GO
Loading...

Commentary: No Dull Days Ahead for EUR/USD

One euro and U.S. dollar
AP
One euro and U.S. dollar

There has been no shortage of event risk these past few weeks. Despite this, the market has remained relatively resilient to risk-seeking, with the exception of a few bumps along the way.

This past week, market participants turned their focus from Japan back to the eurozone. However, even Portugal's political crisis and its resulting two-notch sovereign debt rating downgrade from Standard & Poor's and Fitch were not enough to derail the euro . This is likely due to the fact that market participants have anticipated for some time that Portugal may be the next country to seek assistance from the bailout fund. The euro also has been supported versus the US dollar due to interest rate differentials — expected monetary policy rate differentials — which currently are in favor of the euro. This is despite the fact that peripheral eurozone economies' 10-year yield spreads to Germany have continued to widen, indicating an increasing risk premia.

For some time, the euro has been subjected to these conflicting influences — one which supports the euro and one which weighs on it. Market participants' attention has switched from one influence to the other. However, as stated above, EURUSD is currently following the spread in short-term interest rates, rather than the widening peripheral eurozone economies' yield spread to Germany.

This has been the case since ECB President Trichet's March 3 press conference, in which he used the words "strong vigilance" — the signal that the ECB, barring any major event risk, will hike its policy rate at its next monetary policy meeting in April. This stands in marked contrast to the Fed, which is still undertaking its second round of quantitative easing. As a result, EURUSD has been supported.

In terms of EURUSD trading, there are a number of events, most in the second quarter, that will have effects. Very near-term, it will be important to look for the reaction to Friday's EU leaders' summit regarding any specifics from that meeting. In the second quarter, at the April 7 ECB meeting, a 25bp rate hike is expected. Trichet's tone at the press conference that follows the policy announcement will be a market mover, as he may or may not allude to further consecutive rate hikes.

If he does not, the euro could sell off after the April rate hike, at least temporarily, as the market would have gotten its expected result and nothing more—and profit-taking would ensue.

Turning to the US dollar, the March US payroll employment report, to be released on April 1, looks like it will show another solid monthly gain. However, that will likely not be enough to price in meaningful Fed rate hikes yet, as the Fed is still in quantitative easing mode. April 27 will be an important day as the FOMC decision will be released.

However, more importantly, it will be Chairman Bernanke's first quarterly press conference following a FOMC meeting. He will explain both the updated Fed economic forecasts and provide additional insight into the FOMC decision. Market watchers will be on the edge of their seats for this event — a big step in Fed communication policy.

Last, but certainly not least, QE2 is scheduled to roll off at the end of the second quarter. Perhaps that, combined with stronger US economic data, will be a catalyst to boost the US dollar.

Those market event risks keep coming — no dull moments in the second quarter.

Amelia Bourdeau is a Director in the Foreign Exchange group at Westpac Institutional Bank, where she advises and assists Westpac's foreign exchange client base.

CURRENCY FUTURES

Tune In: CNBC's "Money in Motion Currency Trading" airs on Fridays at 5:30pm.

"Money in Motion Currency Trading" repeats on Saturdays at 7pm.

Featured