Currency Thoughts and Predictions for the Major Pairs

04/08/2009 10:42 am EST

Focus: FOREX

Kathy Lien

Managing Director and Co-Founder BKForex LLC, BK Asset Management

Markets yesterday exhibited the usual signs of uncertainty in light of a new month that has not exactly gotten off to the best start. Among currencies, the euro, pound, Canadian dollar, and Australian dollar all showed weakness against the US dollar. USD/JPY, on the other hand, clearly exhibited dollar strength, as a surge to 101.00 is currently underway. The one currency that has managed to buck the trend has been the New Zealand dollar, which is only narrowly holding on to gains. Nevertheless, the main driving force is the drop of the Dow. However, as a sign of resilience in even a down market, the Dow rebounded off of exaggerated losses that extended down by nearly 150 pips to close down 41.74.

Big Week of Monetary Meetings

In light of a relatively quiet week in the US, the focus should be dominated by the three central bank meetings of the RBA, BoE, and BoJ. The BoJ should be the first to announce tomorrow. The main expectations coming from their meeting will be any new expansion over the talks of their quantitative easing program. There is speculation that the BoJ will begin to look at municipal bonds as an alternative to government securities. Once again, no rate cut is to be expected through tomorrow's meeting. The RBA is next in line, and is probably set to deliver the most widely anticipated rate decision of this week. The Australians boldly kept rates on hold last month, but as deterioration in growth has made a new surge this month, there is a possibility that the RBA will restart the rate cutting engines. However, at this point, it could go either way. In the event of a rate cut, we may see the impressive rallies over the last month compress in light of the new weight of serious economic concern. The BoE will announce their decision on Thursday. Once again, the main driving force behind any market moving release will be an addition to the quantitative easing program. As rates are already at the record low of 0.50%, it is unlikely that another rate cut would be considered, as it would have negligible effects.

EUR/USD: ECB Shows its Dovish Side

The euro dropped by more than 80 pips on a one-two punch supplied by dovish ECB comments along with some truly terrible economic data. ECB executive board member Lorenzo Bini Smaghi mentioned that, if the situation should present itself, the ECB is fully willing to intervene in the forex markets. He cautioned that intervention could come in the form of either public statements or the typical outright intervention. In any effect, his public statement was an intervening force in the markets as the euro faces broad weakness. These comments are primarily targeted toward the EUR/GBP exchange rate, which has appreciated drastically over this year, hindering the EZ's competitiveness as a primary trading partner with the UK. Smaghi's statement is in many ways reminiscent to the SNB's policy decisions. The SNB both made publicized statements as well as the outright intervention. This could in fact be the non-conventional policy measure that the ECB has been thoroughly promoting. Nevertheless, one can argue that his statements are baseless threats since the EZ vowed to "refrain from competitive devaluation" of their currency during the G-20 meeting only last week. Other dovish statements were made by the ECB's Tumpel-Gugerell, who said that there still was room to continue rate cuts as a main policy option. Economic indicators may spur these plans into effect quicker than otherwise determined. EZ retail sales plummeted by the most on record on an annualized basis. In addition, producer prices fell more than expected, to -1.8%. Even though Trichet has consistently denied the presence of deflation, it is starting to make a much-defined appearance. Tomorrow's main event will be the EZ gross domestic product release.

GBP/USD: Awaiting Thursday's BoE Decision

GBP/USD lost its footing Tuesday after rallying for a total of five consecutive days. We caution that the pair may consolidate in light of Thursday's BoE meeting. Even though the bank has pretty much extended all options to the limit, there is still the potential for a market-moving announcement. Chancellor Alastair Darling's comments from the weekend are starting to have an effect on the currency, which retreated quickly after reaching three-week highs in Tuesday trading. Mr. Darling does not hold back in his predictions that 2009 would be a very difficult year. Even though this is not news to anyone, the comments certainly pose a psychological impact on a day that is in large part lacking any significant economic data. Tomorrow's schedule will be quite different. We are expecting several indications of how much growth deteriorated this month in the industrial production report and the NIESR gross domestic product estimate. We can assume that these reports will be on the top of the BoE's watch list, and may have an effect on the severity of any new announcements. Nevertheless, reports as of late have hinted toward some stabilization. If this is reflected in tomorrow's release, we may not have anything to expect from the rate decision.

USD/CAD: Canadian Quantitative Easing on its Way

Commodity currencies remain surprisingly mixed in today's markets. USD/CAD pushed higher by more than 100 pips after a consecutive four-day decline, while AUD/USD faces it second straight fall. NZD/USD on the other hand is still holding onto some strength, despite the fact that earlier rallies have almost completely sold off. It is becoming a widely held expectation that the BoC will promote their own version of quantitative easing by their next meeting. Even though Mark Carney warns that the plan is not a definitive choice, the bank is running out of options as rates have reached the pivotal 0.5% level. Nevertheless, the size of the program should not be as large as those being implemented by other nations. Canada still maintains a relatively well-positioned banking sector that may limit the severity of the proposed announcement. Canadian IVEY PMI showed its fifth straight decline while building permits fell to the lowest level in seven years. There is no doubt that these reports will have an implication for any such non-conventional policies during the BoC's meeting on April 21st. Of the central bank meetings expected for this week, it is doubtful that any will be watched as closely as the RBA's decision for tomorrow. There is much more uncertainty with their decision than for those from the BoE or BoJ (For more on the RBA's decision, check out our RBA preview below). New Zealand data will remain sparse for the next few days.

MORE: USD/JPY: BoJ to Take a Much-Needed Break |pagebreak|

USD/JPY is boosted for the third straight day. Intraday prices are maintaining at the 101.00 area, but have not made a sustained break through the level. The Bank of Japan's monetary meeting is currently underway. Even though many view the BoJ's meeting as a non-event for the currency markets since rates cannot be lowered any further, the bank has produced a consistent string of announcements. Of course, the main anticipation behind the meeting would be related to an expansion of the central bank's asset purchasing program as delegated by the quantitative easing initiatives. Even though we could see the program consider municipal bonds for purchase, the bank may keep things on pause for this month. The reason being is that Prime Minister Taro Aso is planning a new stimulus package to be formally announced next month. The bank may choose to wait it out in hopes that the new stimulus plan stabilizes conditions to the point where new government bond purchases may not be warranted. Nevertheless, economic indicators pointed to the downside today, with the leading and coincident indicators both posting worse-than-expected numbers. Tomorrow night, we will receive the current account and trade balance.

AUD/JPY: Currency in Play for Next 24 Hours

AUD/JPY will be the new currency pair in play. We have two big events for each country-their central bank rate decisions. The RBA will announce their decision at 12:30 am ET or 4:30 GMT. AUD/JPY has been in rally mode ever since the beginning of February, and has rightfully earned its spot in the Bollinger band buy zone. Nevertheless, the pair is approaching a very significant resistance level that may be enough to shut down any further rallies. Drawing a Fibonacci retracement level from the July 2008 highs to the late-October lows, we get a 38.2% retracement at 74.00. This level is particularly important due to the psychological relevance of the level. Support, on the other hand, should contain downward pressure at about 68.33, or the early-January high. It should be stressed, however, that the 74.00 level should be very significant. A break could see rallies extend conceivably to the 50% retracement at about 80.00.

AUD/JPY Chart:

By Kathy Lien, Director of Currency Research at GFTForex.com

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