EUR/USD near 1.06. Will Yellen sink the dollar?

Fed chair Yellen is scheduled to deliver the first semi-annual monetary policy report under the new leadership of President Trump. Will she support or sink the dollar?

Dollar is going through roller-coaster ride, driven by President Trump’s comments and policies. He grumbled over nations gaining trade advantage by weakening their currency, in a way expressing his wish for the dollar to be weaker. At the same time, he announced policies that are positive for the greenback. The latest being a promise of "something phenomenal on taxes in 1-2 weeks". To date, EUR/USD and USD/JPY has lost 40% and 30% of the post-eleaction gains respectively. So, who is the biggest currency manipulator?

US data are pretty much supporting rate hikes. Although consumer confidence and sentiment are both lower than expected, but jobs are adding at a healthy rate and unemployment claims are dropping. We expect Yellen to keep the hopes of rate hike alive, but not “over promising”.

Draghi “face-off” with Trump

European Central Bank (ECB) president Draghi rebuted Trump’s accusations of the Euro being manipulated and Germany is gaining unfair trade advantage from the low euro. Draghi put forward arguments saying ECB has not intervened in the forex market since 2011 and has not engaged in persistent one-sided intervention. Draghi counter-attacked by warning of undesirable consequences by removing the Dodd-Frank Act. “Frankly I don’t see any reason to relax the present regulatory stance which has produced a stronger banking and financial services industry than before the crisis,” Draghi said. ECB is expected to maintain loose monetary policy amidst global and local uncertainties.

Divergence in Aussie and Kiwi

Both Reserve Bank of Australia (RBA) and Reserve Bank of New Zealand (RBNZ) kept their  interest rates unchanged. RBA acknowleged the recent improvements in global economy. Their optimism on export growth and moderate consumption growth boosts their growth outlook. New Zealand’s economy is growing at more than 3% in a year, sparking speculations on tightening. However, RBNZ eliminated any tightening bias by opting to maintain a neutral policy. The key divergence came from their views towards their respective currency. RBA is unsure if the Aussie can be consider too strong given their positive growth outlook. On the other hand, RBNZ said the Kiwi is higher than the sustainable level for balanced growth. A strong Kiwi could hold back inflation from hitting their 2% target. Given this divergence, traders could possibly continue to look to go Long on AUD/NZD. Do watch out for Australia’s employment data and New Zealand’s retail sales towards end of the week.

Our Picks

AUD/NZD – Bullish.  Traders are likely to continue to buy into the divergence in opinions between RBA and RBNZ.  Possible to buy at dips.

EUR/USD – Bullish.  We expect Yellen to play safe, avoid strengthening the dollar too much before the next rate hike.  1.06 could be the support for EUR/USD this week.

XAG/USD (Silver) – Bullish.  Price made a new high; the bullish momentum is in tact.  Consider buying at dips.

Top News This Week (GMT+8 time zone)

UK: CPI.  Tuesday 14^th February, 5.30pm.

We expect figures to come in at 1.8% (previous figure was 1.6%).

Australia: Employment Change.  Thursday 16^th February, 8.30am.

We expect figures to come in at 18K (previous figure was 13.5K).

New Zealand: Retail Sales q/q.  Friday 17^th February, 5.45pm.

We expect figures to come in at 0.6% (previous figure was 0.9%).

Fullerton Markets Research Team

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