US Dollar Turn Can Forge Trend on Fed Decision, NFPs, 2Q GDP
Fundamental Forecast for Dollar:Bullish
The Dollar advanced this past week – with remarkable progress from EURUSD and GBPUSD – despite a tepid fundamental backdrop
Event risk fills out this week with high profile events like the FOMC Decision, NFPs, and 2Q GDP to spur rate forecasts and risk trends
Watch the volume on dollar-based majors with the release of NFPS using the FXCM Real Volume indicator
There was little in the backdrop that should have meaningfully bolstered the US Dollar. Interest rate expectations measured through yields and Fed Fund futures were stagnant. Meanwhile, sentiment trends came nowhere near the necessary risk aversion intensity to spur a demand for the haven’s liquidity. And yet, the greenback put in for a meaningful turn. From the precipice of breaking a 17-month range support, the Dow Jones FXCM Dollar Index (ticker = USDollar) has climbed. From the majors, that has manifested in a EURUSD break to 8-month lows below 1.3500 and a tentative GBPUSD reversal back below 1.7000. However, this turn is not yet a reliable trend that can override the general lassitude in financial markets. Yet, that may change in the turbulence of this week’s packed calendar.
Though there is a flood of top-tier US event risk penciled in this coming week, three particular releases stand out: the second quarter US growth report (US 2Q GDP), the FOMC rate decision and July nonfarm payrolls (NFPs). These are not only high-profile events with a history of induced volatility, but they are capable of shaping the FX market’s most prominent fundamental themes: interest rate expectations and sentiment trends. Between these two overriding fundamental subjects, the timing and pace of the Fed’s monetary policy is more susceptible to change. Yet, should one or more of these events strike a risk nerve, the potential is far greater.
The major event risk will be split into two discrete sessions: the New York sessions on Wednesday and Friday. And, with all of these events, there is worth noting that there is a skew of possible impact to certain outcomes. In the first round of event risk, we have the growth report and policy decision. This past week, the IMF downgraded its 2014 GDP forecast sharply (2.8 to 1.7 percent) after the unexpected 1Q contraction. This tempers expectations even though the Fed and market have maintained optimism for a quick rebound in the 2Q. We will see if that is the case, but a disappointment could be the greater surprise here than a rebound that meets or outpaces expectations. Yet, a weaker pace of recovery is unlikely to materially shift the need for policy normalization. So GDP may prove a more capable risk driver.
Later in the same session, this FOMC rate decision will not provide the updated forecasts (on employment, inflation and interest rates) nor Chairwoman Janet Yellen’s press conference. That means, we are left to an expected Taper – third to last if their pace holds – and evaluating the monetary policy statement for tone. The central bank has remained elusive on their timing for a policy shift and its subsequent pace – at least that‘s how markets seem to be treating it. Policymakers cannot pre-commit or they would risk a causing a greater surprise should conditions change and warrant a different policy approach. That said, the interest rate forecasts (often referred to as the ‘blue dots’) are fairly straightforward. They project a first hike in mid-2015, a benchmark rate of 1.12 percent by end of 2015 and 2.50 percent by the close of 2016. Yet, Fed Funds futures, swaps and yields are all discounting that tempo. That is a lot of room to close the gap.
Should the combined outcome for the FOMC and GDP leave the market on the fence, the tension will be particularly high for Friday’s NFPs. Yet, the jobs data isn’t only one facet to a more complete picture to develop that day. The Fed’s two primary policy mandates are maximum employment and stable prices. The labor statistics are a clear rudder for the former. Yet also due Friday is the personal consumption expenditure (PCE) report for June. This is the Fed’s preferred inflation measure – rather than the CPI. Where the FOMC decision can seem vague, the combination of these two indicators is straightforward. – JK
Euro Starts to Slip Under Weight of Falling Inflation Expectations
Fundamental Forecast for Euro: Neutral
- The daily sell signals seen in EURJPY and EURUSD on July 11 started to play out bearishly.
- EURUSD faces significant trendline support from the July 2012 and July 2013 lows.
- Have a bullish (or bearish) bias on the Euro, but don’t know which pair to use? Use a Euro currency basket.
The Euro’s price movement this past week by no means screams ‘the period of low volatility has ended!’ but there are definitely signs of markets coming unstuck. The 18-member currency was broadly under pressure over the past five days, losing ground to all of the majors but for the CHF (+0.08%) and NZD (+0.78%); against the five other majors, the Euro’s losses ranged from -0.46% (GBP) to -0.63% (CAD). Still, there hasn’t been one definitive event to kick off the latest round of Euro weakness.
The outside pressures that may be dragging down the Euro by proxy – vis-à-vis the Euro’s pairings with the British Pound and the US Dollar – are still the most prevalent influences on the EUR-complex. The Bank of England’s low interest rate policy may start to come under more pressure now that inflation readings have started to pick back up, while the Federal Reserve may be closing in on the end of QE3 sooner than market participants have priced in.
The influence of the Euro’s own central bank is very much in flux. One perspective dictates that the European Central Bank has opened up the floodgates for monetary easing, by lowering the interest rate corridor into negative territory and promising targeted liquidity measures (TLTROs) to ease credit conditions for small- and medium-sized enterprises. Another perspective says that the ECB has already reached the end of its easing capabilities so long as debt crisis fears stay capped during the banking system stress test period (through the end of October).
While we feel that any chance of a full-blown, Fed-styled QE program is unlikely in the near-term (hence the only limited downside in the EUR-complex after the ECB’s June and July meetings), we must be acutely in tune with the inflation environment. The ECB has made it clear, through its official policy transmissions and various policy speeches from Governing Council members, that only further erosion in the region’s price environment would warrant additional easing action over the coming months.
Given recent developments along the inflation expectation front, a softened outlook for price pressures may be setting in, which in turn could be providing the fuel for the Euro’s recent move to the downside. Indeed, a look at inflation expectations for the Euro-Zone’s largest economy, Germany, are revealing. The 2014 CPI forecast fell to +1.00% the week ended July 18 from +1.30% three-months earlier; the 2015 CPI forecast fell to +1.65% the week ended July 18 from +1.80% three-months earlier; and the 2016 CPI forecast fell to +1.90% the week ended July 18 from +2.00% three-months earlier.
Now that inflation expectations are falling, additional evidence of slowed growth can compound the issues facing the Euro in the near-term. This coming week, preliminary July PMI surveys out of France, Germany, Italy, and the broader Euro-Zone are expected to show a slowed pace of growth from the prior month, perhaps supporting the developing trend seen in German inflation expectations for 2014, 2015, and 2016. While we anticipate exogenous influences maintaining their clout with respect to the Euro, we shouldn’t be dazed by the low volatility state persisting in spot FX markets, as more local influences are starting to exert themselves on the Euro once again. –CV
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USDJPY Rallies to Multi-Week Highs, but What Could Force it Higher?
Fundamental Forecast for Yen:Neutral
The Japanese Yen remains in a miniscule trading range versus the US Dollar, but a jump in volatility suggests some predict key events ahead could finally force some sharper USD/JPY moves.
What keeps the Japanese Yen from much larger price swings? Record-low interest rates across the globe almost certainly play a part; yield-sensitive traders see little reason to buy or sell given expectations that global central banks will keep rates near record-lows.
We’ll watch a potentially significant US Federal Reserve interest rate decision and US Nonfarm Payrolls report for USDJPY volatility.
The US Fed will almost certainly stick to the script and continue its “Taper” of Quantitative Easing policies, but the devil is always in the details. Traders drove the Dollar to fresh multi-week highs versus the Yen—perhaps an indication of positive expectations ahead of the FOMC meeting.
It’s important to note we saw similar price action into the June monetary policy announcement; an initial Dollar surge proved short-lived, and the USDJPY has yet to break above the highs established following the June meeting.
The monthly US Nonfarm Payrolls report provides the other important bit of economic event risk for the Dollar/Yen. Economists predict that the US added over 200k jobs in the month of July for the sixth-consecutive month, and lofty expectations leave ample room for disappointment. It would likely take a substantially above-forecast print to force a major Dollar rally, while a disappointment could kill the momentum of positive data for the Greenback.
Will the week ahead finally force the USDJPY out of its narrow range? The odds are admittedly low, but a slow build in FX volatility prices suggests some are betting on/hedging against larger moves. Until we see a break of much more significant resistance of ¥103 or support near ¥100.80, however, we expect USDJPY volatility to trade back towards record lows. - DR
GBP/USD to Carve Higher-Low on Dovish FOMC
Fundamental Forecast for Pound:Bullish
The GBP/USD faced a larger correction going into the end of July as the Bank of England (BoE) Minutes showed a unanimous vote to retain the current policy, but the fundamental outlook continues to generate a bullish bias for the British Pound as central bank Governor Mark Carney sees the spare capacity in the U.K. economy being used up faster than expected.
It seems as though the Monetary Policy Committee (MPC) is moving closer to normalizing monetary policy as ‘some’ members see less risk of a rate hike derailing the economic recovery, and it appears as though a growing number of central bank officials are showing a greater willingness to raise the benchmark interest rate later this year as the underlying momentum in the U.K. economy looks ‘more assured.’ Despite the lackluster 2Q U.K. GDP print, the International Monetary Fund (IMF) continued to raise its economic forecast for the region, with the group now calling for a 3.2% expansion in 2014 versus an initial forecast for a 2.9% rise.
As a result, the BoE’s Inflation report due out on August 13 may further boost the appeal of the sterling should the central bank adopt a more hawkish tone for monetary policy, and the GBP/USD looks poised to retain the bullish trend carried over from the previous year as the Federal Reserve remains reluctant to move away from its highly accommodative policy stance.
With that said, we are still looking for a higher-low in the GBP/USD as price continues to hold above channel support, and the Federal Open Market Committee (FOMC) interest rate decision on July 30 may serve as the fundamental catalyst to spark a resumption of the bullish trend should Chair Janet Yellen continue to highlight a dovish tone for U.S. policy. - DS
Gold Defends July Lows- Outlook Hinges on GDP, FOMC, NFPs
Fundamental Forecast for Gold:Neutral
Gold prices are softer on the week with the precious metal off by 0.51% to trade at $1298 ahead of the New York close on Friday. The losses come amid continued strength in the greenback with the Dow Jones FXCM Dollar Index breaking into fresh monthly highs as equities struggled. However with the month close at hand, escalating geopolitical tensions abroad and a jam packed economic docket, our bearish bias is curbed as we close the week just above key support.
Looking ahead to next week, US economic data comes back into focus with 2Q GDP, the FOMC rate decision and non-farm payrolls on tap. Inflation data early this week was broadly in line with expectations with core CPI even missing expectations by 0.1% to print at 1.9% y/y. In light of last week’s Humphrey Hawkins testimony, where Fed Chair Yellen continued to cite a more cautious outlook on the economy, traders will be closely eying the advanced second quarter growth figures on Wednesday with consensus estimates calling for an annualized read of 3.0% q/q- a sharp rebound from the 2.9% q/q contraction seen in the first quarter. The FOMC policy decision is released later in the day with the central bank expected to stay on course with another $10billion taper in the pace of asset purchases. Look for the policy statement to drive price action should the Fed cite an improved labor market outlook on the back of last month’s blowout 288K print.
The July employment report highlights the docket next week with expectations calling for a print of 230K and a hold on the headline unemployment figure at 6.1%. The biggest threat to gold remains a stronger than expected read as such a scenario would likely see interest rate expectations fuel more strength in the greenback. On the other side, the most supportive scenario would be building geopolitical tensions in the Middle East and Ukraine. These events do pose a threat to broader market sentiment with gold likely the biggest winner if the situations were to deteriorate further.
From a technical standpoint, gold remains vulnerable below key resistance at $1321/24 with more definitive support at $1292/93. We will continue to eye this level as a key inflection point heading into the close of July trade with a break below targeting support objectives at the 61.8% retracement of the June rally at $1280 and a multi-year pivot zone around $1270. A topside breach/close above $1324 invalidates our near-term approach with subsequent resistance levels seen higher at $1335 the monthly high at $1345 and the 78.6% retracement of the decline off the March highs around $$1360.” We’ll maintain a more neutral stance as prices hold just above support into the close of the month with next week’s event risk and the August opening range likely to offer further clarity on our medium-term directional bias. -MB
Canadian Dollar To Consolidate Ahead of GDP Report
Canadian Dollar To Consolidate Ahead of GDP Report
Fundamental Forecast for Canadian Dollar: Neutral
The Canadian dollar strengthened this week against its U.S. counterpart on an improved economic outlook in the U.K. and U.S. Britain managed to avoid a triple-dip recession, recording a positive growth rate in the first quarter. Meanwhile, the U.S. jobless claims report came out better than expected as first-quarter GDP grew at a moderate rate, further helping to push the loonie higher. Also, Crude oil, Canada’s biggest export, rebounded, and hit its highest level in two weeks. Looking forward, we may see the Canadian dollar consolidate and build a short-term base before making another major move to the upside.
Canada’s February Gross Domestic Product highlights the biggest event risk for the week ahead. According to a Bloomberg News survey, economists have called for a consensus estimate of 0.2 percent growth in GDP, the same pace as in the previous month. In his last testimony before parliament, Bank of Canada Governor Mark Carney said that “Canada’s economy is strong but still faces risks.” Furthermore, signs of improvement in the domestic economy have materialized recently, with positive data in the manufacturing and sales sectors. At the same time, the latest unemployment rate report indicates that the recovery in the labor market remains slow. As a result, uncertainties in Canadian fundamentals could lead to a disappointing GDP report, potentially dragging down the loonie
Inflation within Canada has remained low in recent months, but is expected to gradually rise to the target level of 2 percent by mid-2015, when the economy is expected to return to full capacity. Although the Bank of Canada chose to hold its benchmark interest rate at 1.0 percent, the continual threat of record-rising household indebtedness could cause the central bank to hike interest rates in order to make borrowing more difficult and expensive. However, Governor Carney softened his tone on such a rate increase after growth unexpectedly stalled. The central bank cut its 2013 growth forecast to 1.5 percent from 2.0 percent. In addition, the IMF’s latest report suggested that Canada should refrain from tightening its monetary policy until its economy improves. In order to get a clue on the timing of interest rate move, investors will want to keep a close eye on three factors: economic growth, personal debt, and aspects of the housing market. With rates currently as low as they are, the Canadian dollar has less upward support.-RM
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AUD To Continue Consolidation With Void Of Local Data On Tap
Fundamental Forecast for Australian Dollar: Neutral
AUD Set For Another Flat Finish Despite Plenty Of Intraday Volatility
Light Economic Docket May Do Little To Shift RBA Policy Bets
Low Vol. Environment Could Continue To Support Carry Demand
The Australian Dollar is set for a relatively flat finish after a turbulent week that yielded plenty of intraday volatility. An upside surprise to the Australian second quarter core CPI reading, and rise in headline inflation to the top of the RBA’s 2 to 3 percent target band, sent the currency soaring above the 94 US cent handle. Additional strength for the Aussie was found on the back of a bumper China PMI print, as well as an absence of ‘jawboning’ in a speech from RBA Governor Glenn Stevens. Ultimately, most of the gains proved short-lived, which may have reflected some hesitation from traders to push the currency into a region of noteworthy technical resistance.
Looking to the week ahead; Building Approvals and the Performance of Manufacturing Index figures represent the only medium-tier domestic economic data on the calendar. However, the leading indicators for the health of the local economy may do little to materially shift the rate outlook, meaning any reaction from the AUD may fail to find follow-through. Similarly, the Chinese manufacturing figures (also on tap) could generate another round of knee-jerk volatility on a surprise reading, yet likely hold do not hold the requisite power to leave a lasting impact on the currency.
Indeed, Stevens’ recent address reinforced the prospect of a ‘period of stability’ for the cash rate over the near-term. At this stage it appears unlikely the RBA will change its stance while it attempts to foster a rebalancing of the domestic economy.
Implied volatility remains near multi-year lows, suggesting traders continue to price in a relatively small probability of a major economic crisis occurring in the near-term. Traders are seemingly looking past the latest flare-up in geopolitical tensions and have returned to the hunt for yield. Against this backdrop the Aussie’s relative interest rate advantage remains a source of strength for the currency, and could continue to keep it elevated. This leaves the major threat for the AUD/USD to stem from the US Dollar side of the equation given several key pieces of US event risk ahead. Refer to the US Dollar outlook for insights into how the reserve currency may perform over the coming week.
New Zealand Dollar May Continue Lower on US Economic News-Flow
Fundamental Forecast for New Zealand Dollar: Bearish
NZ Dollar Down to 6-Week Low on Eroding RBNZ Rate Hike Outlook
Selling Pressure May Persist as US News-flow Triggers Risk Aversion
Help Identify Critical Turning Points for NZD/USD with DailyFX SSI
The New Zealand Dollar proved to be the worst-performing currency last week, sliding over 1.5 percent against its US counterpart. The move lower tracked a dramatic decline in New Zealand’s benchmark 10-year bond yield, pointing to eroding RBNZ interest rate hike expectations as the catalyst behind the selloff. A pre-emptive reversal began early in the month amid murmurs of a forthcoming pause in the central bank’s tightening. These fears were confirmed last week as Governor Graeme Wheeler signaled that rate hikes are on hold for time being, sending the currency to the lowest level in nearly two months.
Looking ahead, a lull in homegrown event risk will bring external macro-level trends into the driver’s seat. That puts the spotlight squarely on the US, where the docket is so overstuffed that the FOMC policy announcement may actually prove least market-moving among the high-profile releases. Janet Yellen and company appear determined to continue tapering QE until the program is wound down in October. That much is probably priced in already, with the markets now focused on the length of the time gap between the end of asset purchases and the first interest rate hike. That means familiar cautious optimism may not yield much in terms of volatility.
Meanwhile, an extensive supply of heavy-duty activity data will speak more directly to how quickly overt tightening may occur. The spotlight will on second-quarter GDP figures and July’s Employment report. The former is expected to show that economic growth snapped back aggressively following the seemingly weather-driven slump in the first three months of the year. The annualized growth rate is seen printing at 3 percent after a dismal 2.9 percent drop in the prior period. As for the jobs report, economists are looking for a 231,000 increase in nonfarm payrolls. That would amount to the sixth consecutive month above the closely-watched 200k threshold, making for the steadiest such run in job creation in over a decade.
The significance of Fed monetary policy to supporting risk appetite in the post-crisis rebound from 2009 lows is hardly a controversial subject at this point. That means news-flow arguing for stimulus to be withdrawn relatively sooner than the second half of 2015 – seemingly the markets’ baseline scenario – may force a selloff across sentiment-sensitive assets. Needless to say, the Kiwi’s yield advantage against its G10 FX counterparts puts it firmly on the risk-on side of the spectrum, making it highly vulnerable to selling pressure if broad-based liquidation takes hold. -IS