EUR/USD: Support Turns To Resistance

EUR/USD Short-Term Outlook: Data And Levels

After big moves in the EUR/USD on Monday the currency pair traded in a narrow range Tuesday. There were no major euro zone economic reports on the calendar, leaving traders watching the headlines for fresh news out of Cyprus. What we know is that banks will remain closed until Thursday, capital controls will remain in place for “weeks” (likely months), Fitch is at the brink of downgrading Cyprus after putting it on credit watch negative and the Bank of Cyprus -- the country’s largest -- has refused to accept the resignation of its Chairman and four directors. None of these developments is particularly surprising as the deal that Cyprus made will be one that it continue to pay for in the years to come.

What the government and markets are worried about now is how ugly things will get when banks reopen on Thursday. Local banks have contracted G4S, the world’s largest security firm to replenish and guard bank machines. We don’t expect much chaos but at bare minimum we expect the EUR/USD to remain under pressure until Thursday. 1.2880 was the key support level for the EUR/USD and now that it has been broken, that level has turned into resistance.

For the technicians out there wondering why this is an important level, it is where the 200-day SMA and the 50% Fibonacci retracement of the July 2012 and January 2013 rally converge. If the EUR/USD fails to recapture this level in a meaningful way, it could be on its way to support at the November low of 1.2660. In the near term, all eyes are on euro-zone data. German consumer confidence numbers are scheduled for release Wednesday along with euro zone sentiment indicators. Between Italy’s failed election in February and Cyprus’ problems in March, there are plenty of reasons why business and consumers may have grown more pessimistic. Aside from recent deterioration in Germany, the labor market in France remains weak, leading to anemic growth in the region’s second largest economy. The combination of weaker economic data and continued uncertainty could put additional pressure on the EUR/USD, driving it down to its next support level.

USD: Four Fed Presidents To Speak On Wed

It was another mixed day for the U.S. dollar. While stocks resumed their rise the greenback strengthened against the Japanese Yen and British pound but weakened against the euro and comm dollars. The calendar was heavy with U.S. data and there were both surprises and disappointments. For the Federal Reserve, the lack of consistent improvements in the economy is one of the main reasons why weaning off QE is a long-term discussion. Thinking about the exit is the right thing for the Fed to do but it is still miles away from acting on it. Of all the economic reports released Tuesday, consumer confidence is the most important and unfortunately the Conference Board’s index dropped from 68 to 59.7 in the month of March. This decline was consistent with the deterioration reported by the University of Michigan and Investors Business Daily who both cited concerns about labor market conditions and the sequester. Weaker confidence could weigh on consumer spending at the end of the first quarter. New home sales also dropped 4.6% in February but this decline represents a correction after the sharp 13.1% rise in January.

The beginning of the year was a good one for the labor market with house pricing rising 1.02% according to S&P/Case-Shiller, the strongest increase since June 2006. Durable goods orders also jumped 5.7% in the month of February. This increase was more than anticipated and driven largely by a 95.3% rise in commercial aircraft orders. Demand for autos also rose 3.8% but excluding transportation orders, durable goods fell 0.5%. Durable goods can be extremely volatile and therefore we caution traders against reading too much into these numbers because the changes this month mostly reflect a payback from last month. Pending home sales are due for release Wednesday along with comments from Fed President Rosengren, Pianalto, Potter and Kocherlakota. Of these four central bank officials, Rosengren is the only FOMC voter and his comments are usually dovish.

GBP: Hit By Surprise Disappointment In Data

The British pound traded lower against the U.S. dollar and euro after the Confederation of British Industry released a disappointing retail sales report for the month of March. Economists were looking for a sharp improvement in spending but the index of annual sales growth dropped from 8 to 0. This is the weakest reading in seven months and bodes poorly for the broader retail sales index. The only silver lining was in expectations -- retailers expect sales volume to pick up significantly in April. Unfortunately based on this report, we are worried that the 2.1% increase in retail sales last month will not be sustained in March. Fourth quarter current account and final GDP numbers are due for release Wednesday. No growth revisions are expected but the current account deficit could shrink to -12.5B from -12.8B.

CAD: Three Reasons For The Rally

For the fifth consecutive trading day, the Canadian, New Zealand and Australian dollars powered higher against the greenback. The CAD benefitted from three distinct factors -- an unexplained 1.4% increase in oil prices, risk appetite and expectations for a stronger inflation report on Wednesday. Economists are looking for consumer prices to jump 0.7%, after growing a mere 0.1% the prior month. We agree that price pressures in Canada have increased and if the data validates everyone’s views USD/CAD could drop to 1.0120, the 50-day SMA. The Australian dollar tested 1.05 but has so far failed to break above this level -- but we think it is only a matter of time before a break occurs. RBA Governor Glenn Stevens spoke last night but he made no particular comments about monetary policy. The RBA’s half yearly Financial Stability Review is due this evening which could be a trigger for a break above 1.05 as long as the central bank does not sound overly cautious or warns about the negative consequences of a strong currency. The New Zealand dollar on the other hand rose to a one month high on the back of stronger trade numbers. The country turned a 414 million trade surplus after reporting a -287 million deficit in January. Exports increased sharply while imports declined slightly. Business confidence numbers are due for release this evening and we expect the data to on continue to support gains for the NZD/USD.

USD/JPY: Finally Some Help from Kuroda

Japanese Yen crosses received a boost Tuesday from the rally in U.S. equities and overnight comments from the Bank of Japan Governor. During his Parliamentary testimony, Kuroda sounded optimistic about the economy and committed to easier monetary policy. He said the economy has stopped weakening and showed positive signs of improvement. The weaker Yen helped to boost corporate and household sentiment but uncertainties are high for Japan’s economy and therefore the BoJ will need to do whatever it takes to end deflation. More specifically, the central bank plans to discuss different ways to lower the yield curve including extending bond maturities in their asset fund along with increasing purchases of long term bonds. He expects to achieve their 2% inflation goal in two years but admitted that they may not be able to accomplish this goal through monetary policy alone. No Japanese economic data is scheduled for release Tuesday but last night, we learned that small business confidence increased in March while inflationary pressures ticked higher in February. Unfortunately neither one of these reports lent much support to the Yen.

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