  • Building Permits 14% vs. 2.1% Expected
  • NBNZ Business Confidence 11.3 vs. 16.6 Prior

Canada

  • Industrial Product Price 0.1% vs. 0.3% Expected
  • GDP 0.6% vs. 0.3% Expected

Data Preview

Australia

  • AiG PMI Manufacturing, Retail Sales and Building Approvals- Potential for downside surprise given retail sales likely to be weaker given drop in PSI. PMI is hard to predict
  • Caixin PMI Manufacturing- Chinese data is hard to predict but can be market moving
  • Trade Balance- Potential for upside surprise given exports rising strongly in Feb
  • RBA Cash Rate Target – We do not trade rate decisions but RBA could be more cautious
  • PMI Services- Will update after PMI manufacturing

New Zealand

  • No Data

Canada

  • International Merchandise Trade- Potential for downside surprise given that IVEY dropped in Feb
  • Employment Report- Likely to be weaker given strong rise in full time work in Feb
  • IVEY PMI- Potential for upside surprise given Possible strength given higher trade & retail sales

Key Levels

  • Support AUD .7600 NZD .6900 CAD 1.3200
  • Resistance AUD .7700 NZD .7100 CAD 1.3400

Meanwhile there was very little consistency in the performance of the commodity currencies this past week. The Australian dollar ended the week unchanged (though it performed well in the first quarter), the New Zealand dollar weakened and the Canadian dollar strengthened. AUD was supported by stronger Chinese data while faster growth in Canada and higher oil prices lifted the loonie. CAD GDP growth accelerated to 0.6% in the month of January, driving year over year growth to 2.3% from 2.1%. AUD and CAD remain in play with the Reserve Bank of Australia’s monetary policy announcement and Canadian employment plus trade data scheduled for release this week. Business activity appears to have slowed a bit in Australia since the last monetary policy meeting but we’ll get more clarity with the release of retail sales and PMIs. Iron ore prices have also fallen which means the Reserve Bank has less to be optimistic about in the month of April. If they shrug off these reports and remain positive, AUD will continue to outperform. However if they finally admit that the outlook may not be so bright, AUD/USD could come off its highs. CAD employment was very strong in February and is likely to retreat a bit in March. There are no major economic reports scheduled for release from New Zealand and no explanation for the underperformance of NZD versus other currencies over the past week outside of possibility of month/quarter end flows.

AU Economy - Changes Since Last RBA Meeting


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