The week started with some agitation on financial markets with several currency pairs opening with large gaps from last week’s close. European Central Bank President Mario Draghi revived talk over more stimulus to help stem the rise of the single currency.
Tensions in Ukraine re-escalated, as armed pro-Russian separatists continue to seize control of government buildings in Eastern Ukraine. US President Barack Obama and Russian President Vladimir Putin held a tense phone call on Monday, without any substantial breakthrough. President Obama has told Putin to call off the separatists or face further sanctions. The Kremlin said that Putin told Obama Moscow was not interfering in Ukraine and invited Washington to use its influence to avert bloodshed.
While Washington is trying to add pressure on Russia by suggesting more economic sanctions targeted specifically on financial services and energy, its EU counterparts are only keen to expand the list of individuals under asset freezes and travel restrictions. Without the full support of the Chinese government and the EU, the current sanctions will have a limited impact on Moscow.
Meanwhile, Ukraine’s interim President Olexander Turchynov lashed out against “aggression” from Russia but conceded that he would support a national referendum, a key demand by protesters.
Gold benefits from safety-bid, but gains short-lived
The escalating tensions boosted demand for safe-haven assets and weighed on risk sentiment. Gold started the week sharply higher, and hit a three-week high by $1’331.23/ounce, compared to Friday’s close of $1’317.86. With Tuesday’s move to below $1’295, the bullion now looks set to resume its bearish path. The initial target for gold bears in the near-term will be $1’277.81, April 1st low.
The euro opened the week on a sluggish note, almost 30 pips lower against the dollar and just over 30 points against the Japanese yen. In fact, the yen benefitted from the weekend turmoil in Ukraine, as it opened the week. However, the risk adverse mood to start the week was offset later on Monday afternoon with strong advance retail sales data, which signaled a brighter outlook for the world’s largest economy.
Strong US data buoys Treasury yields, dollar
Advance retail sales rose to their highest in one and a half years in March, which boosted US Treasury yields and lifted the buck. The Bloomberg Dollar Spot Index edged 0.2 percent higher on Monday and extended its gains to 1’009.82 on Tuesday, after dropping to its lowest in a month last week by 1’004.20.
EUR/USD fell to 1.3790 on Tuesday, and looked set to extend its decline after CPI y/y in the US came in better than expected, at 1.5 percent versus market consensus for 1.4 percent. In the near-term the pair is expected to bounce higher, as forex traders will attempt to close the weekend gap. In addition investors will test the ECB to see if Draghi will put his money where his mouth is, with regards to more easing to curb the single currency’s strength. With a continued show of strength by the US economy, and an eventual easing in ECB policy coupled with the Fed’s tapering, we expect a decline in the medium-term for the EUR/USD pair. Support in the near-term is at the 1.3685 level, while targets for bulls will be the 1.3900 level before pushing higher.
Aussie and kiwi remain solid since start of the year
The Aussie and kiwi have been among the strongest performers this year so far, despite geo-political tensions, slower Chinese growth and credit concerns, and fears of less cheap cash due to Fed tapering. The Antipodean currencies have been buoyed by sustained economic growth and an end to interest rate cuts by the respective central banks. In fact, the Reserve Bank of New Zealand became the first central bank among developed nations to end its easing cycle and started to raise rates, while its Australian counterpart has spoken about bottoming of the country’s benchmark rate.
The Bloomberg Correlation-Weighted Currency Index shows the kiwi and Aussie as the best and second best performers, with a gain of 4.62 and 4.53 percent respectively. AUD/USD trimmed some of its gains at the start of the week, as China’s Shanghai Composite Index slipped sharply and the RBA reiterated that interest rates will stay on hold for the time being. However, continuing strong data from Down Under will undoubtedly put pressure on policymakers to rethink their stance on interest rates.
In the near-term AUD/USD should continue its bullish trajectory, and a sustained break of 0.9500/9540 will give scope for an acceleration towards 0.9757, October 2013 high. NZD/USD is also on a sustained bullish path, and traders will likely push the pair to test a multi-year high by 0.8843, hit in August 2011.
Technical Key points:
EUR/USD is bullish, target 1.4000, key reversal point 1.3700. EUR/GBP is neutral. USD/JPY is bullish, target 105.50, key reversal point 101. GBP/USD is bullish, target 1.6900, key reversal point 1.6250. USD/CHF is bearish, target 0.8575, key reversal point 0.9000. AUD/USD is bullish, target 0.9540, key reversal point 0.8900. NZD/USD is bullish, target 0.8850, key reversal point 0.8400.