From the economic calendar front, data last week was predominantly in favour of further reduction of stimulus by the US Federal Reserve. Following a disappointing non-farm payroll reading at the start of the week, it was back to business as far as strong bullish data for the US was concerned.
First we had the advance retail sales figures, which were much anticipated by investors, given that they were the first major numbers to be released after the jobs data. Retail sales came out higher than expected, which already signalled to market participants that perhaps the pessimistic employment numbers were just a minor bump on the road to recovery.
Factory inflation numbers were higher and consumer prices were confirmed, edging closer to the Fed’s two per cent target, in contrast to sluggish inflation figures out of the eurozone and its major economies. Finally, weekly jobless claims figures fell to their lowest since November, silencing sceptics over the real strength of the US economy.
In the eyes of market analysts and participants, this leaves little doubt as to whether the Fed will continue on its path to taper the massive bond-buying stimulus programme. The dollar capped a strong week to close at its highest level since November against the euro. The Bloomberg Dollar Index was on a six-day winning streak by the time of writing on Tuesday, with another FOMC meeting on the doorstep, the last with chairman Ben Bernanke at the helm.
EUR/USD touched 1.3507 so far this week, and as growth in the US continues to support a growing divergence between central bank policies, the pair may gather momentum to the downside in the near-term. In fact, forex investors may push the pair lower amid growing speculation that the European Central Bank will keep policy accommodative and may even signal a rate cut.
Next week, the Fed holds its first FOMC meeting of this year, while the Bank of Japan holds a two-day policy meeting this week. There is talk that the Fed will announce further curbing of its monthly asset purchases to $65 billion per month from $75 billion.
This renewed talk on continued Fed tapering nudged Treasury yields higher, which in turn lifted the USD/JPY currency pair, given its strong correlation to the US yields. The BOJ is also expected to continue with its accommodative stance and Governor Kuroda should announce an expansion to the stimulus programme.
This, in addition to a rise in Asian stock markets on Tuesday, curbed demand for safe-haven assets and weighed on the yen. USD/JPY rose to 104.75 on Tuesday, within reach of the 105 mark. As is the case for the single currency, growing policy divergence should keep the yen grounded against the greenback and the USD/JPY pair may soar to fresh highs in the near-term.
A report on Bloomberg this week said a shale boom in America is giving US government bonds an unexpected lift. The boom in shale gas and oil means less energy imports and lower expenses for Americans. This leads to slower inflation and lower interest rates than would otherwise be the case. Furthermore, spending fewer dollars on foreign oil means that a rise in the price of crude oil doesn’t necessarily mean a weaker buck.
The climate wasn’t as bright north of the US border. The Canadian dollar fell to 1.1019 per US dollar on Tuesday, its lowest since early September 2009, ahead of a Bank of Canada rate decision yesterday. The BoC was expected to leave rates unchanged but also signal a bias to lower rates in the near future.
USD/CAD was up to 1.1019, as the yields advantage of the 10-year US bond over its Canadian peers widened to 35 basis points. If the central bank did in fact confirm an easing bias, the pair could continue soaring towards the 1.15 or 1.20 mark.
Kiwi was supported by surprise acceleration in inflation which gave more scope for the Reserve Bank to tighten policy. NZD/USD jumped to 0.8341 on Tuesday, before retreating slightly to 0.8297. The Aussie on the other hand was back under pressure, paring back the gains recorded after a stronger than expected Chinese GDP figure. AUD/USD trades around the 0.88 handle but may test its lowest since July 2010 by 0.8757.
Upcoming FX Key events:
Today: EZ flash PMIs, Canadian retail sales & US existing home sales.
Tomorrow: Canadian CPI.
Technical Key points:
EUR/USD is bearish, target 1.3300, key reversal point 1.38. EUR/GBP is bearish, target 0.8050, key reversal point 0.8600. USD/JPY is bullish, target 105.00, key reversal point 97.50. GBP/USD is bullish, target 1.6700, key reversal point 1.5700. USD/CHF is neutral. AUD/USD is bearish, target 0.8750, key reversal point 0.9750. NZD/USD is neutral.
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Emman Xuereb is a trader at RTFX Ltd.