Will EUR/USD Hit 1.12 or 1.06?

• Will EUR/USD Hit 1.12?
• Low Yields Keeps Dollar Weak
• AUD Soars Ahead of Chinese Data
• USD/CAD Hits Fresh 5 Year Highs
• NZD Bounces on Stronger Data
• AUD Rallies Ahead of Chinese PMI
• GBP: Export Orders Hit 2 Year Lows

Will EUR/USD Hit 1.12?

Investors continued to sell U.S. dollars on Monday, driving EUR/USD within a whisker of 1.10.  After last week's FOMC meeting, daily trading ranges for many currency pairs expanded significantly and since then currencies have fluctuated within the wider bounds.  The euro has been the biggest beneficiary of dollar weakness because short positions have been extremely overstretched and the lack of follow through on the back of the FOMC meeting prompted many EUR/USD traders to buy unwind their short trades by buying the currency back. No Eurozone data was released this morning but comments from ECB officials on the possibility of QE ending earlier helped to lift the currency.  As the EUR/USD bounces off its 12-year lows and closes at the day's high, many investors are now wondering if EUR/USD has bottomed.

To answer this question, we want to start by saying that the dollar's rally is far from over.  The FOMC statement may not have been as hawkish as some investors anticipated but 15 out of 17 or 88% of Federal Reserve officials expect the central bank to raise interest rates this year.  Tightening by the Fed will come at a time when the European Central Bank is increasing its balance and injecting further stimulus into the Eurozone economy. As long as the foundation of tighter U.S. and looser EZ monetary policy remains, EUR/USD is headed for further losses. So while the euro may break 1.10 against the U.S. dollar and perhaps even test 1.12, we expect a rally to be capped at that level. The downtrend may not resume this week but it will certainly happen in the months to come, which means a move below 1.06 is still a strong target. This week, we have a number of important Eurozone economic reports that could lend support to the euro.  This includes tomorrow's flash PMI reports and Wednesday's IFO report.  Between the weaker euro, lower rates, quantitative easing, the recent improvement in investor confidence (ZEW) and industrial production, the Eurozone economy should start to report more positive surprises. At the same time however 12 to 18 months of QE, negative interest rates and ongoing political troubles in Greece will keep the euro on track for parity. 

Low Yields Keeps Dollar Weak

The U.S. dollar traded lower against most of the major currencies today as profit taking, low yields and the lack of market moving data discouraged investors from buying dollars.  The fact that ten-year Treasuries are yielding close to 1.9% indicates that investors haven't returned to their rate hike bets.    Last week Janet Yellen made it clear that a hike anytime after April is possible including the June meeting but this possibility was undermined by downgrades to their economic assessment and forecasts that suggests they will delay tightening to September.  Either way, the Fed is poised to raise rates this year and the dollar will push to new highs when a hike nears.  In the meantime, we expect choppy consolidation in the majors until next week's non-farm payrolls report. With only consumer prices, more housing data, durable goods, revisions to Q4 GDP and the final University of Michigan consumer sentiment report scheduled for release, the focus will be on Fed speak. We heard from two policymakers today - Fischer and Mester.  The Vice Chair of the Fed expressed concerns about the dollar's strength and labor market, but felt that a hike before year-end is likely, a view that Mester shares.  Bullard, Evans, Lockhart and Yellen are scheduled to speak later this week and the dollar could regain momentum if more policymakers publicly throw their support behind 2015 tightening.  The louder the hawks scream, the sooner the dollar will resume its rise.  We continue to believe that the dollar is a bargain now and if you don't buy in the next few days or weeks, you may regret it. With that in mind, one other tactical option would be to wait for the dollar to stabilize and rejoin the move after it starts to rise to ensure that momentum is on your side.  Regardless of the strategy chosen, six months from now we expect the dollar to be trading 3 to 5% above current levels.  

AUD Soars Ahead of Chinese Data

All three of the commodity currencies traded higher against the U.S. dollar today but the strongest gains were seen in the Australian dollar.  As no Australian data was released overnight the move can be largely attributed to positioning.  The CFTC data showed that before the FOMC meeting, there was a significant reduction in Australian dollar short positions.  Traders started to turn less bearish Aussie and it may have even flipped from net short to longs after the Fed meeting.  While the Australian dollar has performed well versus the greenback, euro and British pound, it dropped to a record low versus the New Zealand dollar. Both currencies offer a higher yield than many other major economies but the RBA is still talking about lower rates while the RBNZ has made it clear that rates will remain unchanged for the time being. The decline in dairy prices last week drove the New Zealand dollar lower initially but Fonterra reaffirmed its dairy payout forecast, which helped to revive the rally.  Stronger consumer confidence in the first quarter also boosted demand for the currency.  There was no data from Australia but steady gold prices and upcoming data have investors turning back to the currency.  While economists are looking for a slowdown in Chinese manufacturing activity, investors are optimistic and looking for stability. If Chinese data surprises to the upside, AUD/USD could hit a 1-month high but if the report disappoints, the Australian dollar could give up its gains quickly. Finally the rebound in oil prices drove USD/CAD to 1.25.  As we believe that the currency pair will range trade between 1.24 and 1.28 in the coming weeks, USD/CAD is nearing the bottom of this range.  

GBP: Export Orders Hit 2 Year Lows

The British pound ended the day unchanged against the U.S. dollar, making it the day's worst performing currency.  According to the Confederation of British Industry, industrial trend orders dropped to its lowest level in 2 years. This fueled speculation that the Bank of England will postpone tightening this year as a strong sterling weighs on the economy. This is a busy week for the British pound with inflation data scheduled for release tomorrow and retail sales due on Thursday. We know that the central bank is worried about weak wage growth so it will be interesting to see if it prevented spending from recovering.  Inflation is also expected to rebound but unambiguously positive data is needed to take GBP/USD back above 1.50.  Aside from concerns about wages, U.K. policymakers also made it clear they are worried about the impact of a strong currency on low inflation.  The British pound may have been weak versus the dollar but it has been very strong versus the euro.