With 2 monetary announcements, 3 employment reports, Eurozone GDP and PMIs scheduled for release from all corners of the world, this will certainly be an active week for currencies. Volatility has returned with the euro hitting to 2-year lows and the commodity currencies falling to their weakest levels of the year. Support and resistance levels could be tested if data or central bank speak shines a light on growing economic and monetary policy divergences. The holidays in Japan and China will only make things worse as lower liquidity compounds the market’s reactions.
The US dollar traded lower against all of the major currencies on Monday despite stronger personal spending. Led by the recovery in the labor market, consumer demand was particularly robust in March. However investors fear that with price growth slowing according to the PCE deflator and incomes rising only 0.1% last month compared to a forecast of 0.4%, demand will ease in the months ahead. But that may not happen because consumers could keep spending thanks to the tight labor market and record breaking stocks. So while USD/JPY is lower today on profit taking, we believe that this week’s Federal Reserve monetary policy announcement will help rather than hurt the dollar.
Euro for the most part will be driven by the market’s appetite for US dollars but tomorrow should be exception because the Eurozone’s first quarter GDP report will be released alongside German labor and inflation data. We are looking for firmer employment and GDP numbers because according to the PMIs, job growth accelerated strongly in April. Solid demand and improved trade activity at the start of the year should also bolster growth but inflation is likely to be lower because producer prices declined. EUR/USD came off last week’s lows and the real question is whether the central bank will be swayed by good numbers. Earlier this month Bundesbank President Jens Weidmann’s said growth could slow materially in 2019, a view that ECB President Draghi likely shares. This morning’s confidence numbers were lower. So even if Eurozone data is good and there is a rally, it will be short lived especially if US data is good or the Fed is slightly more optimistic.
Chinese PMIs are also scheduled for release this evening. We have been seeing initial signs of stabilization in China’s economy and if tonight’s reports confirm that trend, there could be a more substantial recovery for the Australian and New Zealand dollars. Of course that would be contingent on Australian and New Zealand data beating and unfortunately the risk is to the downside for Australian PMIs and New Zealand’s employment reports this week. For the time being, the downtrend for both currencies remains intact. Lower highs and lower lows signal a deeper correction for USD/CAD. GDP numbers are due tomorrow but there will be less focus on CAD because these monthly reports. Nonetheless growth could be stronger given better trade and retail sales numbers.