UBS - "The dollar has reached a major turning point against the euro. For the first time in eighteen months, relative central bank balance sheet growth is favouring the greenback as the Federal Reserve tapers its asset purchases. At the same time the European Central Bank's balance sheet contraction is also slowing as commercial banks cut their repayments of Longer-Term Refinancing Operation loans. Since the 2008 financial crisis such shifts have led to major turning points in the currency markets.
Furthermore, this month's Federal Open Market Committee meeting has primed the dollar for a major rally over the next few weeks by signaling that the first Fed funds rate hike may only be one year away now. Thus a strong payrolls release in the week ahead has the potential to induce a major move in the greenback, particularly as the latest data suggest America's economy is emerging from its winter slowdown. This week's key points for currencies are:
- strong payrolls would spark sharp dollar rally
- ECB to keep talking euro down but not ease policy
- Tankan key in the week ahead for yen
- MPC hawks likely to stay in the minority, fade Cable
- Swiss balance of payments key in the week ahead
- RBA to retain moderately bearish view on currency
- Australian banks hold one key to AUDNZD basing
- Canadian dollar's reprieve only temporary"