Should You Be Buying Dollars Here?

Should You Be Buying Dollars Here?
ECB Sends EURO On Rollercoaster Ride
USD/CAD Melts Down On BoC and Oil
NZD: Prices Fall 3% at Latest Dairy Auction
AUD Shakes Off Disappointing Chinese Data, Employment Next
Sterling Lifted by Dollar Weakness

Another round of weaker U.S. economic reports drove the dollar sharply lower against all of the major currencies Wednesday. In the past 48 hours, the sentiment in the market has changed significantly with investors now worried that the dollar has peaked. If one thing could change the Fed’s mind about raising interest rates, it would be that economic data and recent reports do not support the case for tightening. Wednesday morning we learned that manufacturing activity in the NY region contracted and that industrial production declined. Earlier in the week, retail sales fell short of expectations. Is that enough for the Fed to refrain from raising interest rates this year? No. According to the Beige Book, the economy continued to expand in most regions between the middle of February and the end of March. Economic activity grew at a moderate pace with stable or modest improvements in the labor market. So if the outlook for monetary policy has not changed, the next question to ask is whether it's a good time to buy dollars. From a long-term perspective we still like buying U.S. dollars, especially since the risk of U.K. election uncertainty and the possibility of a rate hike by the RBA has not been removed. But as mentioned in yesterday’s note, EUR/USD could test 1.08 and USD/JPY could drop to 118.25 before that happens. So while you could buy dollars here, you may have the opportunity to do so at a better price later. Housing starts, building permits and the Philadelphia Fed manufacturing index are scheduled for release Thursday. These second-tier reports are not expected to have a lasting impact on the dollar.

ECB Sends EURO On Rollercoaster Ride

The most exciting part of Wednesday’s European Central Bank meeting was that a political activist jumped on the table in front of Draghi waving her hands and calling for an end to the “ECB dick-tatorship.” No one was hurt, the disruption lasted minutes and the central bank President quickly resumed his press conference. Earlier in the morning, the ECB left monetary policy unchanged and at the conference that followed, Mario Draghi expressed his satisfaction with the smooth implementation of QE and the effectiveness of the program thus far. The tone of the press conference was decidedly more upbeat with the ECB head saying that the recovery is broadening and strengthening. These improvements diminished the economic risks and moves the economy in the right direction. Draghi ruled out a rate cut and instead said that the central bank can adjust QE if needed. European policymakers are happy with how Quantitative Easing is working and this optimism helped to stem the slide in EUR/USD. While a further short squeeze could drive EUR/USD higher, negative rates in Germany should cap the gains in the currency pair. S&P also downgraded Greece on Wednesday to CCC+/C with a negative outlook. While Mario Draghi does not believe that Greece’s problems will harm the world economy, negative headlines could still affect the currency.

USD/CAD Melts Down On BoC and Oil

The worst-performing currency pair Wednesday was USD/CAD, which fell sharply on the back of a less dovish Bank of Canada monetary policy statement, weaker U.S. data and higher oil prices. The BoC’s decision to leave interest rates unchanged was widely anticipated but having just warned about an atrocious quarter, few expected the air of optimism. While the central bank lowered its Q1 and 2015 GDP forecasts, they raised their outlook for 2016 growth. Most importantly, they upgraded their assessment of inflation by saying that the risks are now roughly balanced. The central bank expects the economy to reach its full capacity next year with conditions expected to improve in the second half of 2015. Not only did Governor Poloz say that he is looking past the oil impact on inflation but he also recognized the improvements in the labor market and said he expects a soft landing in housing. In other words, a rate cut is now off the table. Between their less dovish tone and the 5% rally in oil prices, USD/CAD dropped to its lowest level in 2 months. Further losses are likely with no support until the 100-day SMA near 1.22. The Australian and New Zealand dollars also performed extremely well despite disappointing Chinese data. GDP growth met the government’s 7% forecast but industrial production and retail-sales growth slowed significantly. Dairy prices fell for the third auction in a row but the 3.6% decline was far more modest than the 10% drop at the last auction. Wednesday night’s Australian employment report could take some of the focus off the U.S. dollar. Weaker numbers would remind investors of the challenges that Australia’s economy faces and the serious risk of a rate cut by the RBA next month
.
Sterling Lifted by Dollar Weakness

The British pound traded higher versus the U.S. dollar and euro but with no U.K. economic data on the calendar, the moves were driven entirely by the market’s appetite for U.S. dollars and in a very small part, euros. Sterling has now rallied against the greenback for 3 straight days and we don’t expect the moves to last. The U.K. general election is 3 weeks away and its impact on the British pound will be significant. This general election is filled with uncertainty and sterling has been under pressure because of the fear that the Conservative Party will fail to win enough seats. We expect the British pound to fall further in the weeks ahead with GBP/USD falling to a fresh 4-year low after the election. What makes this year’s election different from 2010 is the potential power grab by smaller parties that could lead to more difficulty in forming a coalition. If this leads to a hung parliament, it will translate into more losses for the currency. Sterling 3 month option volatiles are at a 3-year high but could rise even further as it did in 2010. Five years ago volatility jumped to 17% in the days after the election and not only did GBP/USD fall 400 pips on election day, but it dropped another 500 pips in the 2 weeks that followed.