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All Hands on Deck as Dollar Volatility Near-Guaranteed in Week Ahead

By , Quantitative Strategist
29 March 2013 22:28 GMT
All_Hands_on_Deck_as_Dollar_Volatility_Near-Guaranteed_in_Week_Ahead_body_Picture_1.png, All Hands on Deck as Dollar Volatility Near-Guaranteed in Week Ahead

All Hands on Deck as Dollar Volatility Near-Guaranteed in Week Ahead

Fundamental Forecast for US Dollar: Neutral

The US Dollar finished the month of March almost exactly where it began, but an impressive Q1 of 2013 suggests the Dow Jones FXCM Dollar Index (ticker: USDollar) could continue to fresh multi-year peaks as we enter the start of the second quarter on a critical week of forex market event risk.

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It will be a veritable alphabet soup of top-tier market events with highly-anticipated Bank of Japan (BoJ), European Central Bank (ECB), Reserve Bank of Australia (RBA), and Bank of England (BoE) interest rate decisions. The US Dollar may prove especially volatile on the all-important US Nonfarm Payrolls report (NFPs), and suffice it to say we can see big moves across key currency pairs.

The combination of this event risk and the start of new month and quarter creates a heightened sense of uncertainty, and it will be especially difficult to go into the week with a proactive trading plan. Forex seasonality studies will show that the beginning/end of the trading day/week/month/quarter/year is often a time for important market reversals and key tops/bottoms. Thus it’s no exaggeration to say that we’ll watch Sunday night into Monday for the first clues on how the Dollar might trade in the new quarter.

The importance of the coming week can’t be overstated for the US Dollar/Japanese Yen currency pair in particular given a hugely important inaugural meeting of newly-appointed Bank of Japan Governor Kuroda. Talk of aggressive monetary policy easing from Shinzo Abe—then the frontrunner to win Japanese elections and become Prime Minister—sparked the start of an impressive JPY downtrend which left the Japanese currency near significant lows across the board. Abe appointed an ultra-dove to head the BoJ in Kuroda, and the new governor has spoken openly about aggressive Quantitative Easing measures.

Expectations are one thing but actions are an entirely different matter. The BoJ is virtually guaranteed to announce new QE measures, but it’s honestly difficult to imagine that officials can match lofty expectations; the downtrodden Japanese Yen could surge against the US Dollar on any disappointments.

The key Japanese central bank announcement would normally be enough to call it a “critical” week for the US Dollar, but the addition of RBA, ECB, BoE, and US Nonfarm Payrolls puts it on another level. See individual Australian Dollar, Euro, and British Pound weekly forecast sections to find out more about why those interest rate decisions might shake those particular currencies (I only have so much space about USD pairs in this section and don’t want to give anyone the short shrift).

US NFPs can quite often spark big moves not only in the US Dollar but in global financial markets, and the surge in domestic hiring seen in February’s report puts special focus on whether March can match the promising signs of US labor market recovery. Consensus forecasts tell the story: analysts and economists tell Bloomberg News they expect a 198k additional jobs in March, and one outlier predicts a 410k jobs gain! At the risk of sounding like a broken record, expectations are one thing but actions are an entirely different matter. The Greenback could give back gainsif new data suggests February’s surge in hiring was not the start of a larger improvement for the all-important American consumer.

Even the die-hard of market technicians (or this quant) might concede that the coming week’s fundamental developments could determine the Dollar’s moves through the foreseeable future. But even if you don’t agree that a handful of events could determine market trends, the beginning of a new month and quarter means that markets are ripe for major reversals regardless. In a sense, technicians and macro (fundamental) traders can agree that the coming week could prove pivotal. We’ll need to wait and see how situations unfold before taking a strong stance, but suffice it to say we’ll be particularly attentive to market swings in the days ahead. - DR

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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29 March 2013 22:28 GMT