Here’s Who Benefits From Dollar Weakness

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

The sellers are back and they have driven the lower against all of the major currencies. Thursday’s move had nothing to do with data or Fed speak. fell to a 5-week low, which should have helped rather than hurt the dollar. Instead, currencies continued to take their cue from equities with the dollar being sold in favor of risk currencies. The biggest beneficiaries of the dollar’s move were the , and dollars. Aside from the fact that AUD and NZD are risk currencies, the dollar’s decline is also positive for commodity prices.

Yet the failed to participate in the rally because of disappointing retail sales. Spending dropped -0.8% , which was significantly weaker than expected. , sales declined -1.8% versus a forecast for 0.3% – this was the biggest one-month decline since Jan 2015. USD/CAD actually came a long way from its high of 1.2758, driven in part by the jump in oil. rose nearly 2% on the back of an unexpected . On a technical basis, USD/CAD appears to have found resistance at the 200-day SMA near 1.2700 but it could still see one final push higher if Friday’s Canadian falls short of expectations. No data is due from Australia but New Zealand are scheduled for release and given the recent rise in , we believe that the data will surprise to the upside, which would be consistent with the technical outlook for NZD/USD. The pair bounced off the 20-day SMA and appears prime for a move back to 74 cents. could also move higher but there’s a lot of resistance near 79 cents.

is the only currency pair that is not benefitting from the improvement in risk appetite and rally in equities. We’ve seen this before when Treasury prices decline but Treasuries were higher Thursday so in some ways, USD/JPY’s breakdown defies logic. Its weakness can be explained by the prospect of greater issuance, ongoing anxiety in the financial markets and a trigger of stops below Wednesday’s low. USD/JPY has support at 106.50 but technically, the sell-off could extend back down to 106/105.75. We also have an eye on , which has more room to fall and is just beginning to turn lower after a 4-day rise.

shot higher on the back of the European Central Bank meeting “” and extended its gains when U.S. equities opened for trading. By then, investors completely forgot about the softer German that showed business confidence falling in February. Considering that sentiment hit a record high at the end of last year, the retracement does not necessarily reflect weakness in the German economy, which is why EUR/USD traders were able to overlook it quickly. The ECB minutes weren’t overwhelmingly hawkish but they were good enough to drive the currency higher. According to the report, ECB officials agreed that it was too early to adjust their forward guidance at their last meeting because patience and persistence is needed amid weak inflation. Yet some officials wanted to drop their easing bias on QE and they are likely to do so in the next 2 meetings. With all of the major Eurozone economic reports behind us, if stocks continue to recover, EUR/USD should recapture 1.24.

also recovered earlier losses to end the day in positive territory. was revised slightly lower due to lower exports but this backward looking report was quickly forgotten as the slipped lower. Investors are also thinking about the Bank of England’s hawkish comments, which should carry sterling upwards. GBP/USD is still hovering below 1.40 and while the lower highs/lower lows signals weakness, we think it’s only a matter of time before the pair finds its way back above 1.40. is still eyeing a move below 88 cents.