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Weekly Update for April 27, 2015

Posted By John Min, PhD, Tuesday, April 28, 2015

USD: Dollar rally slumps

The economy slumped last week when the market realized that the strong dollar continues to create drag on growth. Durable Goods Orders – purchases lasting two to three years such as appliances and trucks – rose in March from the previous month. But, when volatile transportation components are stripped away, the core orders surprisingly dropped 0.2% in March. This was the largest monthly drop since December 2012, and the 6th consecutive decline in so many months. This doesn’t bode well for those who want the Fed to hike the rates this year.


This week, the 1st quarter Gross Domestic Product report will be released on Wednesday morning, followed by the Fed’s policy statement. I have no doubt the market will be parsing the statement to see if the Fed is concerned about the dollar’s impact on the economy. And if they are, I expect the dollar to set new lows this week.

EUR: Greek bailout drama continues

The euro climbed to a near 2-week high last week despite the Eurogroup refusing to give any bailout loan to Greece. Apparently, Greek Finance Minister Varoufakis took a “hammering” on Friday for a lack of details on his proposed austerity program.

The next meeting is scheduled for May 11th. Coincidentally, a cash-starved Greece has to make €780 billion debt payment to the IMF on the following day. So, I expect the Greek debt crisis will continue and cap the euro at the current level.

Meanwhile, the April Purchasing Manager Index measures missed the market expectations last week. It seems the recovery is lacking momentum despite record bond purchasing and low-interest rates. And, on Wednesday, we’ll see if there is any sign of a pickup in consumer inflation.

GBP: The pound may go higher

The pound climbed to a 7-week high last week. The Bank of England’s April meeting minutes were surprisingly upbeat. In fact, policy makers specifically noted that the currency strength may have already fed through the economy, implying that this will put less downward pressure on prices.

So, when the effects of recent declines in energy prices fade in the coming months, the prices should pick up faster toward the bank’s target rate of 2%. This suggests that the Bank’s next policy move will likely be a rate hike. And, this will be pull the pound higher towards its fair value.

This week, we have the first release of Q1 Gross Domestic Products report tomorrow. If the report shows a strong growth, then I expect the pound to climb higher despite the concerns over the May 7th election.

CAD: As oil prices go up, the loonie could follow

The loonie traded sideways near a 4-month low last week. Bank of Canada Governor Poloz’s recent comments have been more upbeat, which actually doesn’t surprise me. Spring economic data has turned markedly positive, suggesting that the negative impact of lower oil and commodity prices may be dissipating.

So, I’m betting that the Bank will refrain from making another rate cut to see if the data continues to improve in the coming months. And, if oil prices recover particularly in response to a surge in summer driving demand then the currency pair has a good chance of going lower.

This week, the February Industry Gross Domestic Product report will be released on Thursday. I expect to see the last of a negative month-on-month growth rate. Stay tuned.

AUD: Reserve bank may surprise the market - again?

The Aussie dollar climbed last week on the speculation that the Reserve Bank may refrain from cutting the bank rate on May 5th.

If the speculation turns out to be correct, it’ll be a big surprise because most investors have already priced in another rate cut. The latest Bloomberg survey reported that 23 of 26 analysts expect the Reserve Bank of Australia to cut rates on May 5th. And, the futures market has already priced the rate cut.

But there is no sure thing in the currency market. The Reserve Bank surprised the same analysts in March by not cutting the rate. So, I’ll be paying close attention to the Bank Governor speech today to see if the speculation has any merit.

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