Why Did EURO Rally With No Greek Deal?

• Why Did EURO Rally With No Greek Deal?
• USD: Why the April FOMC Meeting Could be a Big Deal
• GBP: Tests 100-Day SMA Resistance
• NZD: Will the RBNZ Cut Rates Next Week?
• CAD: More Optimism from BoC
• AUD: Oil and Gold Prices Move Lower

Why Did EURO Rally With No Greek Deal?

Most investors may be surprised that the euro extended its gains against the U.S. dollar on Friday despite the lack of progress at the latest Eurozone Finance Ministers meeting.  However taking a step back and looking at how all of the major currencies traded at the end of the week, we can see that broad based weakness in the U.S. dollar played a major role in the EUR/USD's recovery.  The Federal Reserve meets next week and another round of softer data has investors worried that the central bank will grow more dovish.  Not only have we seen the dollar extend its losses against all major currencies but Treasury yields have also moved lower.  While the EUR/USD's reaction to the EZ meeting was unexpected, the outcome was not.  According to the Wall Street Journal it was an incredibly frustrating meeting where Greek Finance Minister Varoufakis was accused of wasting everyone's time.  Greece will remain in the headlines as the focus has now shifts to the Eurogroup meeting on May 11th.  This meeting takes place 24 hours before the country is scheduled to make a massive EUR780 million payment to the International Monetary Fund.  Greece plans to raise funds by forcing state entities to lend to the government but chances are they will miss the payment, forcing the IMF to grant an extension. Even if Greece manages to make this payment, there's a lot of money due to the IMF and ECB over the next few months.  In other words, Greece faces many hurdles in the coming months that can pose an ongoing risk for euro. Aside from U.S. dollar weakness, stronger German business confidence also contributed to the EUR/USD's rally but next week, the currency's flows will most likely be driven by the market's appetite for U.S. dollars.

USD: Why the April FOMC Meeting Could be a Big Deal

Weaker economic data drove the U.S. dollar off its highs this month and the big question before us is whether these softer reports will lead to a more dovish FOMC statement next week. Between a slowdown in manufacturing and service sector activity along with the weakest pace of non-farm payrolls growth since December 2013, there's no doubt that the recovery lost momentum over the past month.  Today's durable goods report only reinforces recent vulnerabilities.  While orders rose 4% in the month March, the increase was driven entirely by transportation with defense aircraft orders rising 112%.  If these were excluded, durable goods orders dropped 0.2%.  Core capital goods orders fell by the largest amount since December 2012. The reaction in the dollar would not have been so negative if the February numbers were not revised sharply lower as well.  The U.S. is not an export dependent economy but the strong dollar is clearly having an impact on manufacturing activity.  Although the Federal Reserve is not expected to change monetary policy next week and there is no press conference from Janet Yellen, dollar bulls fear a more dovish FOMC statement.  Policymakers have been split on a June rate hike and this month's reports should encourage more members of the central bank to vote in favor of a September liftoff.  If this sentiment makes its way into the FOMC statement, the dollar could extend its slide quickly.  However we believe there's no benefit to pre-warning of a move in June or September because there's still 2 months before the June meeting. Based on the consistent calls for a rate hike this year by U.S. policymakers, there's still a good subset favoring an earlier move.  Yet considering that some market participants had hoped the central bank would preannounce June tightening, the dollar could still slip after the FOMC meeting unless the statement is unambiguously positive.

GBP: Tests 100-Day SMA Resistance

It has been a great week to be long sterling as the currency rose to its strongest level versus the U.S. dollar in 7 weeks. The move was largely driven by U.S. dollar weakness but less dovish Bank of England minutes also contributed to the rally. Next week's Q1 GDP report and the upcoming general election pose more upside than downside risk for GBP/USD. In fact, even on a technical basis, the latest move stopped short of the 100-day SMA and the 1.52 resistance level.  Nonetheless, the 3.65% bounce over the past 10 trading days is significant and if the dollar continues to fall next week, GBP/USD could break above its resistance level. We don't expect a rally to be driven by U.K. fundamentals. The most important event risks on the calendar next week will be the first quarter GDP report and manufacturing PMI. We already know that GDP growth will be negatively impacted by consumer spending after retail sales dropped 0.5% in March.  Consumption was significantly weaker in the first quarter of 2015 compared to the fourth quarter of 2014.  We also continue to be worried about the downside risk leading up to the general election. Back in 2010, GBP/USD trended higher and consolidated before settling on a decline that began on April 27th.  In the run up to the election, GBP/USD dropped 300 pips.

NZD: Will the RBNZ Cut Rates Next Week?

There was very little consistency in the performance of the commodity currencies on Friday.  The Canadian and New Zealand dollars ended the day unchanged while the Australian dollar extended its gains. No major economic reports were released from any of the commodity producing countries.  We only heard from Bank of Canada Governor Poloz who said the adverse impact of lower oil prices will be gone by the second half. The only country with market moving data next week is New Zealand.  The Reserve Bank of New Zealand has a monetary policy announcement and after Assistant Governor McDermott's comment yesterday the central bank would consider lowering rates if prices fall further, some investors are positioning for easing.  The complete U-Turn in the central bank's policy stance could spell big trouble for NZD/USD especially since speculators have been long the currency pair since the beginning of the month. While we don't think the RBNZ will lower rates next week there is a very good chance that NZD/USD will drop to 74 and possibly even 73 cents on the back a dovish RBNZ statement. In addition to the RBNZ decision, the trade balance is also scheduled for release. From Canada, we only have the GDP report for February and from Australia the most important releases will be the Australian and Chinese PM numbers.