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How Low Can EURO, AUD, & GBP Go?

  • Kathy Lien
  • 18 May 2019

Daily FX Market Roundup May 17, 2019

Every one wants to know how low the euro, Australian dollar and sterling can go.All three of these currencies fell sharply last week and a few even hit multi-month lows in the process. Demand for the greenback was strong as the dollar held steady or traded higher against all of the major currencies. Although stocks rebounded over the past week, it will be difficult to convince anyone that growth prospects are good after the Chinese trade tariffs. Investors are rightfully nervous and it won't be long before central bankers express their concerns as well. The trade war is bad for the US and the rest of the world but there's no question that it hurts the US less, which explains why the dollar and stocks are up despite rising trade tensions.

The fear that growth in the Eurozone, UK, Australia and New Zealand could slow is the main reason why the currencies of these countries have performed so poorly.Central bankers have warned about trade uncertainty in the past month and now that we know the US and China are facing each other head on, the outlook only worsened. This morning China questioned the US' sincerity and who could blame them? They said it would be meaningless for Mnuchin to come and talk...because "The US does not show any sincerity in continuing talks... Instead, it is extending its pressure tactics. The US on one hand says it engages in talks, but on the other hand keeps using petty tricks to destroy the atmosphere for talks."

After this week's economic reports, the Reserve Bank of Australia will have no choice but to cut interest rates next month and follow with additional easing in the fall.Inflation expectations are falling, the unemployment rate is up and the economy is losing full time jobs. The market is only pricing in a 69% chance of a June rate cut but we think the odds are closing to 90-95%. The RBA had nothing good to say about the economy when they met earlier this month and the only reason why they held off was because they wanted to wait for Trump's decision. Trade tariffs, threat of more duties and breakdown in trade talks are the worst case scenario for China and Australia.   Next week's minutes should hurt rather than help the currency. AUD/USD ends the week at 4 month lows and we think it is inclined to test the 2019 flash crash low near .6750.

The New Zealand dollar has also come under heavy selling pressure, falling to its lowest level since October.So far this month, there's been only 3 positive days for NZD/USD. Investors shrugged off the uptick in manufacturing activity in favor of the decline in producer prices. The RBNZ cut interest rates this month and the market is pricing in a 65% chance of another round of easing this year. If the manufacturing sector improved, then the weakness must be in services so the risk is to the downside for next week's PMI report. The trade surplus should also normalize after last month's sharp rise. Retail sales could be better since card spending rose in Q1. Like AUD, NZD is destined to move lower but it could also find support sooner. 65 cents is an important level to watch for NZD/USD.

USD/CAD tested and rejected 1.35 for the third time in 4 months.Although consumer price growth slowed in April, the Canadian economy is outstripping its peers. Job growth is strong, house prices stabilized and manufacturing sales increased sharply in March. Existing home sales also picked up in April due to strong demand in Vancouver and Toronto. According to Bank of Canada Governor Poloz, growth should accelerate later this year. Therefore we may have seen a near term top in USD/CAD - the sharp reversal on Friday signals a further correction that could take the pair below 1.34.

Unlike some of the other major currencies, euro did not hit any milestones this week.However, there were no buyers in sight as EUR/USD fell each of the last five days. Data from the Eurozone hasn't been great but the slide in the euro has more to do with the market's concerns about the impact of slower global growth. The European Central Bank has been on the defense for most of the year, warning about these very same risks and unless US-China relations improve over the next few weeks, they won't have anything good to say when they meet in April. Concerns about future activity are so elevated that investors completely shrugged off President Trump's decision to delay auto tariffs for 6 months. This temporary reprieve sets up for a tense period of negotiations with Japan and the Eurozone. Eurozone PMIs and the German IFO report are scheduled for release in the week ahead. If the data is weak, we could see EUR/USD extend its losses to 1.10.

Last but certainly not least, sterling is hands down the weakest currency.It lost over 2% of its value versus the greenback, Japanese Yen, and Swiss Franc. There was very little data on the calendar outside of the labor market report which was soft but not abysmal. Jobless claims ticked up slightly, the unemployment rate improved but average weekly earnings fell sharply. For sterling, the biggest problem is Brexit. There's been no meaningful progress and Prime Minister May plans to submit the current Withdrawal Bill for a fourth vote. Sterling is under pressure because the lack of meaningful changes increases the risks of a no deal Brexit. Inflation and retail sales numbers are scheduled for release next week. Spending could actually improve but inflationary pressures should be muted. 1.2700 is an important support level for GBP/USD but it would not be unrealistic to see the pair drop below 1.26.

 

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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.