Be careful, dollar may retrace

After a strong rally on Friday, everyone is asking will the US dollar pick up more?  The short and easy answer is yes.  Most analysts expect the dollar to set new highs this year.

Of course, a difficult challenge for those who forecast currency movements is correctly estimating when the expected movements will happen.  Most analysts are expecting this Thursday’s February Retail Sales Report to be that spark that pushes the dollar to new highs.

The market is expecting a pick-up of 0.8 percent month-on-month in retail sales in February. This will be a welcome news considering retail sales declined in January and December, despite improving job market conditions and low gas prices.

I prefer not to make a contrarian call.  However, I remain cautious this week for the dollar. The recent Fed data suggests that consumers have been increasing their saving instead of spending their extra income.  As a result, there is a good chance that the market will be disappointed on Thursday. The February producer inflation report on Friday is expected to show dis-inflationary data.

 

Euro as risk of another plunge

The euro plunged into an 11-year-plus low territory against the dollar and the pound last week. After its monthly monetary policy meeting on Thursday, the European Central Bank President announced that the bank will start on Monday its €60 billion-a-month bond buying program.

This announcement drove Eurozone interest rates to record low levels, compelling investors to move their savings into more speculative assets such as stocks, corporate bonds and overseas investments.

This week, I believe that the euro is at risk of falling deeper.  The Eurogroup will be meeting Monday to review Greece’s 11-page proposal of budget reforms as part of its bailout extension agreement.  If there is no acceptance this week, then the euro crisis could return as fast as it receded.  Why? Greece is running out of cash.

There are no major economic reports or events scheduled for this week.

 

For the pound to rally, need higher wages

The pound remained strong last week except against the US dollar.  In particular, the EUR-GBP posted a new 7-year low on Thursday amid a poor euro performance after the ECB monetary policy announcement.

That said, my research notes indicate that the pound lost its shine last week. The February Halifax house price and general services activity reports failed to live up to the market expectations.  Additionally, with the inflation rate running well below the central bank’s 2 percent target rate, most analysts expect the Bank of England is in no rush to tighten its monetary policy this year.

Of course, my not-to-rosy view could change if real wages that have been consistently dropping since 2010 shows a recovery in the coming months.  Meanwhile, the Institute for Fiscal Studies reported last Thursday that a mid-range household’s income between 2013 and 2014 was 6% below its pre-crisis peak.

This Thursday, January Industrial Production and Trade Balance reports will be released.

 

CAD:  Loonie could continue to erode

The loonie continues to erode little by little as a string of economic data depicts an economy that is struggling to cope with falling commodity prices and slow growth overseas.

Canada’s January export volume fell by 1.4 percent month-on-month.  As for oil, the export value fell by 23 percent, underscoring how low oil prices continue to be a drag on the economy.  Consequently, the growth is forecast to slow during the first quarter of this year to 1.3 percent from 2.4 percent in the previous quarter. And compounding this problem, WTI oil prices moved back below $50 per barrel last week.

The market will be paying close attention to Friday’s February employment report this week. The market is expecting a modest increase of 5,000 new jobs and that the unemployment rate remain unchanged at 6.6 percent.

My forecast,based on the Bank of Canada’s monetary research notes and statements, suggests that the loonie is at risk of eroding even more this week.  The Bank’s March 4th statement says, “Most of the negative impact from lower oil prices will appear in the first half of 2015.”  Hence, I expect this Friday’s employment data will disappoint the market.  Stay tuned.

 

Poor Aussie dollar, tough times

It is hard to believe that the Aussie dollar has settled near a 15-year low against the dollar last week.  The Aussie dollar has been tracking global commodity prices and has depreciated about 25 percent since last year amid falling exports at home.

Will the Aussie dollar go lower? I don’t see how commodity prices will pick up anytime soon. Australia’s number one export customer is China, and it’s targeting a 7.0 percent growth rate for next year.  This represents the slowest rate of expansion in 20 years.

As consequence, my short term forecast for the Aussie dollar remains bearish. This does not mean the dollar will necessarily fall more in the short term.  The last week’s Reserve Bank of Australia monetary policy statement indicates the dollar is “much, much closer” to where it needed to be for now.

Hence, the Aussie dollar may have found a temporary support. This could change when the February employment report is released on Thursday.  If the employment data fails to stabilize then the dollar may have to move lower to where it is needed.