3 Currencies You Should be Trading this Week

As we look forward to the new trading week, many investors are wondering if the U.S. dollar will continue to decline. Over the past week, the greenback lost value against every major currency with the exception of the Japanese Yen. There hasn’t been too much action in USD/JPY and the increasingly tight consolidation signals a potentially big breakout for the pair in the days to come. Broad based weakness in U.S. data from the ISM manufacturing and non-manufacturing indices along with the trade balance prevented the dollar from rallying but the main catalyst for the breakdown was Thursday’s FOMC minutes. No one was surprised that the central bank had reasons to a delay a rate hike but in addition to looking for more strength in the labor market they added low inflationary pressures and a strong dollar to their concerns.

The U.S. dollar is one of the currencies to trade next week because there are 2 very important pieces of data scheduled for release that could intensify or shift the market’s appetite for dollars. The Fed is watching inflation and so should we. Economists are looking for consumer prices to fall for 2 months in a row, a trend that will most certainly revive some people’s concerns about deflation. Retail sales are expected to grow at a steady pace but slower job growth and softer spending reported by Johnson Redbook puts the risk to the downside. In other words, the dollar could sell-off further especially if the data disappoints as it may lead some investors to consider less hawkishness from the Fed later this month. However at the end of the day, losses in the greenback should be limited especially versus EUR, GBP, JPY and CAD because the problems in those countries are greater and the Fed will still be the first major central bank to raise interest rates. We just need to give the market an opportunity to re-price its October/December rate hike expectations. According to a recent WSJ survey, more than 60% of economists are looking for the Fed to raise interest raise before the end of the year but the price action of the U.S. dollar suggests that investors expect otherwise.

The British pound is another currency that you should be trading this week. Economic data has been mostly terrible and yet the Bank of England Governor Carney keeps saying that wage pressures are building which implies that he wants to raise interest rates sooner rather than later. The decision to trust the data or the central bank hinges upon next week’s inflation and labor market reports. At this week’s BoE meeting, low price pressures were cited as one of the central bank’s main areas of concern but the labor market is one of the country’s main areas of strength. GBP/USD is only half way through what would be a normal reversal for the currency pair and we expect some big swings in the coming week off of U.S. and U.K. data.

The Australian dollar is also in play but if you notice, we did not list AUD as a currency against which the USD could see limited gains. The reason is because unlike Canada, the data has not been overwhelmingly weak. Recently manufacturing activity accelerated, retail sales increased and most importantly gold and iron ore prices have turned higher. Higher interest rates or carry currencies are also in demand as the U.S. dollar weakens. However recent developments in commodity prices along with Australian/Chinese data makes the outlook for AUD challenging. Next week’s Chinese trade balance and Australian employment numbers should go a long way in setting expectations for Chinese/Australian growth. In the short span of 7 trading days, AUD/USD climbed from below 70 cents to above 73 cents. Not only is this a very strong move but there has not been a down day in AUD/USD in 9 trading days and as such, a reversal or turnaround is likely if these economic reports are weak.

EUR/USD will also be on the move but it will most likely trade on the market’s appetite for U.S. dollars because the German ZEW survey is the only piece of market moving EZ data on the calendar. The currency pair is trading near the top of its 5 month long range (barring the short-lived spike in August) and while investors are shunning the U.S. dollar we believe they there is a lot more to be worried about in Europe. German data has disappointed in a very big way and between VW’s problems and downside data surprises, the ZEW survey is likely to show less investor optimism.

The recent recovery in oil prices drove USD/CAD below 1.30. However economic data continues to highlight the vulnerability of Canada’s economy. According to the latest report, Canada added 12.1k jobs in the month of September, which was slightly better than expected but looking beneath the hood, 61.9k full time jobs were lost, the largest amount since October 2011. There was a big increase in part time work which is not as high value or high quality as full time work. In addition, the unemployment rate rose to 7.1%, a 2 year high. The participation rate held steady but that fails to offset the weakness in the rest of the report. Even though oil prices are increasing, we believe the sharp slowdown in manufacturing activity, deterioration in the labor market and expansion in Canada’s trade deficit should help USD/CAD find a bottom soon.