Diverging Paths of Central Banks will Drive Currency Action

Diverging Paths of Central Banks will Drive Currency Action

Central bank policy paths will be the key dynamic over the next few weeks and the diverging course between the two major banks, the FOMC and the ECB will make it difficult for the markets to stabilize. The strength in the U.S. labor market in February set the stage for removal of patient at the March 17, 18 Federal Reserve meeting and puts the FOMC on course to begin normalizing rates.

The BoE is also on course to hike rates, but not until much later in 2015, if not 2016. In sharp contrast, the ECB will begin its QE purchase program on Monday. Meanwhile, the PBoC cut rates further last week and remains biased toward easing, with the BoJ remaining

in ultra-accommodative mode too. RBI surprised last week with another intermeeting cut as it looks to head off deflation. And though the RBA surprised with a steady policy stance, though it maintained a very dovish posture.

U.S. Treasury yields surged sharply higher Friday with the 10-year hitting 2.25% after February job growth beat expectations as payrolls rose 295k and the unemployment rate fell to 5.5%. Those stats were sufficient to solidify expectations the FOMC will eliminate patient from its statement at the March 17, 18 policy meeting. However, other key data in the report weren’t as strong and highlight the tale of two labor markets as wages remained soft and the labor market participation rate slipped lower. With inflation likely to remain well below the FOMC’s 2% target over the next several months, while GDP growth looks to slow to the low 2% area, the more dovish on the Committee may not confident enough to start to boost rates by June. The markets will try to equilibrate this week amid various crosscurrents, including the hawkish Fed outlook, upcoming supply, along with increased stimulus from the rest of the world.

The EUR/USD hit fresh 11-year lows on Monday but seemed to retrace its gains during the European trading session. The currency pair is clearly oversold with the RSI (relative strength index) printing a reading of 25, which is below the oversold trigger level of 30 and could foreshadow a correction. Resistance is seen near the 10-day moving average at 1.1060.

Divergencing Paths of Central Banks will Drive Currency Act