Dollar Sees End of Week Profit Taking but Uptrend Intact | DZHI - DZH International 
logo

Dollar Sees End of Week Profit Taking but Uptrend Intact

  • Kathy Lien
  • 28 April 2018

Daily FX Market Roundup 04.27.18

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management

 

End of week profit taking prevented the U.S. dollar from extending its gains on Friday despite stronger than expected first quarter U.S. GDP growth and an upward revision to the University of Michigan's consumer confidence index. With that in mind, steady growth and rising inflation expectations should foster further gains in the dollar next week as investors are convinced that the Federal Reserve will use the May meeting to prepare the market for a June hike. Every U.S. policymaker who has spoken this month was in favor of more tightening. Traders should expect the dollar to continue to drive currency flows in the week ahead. There's a Federal Reserve meeting on Wednesday and non-farm payrolls report on Friday. Having just raised interest rates at their last meeting, the Fed has no plans to follow up in May but Fed fund futures show a 93% chance of a quarter point rate hike the following month when economic projections are updated and Jerome Powell holds a press conference. U.S. policymakers have been vocal about their desire to raise interest rates at least 3 times this year and the data improvements since the last policy meeting gives them the confidence to take action in the summer. Central bankers always prefer to minimize volatility on the day that a policy change is made, so if the Fed is serious about a June hike, they will signal their intention at Wednesday's meeting which would send the dollar even higher.

However if they don't commit to a rate hike and instead express concerns about the rise in yields and its impact on financial market conditions, the dollar will fall quickly and aggressively as investors are heavily positioned for hawkishness. USD/JPY, which could hit 110 before the rate decision would sink back to 108. Since there is no press conference, for the dollar to hold onto and extend its gains, the FOMC statement needs to be unambiguously positive. Meanwhile don't expect as big of a reaction to this month's non-farm payrolls report because it will be released after FOMC and only be used to confirm or challenge the central bank's guidance. Investors should also keep an eye on U.S. yields as they will determine if the dollar extends its gains ahead of the Fed meeting.

The euro simply couldn't overcome the dollar's strength this past week. The single currency closed in on its 4 month low on Friday despite stronger Eurozone confidence, healthy German labor data and optimistic comments from European Central Bank President Mario Draghi. The problem for the euro is that the ECB is expected to trail behind the Fed so if the U.S. central bank is hawkish, the EUR/USD could break 1.20. While the euro will its cue from the market's appetite for U.S. dollars investors will be eager to see if the inflation and GDP reports show the improvement that Draghi is noting.

Meanwhile sterling fell to a 1 month low against the U.S. dollar on Friday following a softer first quarter GDP report. The U.K. economy expanded by only 0.1% on the first quarter causing year over year growth to slow to 1.2%, its weakest level in 5 years. This report validates Bank of England Governor Carney's concern that the market was getting ahead of itself with their expectations for a May rate hike. Since his speech just over a week ago, the odds of tightening in May have fallen from 90% to 24%. In the week ahead, investors will be watching the PMI reports to see if there have been any improvements that could validate the 2 dissenting votes that favored a rate hike at their last meeting. If the PMIs continue to miss, GBP will fall further but if the tide starts to turn and manufacturing or service sector activity recovers, sterling will rebound as rate hike expectations adjust again.

After selling off sharply this past week, all 3 commodity currencies rebounded on Friday with the Australian dollar leading the gains. AUD shrugged off a weaker producer price report, which wasn't a surprise after Monday's lower CPI report. The New Zealand dollar stabilized despite an unexpected trade deficit caused by a jump in imports and a surprisingly large drop in consumer confidence. The Reserve Bank of Australia also has a monetary policy announcement and in contrast to the Federal Reserve, the latest inflation reports give the RBA reason to remain dovish. There's no RBNZ meeting but data has taken a turn for the worse since the last policy meeting with inflation falling to the bottom of the RBNZ's target so the downtrend for both currencies should remain in tact.

In contrast the Canadian dollar could experience further gains in the week ahead. Although USD/CAD hit a high of 1.29 this week, it rejected that level on the prospect of a NAFTA deal and less dovish comments from the Bank of Canada. At their last policy meeting, BoC Governor Poloz and Deputy Governor Wilkins outlined their dovish bias but their tone seems to have changed this past week. In a speech to the Financial Committee, Poloz said inflation is on target and the economy is close to potential. With a NAFTA deal imminent, we expect the Canadian dollar to outperform in the week ahead as long as GDP, the trade balance and IVEY PMI reports don't disappoint in a significant way. USD/CAD will be affected by the U.S. dollar's reaction to FOMC and NFP but on a relative basis, it should outperform EUR, AUD, NZD and possibly the JPY. 

 

 

For more information, they can be reached at http://www.bkforex.com/.

 

The information, including Commentary and Trade Ideas, provided on BKAssetManagement.com should not be relied upon as a substitute for extensive independent research which should be performed before making your investment decisions. BKForex Advisors LLC and BKAssetManagement.com are merely providing this information for your general information. The information and opinions presented do not take into account any particular individual's investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision and should tailor the trade size and leverage of their trading to their personal risk appetite.

BKForex Advisors LLC will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained on BKForex Advisors LLC. BKForex Advisors LLC do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.


About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.


Articles:

Materials: