The U.S. dollar started the North American trading session on weak footing and its losses were exacerbated after Fed Chair Janet Yellen flapped her dovish wings. Yellen warned “caution in raising rates is especially warranted,” but the line that crushed the dollar was her comment that the “Fed has considerable scope for stimulus if needed.” After last week’s comments from Fed officials who suggested that rates could be raised in April, dollar bulls hoped that Yellen would confirm their less dovish posture. However it is now clear that the Fed Chair does not share her colleagues’ optimistic views. Her comments imply that if it were up to her alone, rates would remain unchanged in April and June. Yellen expressed concern about low inflation, Chinese economic uncertainty, global developments and mixed U.S. data. She also pointed out the areas of weakness in the labor market. Recent U.S. labor data has been strong leading everyone to believe the U.S. is close to full employment. Yet Yellen said there could still be some cyclical depression in the labor market due to slack and high levels of involuntary part time employment. Her dovish comments reignited the decline in the dollar and we believe there could be further losses including a move to 112 for USD/JPY and a rally to 1.1350 for EUR/USD before stabilization. Friday’s non-farm payrolls report is the next major market mover for the dollar but unless it is unambiguously positive with average hourly earnings rising 0.4% or more, the greenback will have a difficult time recapturing its prior gains.
At the start of the week we talked about EUR/USD making a run for 1.1300 and this target was reached today. The currency pair could extend as far as 1.1340, the March high before meeting any formidable resistance. With the Federal Reserve slowing down its pace of tightening and the European Central Bank suggesting they are done with easing, the market’s focus will turn to data. For the U.S., the next test will be non-farm payrolls. For the Eurozone, Germany’s inflation, retail sales, unemployment and PMI manufacturing numbers will be the focus. If these reports show continued recovery, EUR/USD will test this month’s highs. However if they signal weakness, traders will be tempted to take profits on the heels of the recent rally. It is also worth noting that on a technical basis, there’s a cup and handle pattern forming in the EUR/USD. This bullish pattern would be in play if the currency pair breaks above its year to date high of 1.1376, opening the door for a move to 1.1500.
Sterling continues to benefit from the sell-off in the dollar even as the Bank of England warns of Brexit risks. The BoE published a statement from its March 23rd meeting today in which they cited Brexit as the most significant domestic risk to stability. They expect Brexit uncertainty to weaken the pound further and expressed their willingness to take supportive action if needed. The central bank also noted the deterioration in financial stability since November but that isn’t a surprise given beginning of the year volatility. Brexit has clearly fallen to the back of everyone’s minds but it is not a risk that should be dismissed so easily. Sterling remains a sell on rallies and a good entry point could be right around 1.4450.
The Japanese Yen weakened across the board as stocks marched higher. The latest economic reports from Japan reinforced our concerns about the economy. Although overall household spending increased and department store sales rose, the jobless rate ticked higher and retail sales dropped by the largest amount since April 2014. Small business confidence increased but less than the market expected. As reported by our colleague Boris Schlossberg, “the lack of any meaningful wage gains in Japan (latest labor negotiations with auto workers only yielded a 30 yen hike for the spring) are weighing on demand,” making Prime Minister Abe’s decision on whether to move forward or delay the sales tax increase even more difficult.
Despite the fifth straight day of lower oil prices, the Canadian dollar resumed its rise against the greenback. Today’s move can be largely attributed to U.S. dollar weakness but given oil and the loonie’s close correlation, the decline in USD/CAD should be limited to 1.3000. The sharp fall in industrial product and raw material prices is also negative for the currency. Oil inventories are scheduled for release on Wednesday followed by CAD GDP numbers on Thursday. The momentum is to the downside for the pair and for a bottom to occur, we need to see oil inventories rise, the U.S. dollar to stabilize and/or oil prices fall further. The next few days will be crucial for USD/CAD.
Meanwhile the best performing currencies today were the New Zealand and Australian dollars. The 2% rally in NZD/USD took the pair within pips of its year to date high while the Australian dollar rose more than 1%. No economic data was released from either country but U.S. dollar weakness and gold prices contributed to the move.