Four Currencies to Trade this Week

It may be a new trading week but the decline in the U.S. dollar continued with the greenback moving lower against most of the major currencies. Part of the dollar's weakness can be attributed to the rally in equities and improvement in risk appetite but ultimately investors are reluctant to own dollars. They are still skeptical about a 2016 rate hike even though each and every Federal Reserve official who has spoken, dove and hawks included see tightening in 2016. We expect this view to be reinforced by the 8 Fed Presidents scheduled to speak this week but only 1 (Powell) is a voting member of the FOMC. Comments from the rest will probably fall on deaf ears. Investors have seen how the Fed adjusted its tightening forecast on the heels of first quarter volatility and they now believe that the central bank will become even less willing to raise rates as the year progresses. Brexit, Europe and Chinese wildcards will make monetary tightening difficult and unless retail sales grow by 1% or more AND next month's non-farm payrolls report show strong job growth with higher wage gains, there will still be no rate hikes priced in for 2016. This will prevent the dollar from experiencing anything other than a dead cat bounce. No U.S. economic reports were released today and even though we expect retail sales growth to rebound in March, the positive implications for the dollar should be limited. The Bank of Japan's absence leaves USD/JPY vulnerable to a decline below 107 and a test of support at 106.67, the 38.2% Fibonacci retracement of the 2011 to 2015 rally.

Meanwhile the resilience of euro signals a potential move to 1.1500. For the past 9 trading days, EUR/USD held its break above 1.1300 and the lack of market moving economic data means a move to 1.15 this week will be determined by risk appetite. Last week ECB President Draghi avoided talking down the currency because they want more time to see how their latest stimulus program affects the economy so for the time being, there will be no changes in policy. No news is good news for the euro because it means there shouldn't be any significantly negative euro news flow to drive down the currency. Eurozone industrial production is scheduled for release on Tuesday but this a second tier report. The greatest risk for EUR/USD is the dollar and U.S. earnings. If there is a major upside surprise in U.S retail sales, we could see EUR/USD drop to 1.1300 but probably not much beyond that. Earnings on the other hand will affect stocks and in turn in the euro.

One of the best performing currencies today is sterling. What's fascinating about the latest 2 day rally is the lack of catalyst. In fact the news stream was negative for sterling with the British Chambers of Commerce warning that the economy slowed in the first quarter. Brexit remains an ongoing concern especially after the low turnout at the Dutch referendum. If the turnout for the U.K. referendum is anywhere close to the 32% reported for the Dutch vote, it would increase the risk of Brexit as only the most passionate voters would hit the polls. According to Bloomberg, as many as 1 in 3 voters are undecided about whether they will vote to leave or stay raising concern that turnout could be exceptionally low. This is an important week for sterling with U.K. consumer prices scheduled for release tomorrow followed by the Bank of England's monetary policy meeting on Thursday. Data from the U.K. has been better but as Brexit nears, the central bank's concerns about its risks could grow.

Oil prices are above $40 a barrel and this move has been extremely positive for the Canadian dollar, especially coming off the heels of last week's strong employment report. USD/CAD is aiming for its March lows and we believe this level could be tested on the back of the Bank of Canada's monetary policy meeting. The last time we heard from the BoC, they expressed very little concern about the strength of the currency. After leaving interest rates unchanged the BoC said the Canadian dollar and oil were averaging close to levels assumed in their Monetary Policy Report. Since then oil prices have recovered with job growth and and retail sales rising. Although the currency is trading slightly stronger, these improvements along with slower tightening by the Federal Reserve should keep the BoC optimistic.

The Australian and New Zealand dollars also traded sharply higher thanks to the uptick in commodity prices and improvement in risk appetite. Chinese data will be the focus for the commodity currencies this week as both currencies shrug off weaker data. New Zealand reported mixed credit card spending numbers while Australia reported a smaller increase in home loans. Stronger Chinese data could send both currencies back to multi-month highs.