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- Euro Breaks Below 1.3000 - German ZEW Survey Could Impact Trade on Tuesday
- British Pound Tumbles Against Safe-Havens - UK CPI May Fall Back Into BOE's Inflation Target Range
- Canadian Dollar Under Pressure Ahead of Bank of Canada Rate Decision - What to Expect
US Dollar, Japanese Yen Rally on Flight-to-Quality as Investors Fear Results of US Bank Stress Tests
The US dollar and Japanese yen surged on Monday as risk aversion shook the markets once again. Indeed, there is substantial uncertainty about the health of the financial markets as the US government performs stress-tests on the 19 biggest US financial institutions, and the results will not be announced until May 4. Until then, investors could remain jittery, especially when they see announcements like the one released by Bank of America today, as they said the net charge-off rate rose to 2.85 percent from 1.25 percent a year earlier, while credit-card losses increased to 8.62 percent from 5.19 percent. With the US recession lingering on and job losses accelerating, banks may find that they are persistently weighed down by consumers' inability to pay.
Meanwhile, the Conference Board's US leading economic indicators index for the month of March fell 0.3 percent to a more than five-year low of 98.1, marking the seventh consecutive month that the index failed to improve. A breakdown of the report shows that nearly every component contributed to declines, including the average workweek, jobless claims, pace of deliveries, non-defense capital goods orders, building permits, and stock prices. That said, this report is still a lagging indicator but does add to evidence that Q1 GDP for the US could be disappointing. That said, the rally in the DXY index today highlights the fact that the US dollar remains very much within an uptrend. Furthermore, based on the many bearish breaks we've seen in the Japanese yen crosses, including AUD/JPY, EUR/JPY, and USD/JPY, it looks like both of these low-yielding currencies could be in for further gains, especially if risk aversion remains a market-wide theme.
Related Article: DailyFX Trend Report
Euro Breaks Below 1.3000 - German ZEW Survey Could Impact Trade on Tuesday
The euro fell almost 1 percent against the greenback and over 2 percent versus the Japanese yen on Monday, but for what it's worth, the currency escaped some of the more severe declines experienced by the commodity dollars, especially the higher-yielding Australian dollar and New Zealand dollar. Looking to EUR/USD, the pair broke below key support at 1.2950, leaving the door open to further declines toward 1.2740 in the near-term. There wasn't much in the way of economic data from the Euro-zone, but this will change on Tuesday as the release of the German ZEW survey of investor sentiment for the month of April is anticipated to reflect mixed sentiment on current conditions and the economic outlook. Indeed, the index of sentiment on the current situation is forecasted to fall to a more than 5-year low of -90.0 from -89.4 while the outlook is projected to rise into positive territory for the first time since July 2007. This report can be market-moving for the euro on a very short-term basis upon release at 5:00 ET, with disappointing results likely to weigh on the currency. On the other hand, better-than-expected data could provide a bit of a boost for the euro.
British Pound Tumbles Against Safe-Havens - UK CPI May Fall Back Into BOE's Inflation Target Range
Like the euro, the British pound fell hard against the Japanese yen (-3.09 percent) and US dollar (-1.77 percent), but held up well against the Australian dollar (+1.87 percent) and New Zealand dollar (+1.00 percent). Looking to EUR/GBP, the pair managed to bounce from the 50 percent fib of 0.7809-0.9805 at 0.8807 while GBP/USD broke below trendline support at 1.4675 and ended the day just above the 38.2 percent fib of 1.3655-1.5070 at 1.4530.
Where EUR/GBP and GBP/USD go on Tuesday may hinge upon the release of the UK's consumer price index (CPI) for the month of March, which is expected to rise 0.2 percent, the second straight increase. However, the annual rate of growth, which is more closely watched by the Bank of England, is forecasted to fall back into the central bank's inflation target range of 1 percent - 3 percent for the first time since March 2008 to 2.9 percent. If CPI falls more than forecasted, the British pound could pull back sharply as the markets will anticipate that the BOE will expand their quantitative easing efforts. On the other hand, if CPI holds strong, the currency could rally in response.
Commodity Dollar Plunge, Canadian Dollar Under Pressure Ahead of Bank of Canada Rate Decision - What to Expect
The Canadian dollar was hit hard on Monday, but the currency fared a bit better than the higher-yielding commodity dollars. In fact, the Australian dollar plummeted 5 percent against the Japanese yen and close to 4 percent versus the US dollar. Likewise, the New Zealand dollar plunged 4 percent against the yen and nearly 3 percent versus the greenback. With risk aversion back in play, the comm block could remain under pressure, especially against the safe-haven currencies. The Canadian dollar will face its own event risk on Tuesday at 9:00 ET as the Bank of Canada is expected to leave rates unchanged at 0.50 percent, according to a Bloomberg News poll of economists. As it stands, economic conditions continued to deteriorate throughout Q1, as Ivey PMI has held below 50 for the fifth straight month in March, signaling a contraction in business activity, while the unemployment rate climbed to a seven-year high of 8.0 percent. That said, the Canadian dollar's reaction may hinge more upon the policy bias contained within the Bank's concurrent press release. From a technical perspective, USD/CAD is currently testing former support (now resistance) at 1.2392/1.2400 and whether or not we see a break higher may depend on the Bank of Canada's stance tomorrow. Looking to shorter-term hourly and 240-minute charts, RSI is now in overbought territory above 70, suggesting the pair may be due for a retracement lower in the near-term.
Ultimately a surprise rate cut, signs that the Bank of Canada holds a dovish outlook, or comments about quantitative easing could send USD/CAD above noted resistance for a test of the 61.8 percent fib of 1.3065-1.1981 at 1.2647. On the other hand, indications that the Bank will leave rates unchanged going forward could lead USD/CAD back down toward 1.2000. Traders should also keep the link between oil prices and the Canadian dollar in mind, as the correlation between the two is at its highest in at least 10 years.
Related Article: Bank of Canada Interest Rate Outlook
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Written by: Terri Belkas, Currency Strategist for DailyFX.com