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Weekly Forex Trading Forecast

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Dollar Traders Look Ahead to a Return of Liquidity and NFPs

Dollar Traders Look Ahead to a Return of Liquidity and NFPs

Fundamental Forecast for Dollar:Neutral

  • The season is changing from the ‘summer doldrums’ and the Dollar is well positions for the market’s return
  • Top event risk this week is August NFPs which can trigger a rebalance between currency and rate speculation
  • Watch the volume on dollar-based majors with the release of NFPS using the FXCM Real Volume indicator

The Dollar closed out a strong August. Over the past two months, the Dow Jones FXCM Dollar Index (ticker = USDollar) has climbed 2.5 percent. Amongst the majors, the greenback has advanced versus all of its peers and gained an impressive 4.1 percent against its most liquid counterpart - the Euro. The ‘bullish’ label is a deserved one. However, further progress requires more substantive fundamental support. Relative performance versus weakened cross currencies and a stable economic footing are unlikely to drive EURUSD below 1.3000 or GBPUSD through 1.6500. The next leg will be decided between Fed rate forecasts and the level of volatility in the markets. As it happens, we happen to have the ingredients to ignite speculation on both fronts.

In assessing the motivation for capital to flow into and out of the US, a market-wide gauge of risk appetite measures the appeal of the currency’s ample liquidity (safe haven attribute) while local interest rate expectations gauge its future return (what I like to consider the dollar’s dividend). While the S&P 500’s charge bullish charge may be a skewed measure of speculative appetite, sentiment was certainly not suffering this past week the kind of crisis-of-confidence that would funnel capital into the greenback and Treasuries. That suggests that rate forecasts likely played a bigger hand in motivating the dollar last week.

Therein lies a problem. Treasury yields, market rates and Fed Funds futures have fallen well behind the pace of the currency. More than just a curb on further gains, this disparity could turn into motivation for a dollar reversal if fundamentals do not reassure the bulls. There is plenty of scheduled event risk to help feed rate forecasts. On the FOMC’s docket, we have the Beige Book due Wednesday and a range of speeches from the Fed’s Mester, Powell, Fisher, Kocherlakota, Rosengren and Plosser. Of those six, only Jerome Powell is a voter in 2015 when the central bank is expected to realize its first hike.

On the data front, there is a plenty to shape growth forecasts. The ISM manufacturing and service sector surveys, July trade balance, IBD economic sentiment survey, and Markit composite PMI is a comprehensive and timely read on economic health. However, its Friday’s labor data that will slice through the ambiguity and directly influence rate speculation. While the flash of the NFPs will elicit headlines; its the jobless rate, participation level and earnings growth that will influence the central bank’s timing. Therefore, that is where we should look. In the Fed minutes released a week ago, the group relayed that “many” officials believed that a strong growth for the labor markets may lead to an earlier rate hike.

While the potential impact from the jobs data is high, we should remember that it falls on Friday. That means there can be an uneasy quiet in the lead up to the release if there isn’t something else to motivate the dollar. Volatility and volume may finally prove a more meaningful counterweight to price action. While it is still early to expect a definitive rise in system-wide trading volume and activity, we are coming to a seasonal turning point which may help spur a fundamental shift in market conditions. The Labor Day holiday – which we are currently passing through – traditionally marks the end of the ‘Summer Doldrums’. With a strong correlation between volume and volatility, this natural return of liquidity can tip a the scales on a precariously balanced complacency. While such a sweeping change is difficult to expect, we should be prepared.

Euro Bears Shouldn’t Expect QE from ECB This Week

Euro Bears Shouldn’t Expect QE from ECB This Week

Fundamental Forecast for Euro: Neutral

- ECB President Draghi’s commentary at Jackson Hole set the tone for a weaker Euro all week.

- Traders expecting action on Thursday might find opportunities in the EURUSD downtrend or EURJPY inverse H&S.

- Have a bullish (or bearish) bias on the Euro, but don’t know which pair to use? Use a Euro currency basket.

The Euro was the worst performing major currency last week, extending its losing streak against the US Dollar to seven consecutive weeks. EURUSD’s -0.84% drop last week sunk it to $1.3131, its lowest exchange rate since September 6, 2013. In part. The US Dollar’s own stretch of strong data is helping keep it afloat; conversely, there is a great deal of negativity currently encircling the Euro.

The change in European Central Bank Mario Draghi’s tone has been significant since the Jackson Hole Economic Policy Symposium. Instead of ascribing the Euro-Zone’s low growth, low inflation, and high unemployment issues to ‘transitory’ factors, the head of the ECB among, other policymakers, is now accepting that the current weak economic environment is more or less a permanent condition.

Recent economic data has been so poor that another dip into recession across the Euro-Zone is possible – the third recession since the start of the global financial crises beginning in 2007. The Citi Economic Surprise Index fell to -45.1 on Friday, eclipsing the July low and setting a new yearly low for the year. The Euro’s problems are clearly related to economic and geopolitical concerns, as the liquidity conditions in the Euro-Zone are more than plentiful (EONIA fell at low as -0.04% on Thursday, the first time it has even been negative).

Even as Euro-Zone CPI hits its lowest levels since October 2009 (at +0.3% y/y), the aforementioned factors may not be enough to push the ECB into acting this week – at least in the unconventional, QE-inspired manner that market participants may be hoping for. The preferred timeframe to implement new measures is after October, when the ECB finishes collecting and analyzing banks’ balance sheets for the stress tests (AQR).

If it’s too soon for outright QE and meaningless to go forward with another rate cut given regional liquidity conditions, then perhaps the ABS purchase front will pique interest. Even then, substantive action may be falling short of expectations. The most significant steps taken might be downgraded inflation expectations; but that too is only dovish rhetoric at best. With non-commercials/speculators, at 150.7 net-short contracts, the most stretched since July 24, 2012 (155.1K contracts), any disappointment along the easing front could be enough to stoke a short-covering rally by the 18-member currency. –CV

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Japanese Yen Looks Ripe for a Reversal on Huge Week Ahead

Japanese Yen Looks Ripe for a Reversal on Huge Week Ahead

Fundamental Forecast for Yen:Bullish

The Japanese Yen traded to fresh lows versus the resurgent US Dollar on a relatively quiet week of trading. Yet the coming days promise significantly more volatility and may ultimately decide whether the USDJPY continues higher or remains within its year-to-date range.

Five major central bank decisions and a market-moving US Nonfarm Payrolls report will likely drive big currency moves in the week ahead. Japanese Yen traders should pay special attention to the Bank of Japan Monetary Policy decision due early Thursday morning, while the interest rate-sensitive USDJPY exchange rate frequently sees sharp volatility on surprises out of US NFPs data.

Traders widely expect the BoJ will keep their Quantitative Easing policies unchanged through their coming meeting, and indeed recent commentary from Governor Kuroda suggests that officials see little urgency in shifting course. It would likely take explicit reference to deflationary risks—unlikely—to force an important reaction in the Yen.

Focus will otherwise fall to US event risk, and recent declines in US Treasury yields point to muted expectations for key data ahead. Traders kept the US Dollar/Japanese Yen exchange rate near year-to-date highs despite the declines in US yields. Yet the breakdown in correlations can only last so long, and the Dollar remains vulnerable on any disappointments in top-tier data.

The risk of a significant Dollar pullback grew further as recent futures data showed large speculators traders hit their most short the Japanese Yen (long USDJPY) since it traded to ¥105 versus the Greenback. They’re likewise at their most long US Dollar versus the Euro (short EURUSD) since the EUR traded to $1.20 in 2012. Big sentiment extremes are only clear in hindsight, but stretched positions underline the risk of an important USD pullback.

It’s shaping up to be a critical week for the USD versus the Yen, Euro, and other major currencies; big event risk might determine whether it holds the highs or sees a seemingly-inevitable reversal.

GBP/USD Needs Greater BoE Dissent to Breakout of Bearish Trend

GBP/USD Needs Greater BoE Dissent to Breakout of Bearish Trend

Fundamental Forecast for Pound:Neutral

The GBP/USD may continue to trade in a narrow range ahead of the Bank of England (BoE) interest rate decision on September 4 amid the failed attempts to close above the 1.6600 handle.

Indeed, the British Pound may face additional headwinds ahead of the policy meeting as the economic docket for the U.K. is expected to show a slowdown in private-sector lending, and a series of dismal data prints may keep the central bank on the sidelines as Governor Mark Carney persistently highlights the ongoing slack in the real economy.

There is a risk of seeing a limited reaction to the interest rate decision should the Monetary Policy Committee (MPC) refrain from releasing a policy statement, and the BoE Minutes due out on September 17 may continue to show a 7-2 split as Ben Broadbent retains a rather dovish outlook for monetary policy. Nevertheless, Credit Suisse Overnight Index Swaps are showing growing bets for higher interest rates as market participants now see the benchmark interest rate climbing by at least 50bp over the next 12-months, and the fresh batch of central bank rhetoric may continue to prop up interest rate expectations should the committee show a greater willingness to normalize monetary policy sooner rather than later.

With that said, the Relative Strength Index (RSI) on the GBP/USD suggests that a near-term bottom is taking shape as it threatens the bearish momentum from earlier this month, but the sterling remains vulnerable to a further decline as it retains the downward trending channel carried over from July. As a result, we would like to see a close above the 1.6600 handle for confirmation as well as conviction for a move higher, and the BoE meeting may serve as the fundamental catalyst to trigger a topside move in the GBP/USD should the central bank adopt a more hawkish tone for monetary policy.

Gold Posts Monthly Gain But Prices Vulnerable Ahead of NFPs- $1271 Key

Gold Posts Monthly Gain But Prices Vulnerable Ahead of NFPs- $1271 Key

Fundamental Forecast for Gold:Bearish

Gold prices are slightly firmer this week with the precious metal higher by 0.48% to trade at $1287 ahead of the New York close on Friday. It’s been a lackluster month for gold traders and despite the volatility ($49 or 3.75%) prices are just 0.35% higher for the month of August. As we head into the open of September trade, the focus shifts back onto the economic data front as bullion holds just above the technically significant 200-day moving average.

As tensions in the Middle East and Ukraine continue to escalate, the relative support they have offered gold has continued to wane as the focus shifts back on to the outlook for monetary policy. With steady improvement in US data, interest rate expectations have crept forward keeping a bid under the greenback to the detriment of gold. As such, heading into next week all eyes will be fixated on the economic docket with ISM Manufacturing and Factory Orders on tap ahead of Friday’s highly anticipated non-farm payrolls report.

The shortened holiday week kicks off with ISM data on Tuesday with the consensus estimates calling for a print of 57.0 in August, down from 57.1 in July. Factory orders on Wednesday are seen much stronger with calls for a 10.8% print for the month July, a stark contrast to the 1.1% read seen a month earlier. Highlighting the week’s event risk will be the US employment report on Friday with August Non-Farm Payrolls expected to come in at 225K, up from 209K in July as unemployment downticks to 6.1% from 6.2%. As always, we’ll be closely eyeing the changes in the labor force participation rate when trying to assess the validity of the drop in the headline figure. Look for gold to come under pressure the stronger the data is, with a miss on the print likely to offer some relief to the battered metal.

From a technical standpoint, gold remains vulnerable for further losses as we open up September trade and while we will need to confirm that bias with a break of the monthly opening range, our broader outlook will remain tentatively bearish while below near-term resistance at $1292. A break above this region targets more significant resistance at the confluence of the 50-day moving average and channel resistance dating back to the July high at $1306 and we will reserve this level as our bearish invalidation threshold. Interestingly, gold has alternated positive and negative monthly closes for the last seven months and while we eked out a gain this month, suggests we should be looking lower in September. Key support rests at the August lows and the 78.6% extension off the July high at $1271 with a break below this level eyeing support objectives at $1258/60, $1251 and $1224. Look for major event risk next week to offer a catalyst with central bank interest rate decisions and the US employment report on Friday in focus.

---Written by Michael Boutros, Currency Strategist with DailyFX

To contact Michael email mboutros@dailyfx.com or follow him on Twitter @MBForex

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Canadian Dollar Faces Conflicting Cues from BOC, Key US Data

Canadian Dollar Faces Conflicting Cues from BOC, Key US Data

Fundamental Forecast for Canadian Dollar: Neutral

  • Canadian Dollar May Extend Advance on a Hawkish BOC Tone Shift
  • Upbeat US Data May Fuel Fed Rate Hike Bets, Undermining Loonie
  • Help Identify Critical Turning Points for USD/CAD with DailyFX SSI

Last week marked an important turning point for the Canadian Dollar, with prices reversing sharply higher after hitting the weakest level in almost four months near 1.10 against the currency’s US counterpart. The surge gathered momentum after US-based Burger King Worldwide Inc said it will buy Canada’s Tim Hortons Inc for US$11 billion, implying on-coming M&A capital flows favoring the Loonie in the pipeline. The deal’s supportive implications appeared to run deeper however. The news-wires narrative framed the transaction as a poster-child for a broader “inversion” trend, wherein US firms re-domicile abroad to take advantage of favorable tax policies.

While the latest price action demonstrates that M&A considerations are to be respected, their ability to fuel continued Canadian Dollar gains without support from baseline fundamentals seems inherently limited. With that in mind, the outcome of next week’s Bank of Canada (BOC) monetary policy announcement stands out as critical, with the outcome likely to prove formative for the Loonie’s direction in the near term. The last policy announcement in mid-July leaned on the dovish side of the spectrum, with the bank trimming its outlook for growth and establishing a longer timeline for the economy to reach full capacity. A building mound of evidence suggests Governor Steven Poloz and company may opt for a different approach this time around.

As if by design, Canadian economic news-flow began to dramatically improve relative to consensus forecasts on the very same day as the BOC issued July’s policy statement, with a Citigroup gauge showing realized data outcomes are outperforming expectations by the widest margin in 14 months. External developments have likewise proved supportive. July’s announcement stressed that Canada’s recovery “hinges critically on stronger exports”. This underscored the vital significance of a pickup in US demand, which accounts for close to 80 percent of cross-border sales. On this front, the landscape looks far rosier today than it did six weeks ago, with a run of supportive US releases suggesting the world’s largest economy is truly on the mend after a dismal first quarter. The Canadian Dollar may find a potent upside catalyst if these considerations bleed into the tone of the statement accompanying the BOC rate decision.

Looking beyond home-grown factors to macro-level considerations, the key theme still in play is the length of the expected time gap between the end of the Federal Reserve’s “QE3” stimulus effort in October and the first subsequent interest rate hike. Next week’s calendar offers plenty of inflection points to drive speculation. Manufacturing and service-sector ISM readings, the Fed’s Beige Book survey of regional economic conditions and the obsessively monitored Employment report headline scheduled event risk. Persisting strength in US data outcomes is likely to drive speculation that the FOMC will not wait very long before beginning to actively withdraw stimulus. If this triggers a one-sided surge in the US Dollar against its leading counterparts, the Loonie is unlikely to go unscathed.

AUD Braces for Volatility on Torrent of Top-Tier Events

AUD Braces for Volatility on Torrent of Top-Tier Events

Fundamental Forecast for Australian Dollar: Neutral

  • AUD/USD Remains Resilient In The Face Of Geopolitical Turmoil
  • String of Major Domestic Economic Events On The Radar This Week
  • Range May Remain In Play If Fresh Data Fails To Shift RBA Policy Bets

The Australian Dollar is set to finish the week marginally higher as traders look past escalating geopolitical turmoil and return to yield plays. A drought of domestic data is set to give rise to a torrent of top-tier economic events over the coming week. These offer the potential to catalyse significant intraday volatility for the Aussie. Yet an escape from its multi-month range against the greenback may prove difficult without the requisite shift in RBA rhetoric.

Retail sales, PMI and building approvals data are all set to cross the wires throughout the week. On balance leading indicators for the health of the Australian economy have demonstrated resilience in the face of a ‘tough budget’. Another round of encouraging data could offer the Aussie a source of support.

While a less timely indicator, second quarter GDP figures will also likely provide the currency with some guidance. Quarter-on-quarter growth expectations are set relatively low (0.4 percent vs 1.1 percent prior). This may leave some room for an upside surprise which in turn would bolster the local unit.

Traders will also be wary of the potential for another surprise from the trade balance data due on Thursday. This follows the sharp decline witnessed for the June figures. Another significantly lower-than-anticipated reading could yield a knee-jerk sell-off in the currency.

However, the potential for all the aforementioned data to leave a lasting impact on the Aussie rests in the capacity to shape RBA policy bets. This may be somewhat limited in light of Governor Stevens’ recent reiteration of the Board’s preference of a ‘period of stability’ for rates. Another status-quo statement from the central bank on Tuesday could keep the Aussie contained between its 92 to 95 US cent trading band.

Finally, tensions in Eastern Europe are likely to remain on the radar for traders. Yet their influence over the high-yielding currencies appears to have waned. At this stage, it would take a significant escalation and greater international response to cause the required panic amongst traders to leave a dent in the AUD.

For an examination of how the US Dollar side of the equation may influence the AUD/USD read the weekly outlook here.

Written byDavid de Ferranti,Currency Analyst, DailyFX

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New Zealand Dollar Weakness to Persist as Fed Rates Outlook Firms

New Zealand Dollar Weakness to Persist as Fed Rates Outlook Firms

NZDUSD [2HR – 08/22/2014] Chart created using FXCM Marketscope

Fundamental Forecast for New Zealand Dollar: Bearish

  • NZ Dollar to be Driven by Macro Themes, Fed Rates Outlook in Focus
  • Upbeat US Economic Data May Boost US Tightening Bets, Sink Kiwi
  • Help Identify Critical Turning Points for NZD/USD with DailyFX SSI

A lull in high-profile domestic news-flow puts external forces in the spotlight as the primary drivers of New Zealand Dollar price action in the week ahead. The central issue on this front continues to be the evolution of the expected time gap between the end of the Fed’s QE3 asset purchases in October and the first subsequent interest rate hike.

The formative role of US monetary policy in supporting risk sentiment is hardly controversial at this point; one need only compare the five-year trajectory of the S&P 500 and the US central bank’s balance sheet to see it. As stimulus helped build out the risk-on rally since the end of the 2008-09 crisis, so too a shift toward a more hawkish posture may undermine it.

As the highest-yielding currency in the G10 FX space, the Kiwi stands out as particularly vulnerable if risk appetite unravels and capital flees return-oriented assets for safer shores. The prospect of a sooner-than-expected start to Fed tightening may trigger just such a dynamic.

The Fed notably upgraded its language on inflation in July’s FOMC statement, saying the “likelihood of inflation running persistently below 2 percent has diminished. This tone shift and its supportive implications for the possibility that stimulus removal will begin relatively sooner than otherwise was further brandished in minutes from last month’s sit-down as well as Fed Chair Yellen’s comments at the Jackson Hole Economic Symposium.

The week ahead brings ample opportunities to build on this narrative, with a flurry of US economic data releases due to cross the wires. July’s Home Sales and Durable Goods Orders as well as Augusts’ Markit PMI and Consumer Confidence figures are all on tap. In trend terms, the performance of US economic news-flow has markedly improved since early April. Indeed, a Citigroup index measuring realized outcomes relative to consensus forecasts now shows data results are outperforming expectations by the widest margin in six months. This hints that analysts are underestimating the vigor of the US economy, opening the door for upside surprises on upcoming reports that amplify Fed rate hike bets and punish the Kiwi further.

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