Will the Dollar Power Higher Next Week?

March 2, 2015

Over the past week, the U.S. dollar hit a 1 month high against the euro. This move along with the greenback's gains against the Japanese Yen has led many investors to wonder if the dollar will power higher in the coming week.  Before we address this question, it is important to realize that the greenback did not strengthen versus all of the major currencies and in fact its weekly gains were limited to the euro, yen and Swiss Franc. This inconsistency in the dollar's performance is best explained by the lack of a true catalyst for the dollar's strength. Nearly all of this past week's U.S. economic reports surprised to the downside including Friday's Chicago PMI and pending home sales reports.  GDP growth for the fourth quarter was revised higher but the key component - personal consumption was revised lower.  Fed Presidents Mester, Fisher and Bullard got everyone excited about the possibility of a summer rate hike but they are all non-voting members of the FOMC this year. Fed Chair Janet Yellen on the other hand does not share their enthusiasm and we are inclined to believe that her patience more accurately reflects the overall views of the FOMC. So from that perspective we not expect significant gains in the dollar in the first week of March. With that mind, there is a tremendous amount of event risk on the calendar this coming week, which means that the performance of currencies won't be determined exclusively by the market's appetite for U.S. dollars.  With 4 central bank announcements in the coming week and other important reports, monetary policy divergence will be the key driver of FX flows. Whether EUR/USD finds a bottom at 1.12 will depend as much on U.S. data as the comments made by ECB President Draghi in his post monetary policy meeting press conference.  For the dollar itself, non-farm payrolls, the ISM and Beige Book reports will be the events to watch along with speeches from Fed Presidents Evans and Williams, as they are voting members of the FOMC. Unfortunately we do not believe that the dollar will power higher in the coming week because not only are Evans and Williams generally dovish but the trend of weaker February data should also continue for another week. 

Will 1.12 Mark a Bottom for Euro? 

It may be time to consider buying euros. The single currency fell to a 1 month low versus the U.S. dollar this past week despite stronger EZ and weaker U.S. data.  The move was driven largely by hawkish comments from non-voting members of the FOMC. With Greek headline risk neutralized for the time being, the main event risk for the currency pair in the coming week will be European Central Bank's monetary policy announcement. No changes are expected but the ECB will provide details on the Quantitative Easing program that was announced last month. QE is scheduled to begin in March and one of the greatest challenges for the central bank is finding enough government bonds to buy. If you recall, the ECB committed to buying 60 billion euros each month until September 2016.  Some of the details that we expect Mario Draghi to provide include the exact date of when asset purchases will begin, how long they will last, the breadth of bonds purchased and whether National Central Banks can buy other country's bonds or only their own. In addition, the ECB will release its latest inflation and GDP forecasts and while inflation could be revised lower, growth is expected to be revised higher. It has been a long time since we've heard optimism from Mario Draghi.  On Tuesday he said he saw the first signs of confidence in the economy as stimulus starts to have a positive impact on growth. Yet speculators continue to hold a significant amount of short EUR/USD positions and as the downside risks for Europe recedes, the motivation to cover those positions increases.  One of the main reasons why investors sold euros aggressively in the month of January was because of the fear that Greece could leave the Eurozone. This week that fear and concern was eliminated (for the time being) when Greece received a 4-month bailout extension.  Meanwhile unlike the U.S., we expect more upside surprises in EZ data that should lend support to the euro and help the currency find a bottom against the dollar between 1.1150 and 1.12. 

Big Week Ahead for AUD and CAD 

It will be a busy week ahead for the commodity currencies with monetary policy announcements, PMI and GDP reports expected from Canada and Australia.  We expect the central banks of both countries to leave interest rates unchanged after surprise 25bp rate cuts early this year but just because monetary policy will remain unchanged does not mean that there will be no volatility in these currencies. The market is still divided on whether the Bank of Canada and the Reserve Bank of Australia will cut interest rates again so the monetary policy statements will go a long way in hardening or weakening expectations. The GDP and PMI reports will also be looked at as validation of the central bank's views.  Given the recent improvements in Chinese data and less dovish comments from BoC Governor Poloz, chances are BoC and RBA won't say anything particularly damaging to the Canadian and Australian dollars.  Loonie traders should also keep their eyes on oil, which continues to hover at low levels.  Meanwhile there's not much on the calendar from New Zealand outside of the Global Dairy Trade auction on Monday.  If prices continue to rise strongly, the New Zealand dollar should extend its gains against most major currencies. 

GBP: The Real Test Comes Next Week 

Hawkish comments from U.K. policymakers helped sterling outperform many major currencies this past week but the real test for the British pound comes next week when the PMI reports are scheduled for release. We know that the next move from the Bank of England will be a rate hike but how quickly monetary policy is tightened will be determined by data and there are few economic reports as significant as the PMI numbers. If the PMI reports show further improvement in the U.K. economy, sterling will rise back above 1.55 and probably test 1.56.  However if the data shows that the economy weakened during the month of February the gains in the British pounds could be lost quickly.  The Bank of England also has a monetary policy meeting but no changes are expected and when policy is left steady no details are provided, so the rate decision should be a nonevent for the currency. We have been looking for sterling to outperform for some time and we continue to look for upside in GBP/USD. 


Courtesy of http://www.bkassetmanagement.com/ 

1 cubic foot of silver weighs approx 655 pounds whereas 1 cubic foot of gold weighs more than half a ton.

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