Dollars Best Rally in 18 Months Will Stall Without Catalyst
Fundamental Forecast for Dollar:Neutral
The further price moves away from yields, the greater the risk of a snap back due to rate expectations
Key event risk includes Treasury auctions, consumer sentiment and activity indexes; but PCE is the top listing
Watch the volume on dollar-based majors with the release of NFPS using the FXCM Real Volume indicator
The US Dollar has advanced for six consecutive weeks. That represents the most consistent run for the currency since February of last year – which happened to be the most prolific leg of a two-year bull run through the July 2013 peak. While the dollar’s move this time around is more discrete and less momentous than its predecessor, the consistency is nevertheless impressive. Where traders should be concerned is that the difference may extend to the broader extension of the larger trend. Looking into the dollar’s backdrop, there is little of the fundamental motivation we would normally expect the currency to advance on. Without a turn in speculative appetites, groundswell in the market’s rate forecasts or material drop in other majors; the dollar’s rally is likely to stall.
While this past week highlighted a number of impressive moves from benchmarks (Dollar, S&P 500, Yen crosses), trend development is still difficult to maintain in an environment of complacency. And, a lack of conviction is still the most universal aspect of the financial system. A prime example: from the S&P 500’s drive to fresh record highs, the market failed to top 2 billion shares for the week – one of the quietest non-holiday trading periods on recent records. Participation in even the most prolific trends is lacking.
So, if there is a lack of drive to the markets, why have US equities and the dollar gained so much ground recently? For the Index, the motivation was speculation. The swell in ‘risk premium’ through the first half of the month presented traders another opportunity for short-term gains so long as volatility remains deflated. That premium has since been exercised, and further gains now fall more on the shoulders of true trend development. A similar opportunistic appeal was seen in the currency. Motivated declines in key counterparts – Euro, Pound, Yen – translated into consequent gains for their most liquid counterpart. Once again, progress from here requires more.
Looking out over the coming week, the need for an active catalyst is much greater. From a cross-currency gains perspective, USDJPY needs robust speculative appetite to advance; GBPUSD has already slid seven strength weeks (matching the longest decline in decades); and the retreat in NZDUSD has put the kiwi into an almost excessively dovish light. As the FX market’s most liquid pair, EURUSD could strong-arm dollar gains, but there is limited cannon fodder to supply that motivation.
The long-elusive risk aversion theme that could leverage the dollar’s safe haven status is a very high potential candidate, but a dedicated deleverage is a low probability. Moreover, the currency’s full appeal in this all-consuming theme only really hits its stride when the need is liquidity – not just booking profit. A pullback in US equities after this past week’s premium drawdown is likely, but the necessary conviction to fully turn this trend may be beyond what the market’s participation levels are capable of.
As has been the case for some months, the dollar’s most accessible source of untapped strength is an upgrade in interest rate expectations. While the consensus of economists and money managers is for a first hike sometime mid-2015, the market is positioned for something far more distant. Even the Fed’s end-2015 and 2016 rate forecasts (1.12 and 2.50 percent respectively) are met with serious skepticism by the market (0.72 and 1.70 percent). The cadre of unscheduled Fed speakers – and Chairwoman Yellen – this past week was unable to close the gap. The calendar this week may be able to make a dent between economic activity, housing and sentiment readings. However, the most prominent listing will be Friday’s PCE - the Fed’s favored inflation reading. If this theme fails to step up, we may find the dollar stalled or even in retreat.
Euro Exposed to Fresh Lows as Draghi Invites New QE Speculation
Fundamental Forecast for Euro: Neutral
- The early week EURUSD consolidation gave way to a breakdown in the triangle by Wednesday.
- The Jackson Hole Economic Policy Symposium produced speeches from Yellen and Draghi that dropped EURUSD.
- 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 performance was tilted more negative last week, outperforming only two currencies (EURJPY +0.35% to ¥137.64), while EURUSD was the worst performer and closed down -1.20% at $1.3242. Euro-Zone economic data remained on the downswing, with the Citi Economic Surprise Index closing at -36.2, just above the yearly low set on July 21 at -43.3. It’s becoming a more difficult trading environment for the Euro, however.
Per the CFTC’s COT report, non-commercials/speculators increased their pressure on the 18-member currency, increasing net-short positions 138.8K contracts. This is the most extreme short positioning seen in the corresponding futures market since the week ended July 31, 2012 (139.0K). While these shorts represent tinder to fuel a sharp short covering rally by the Euro, a catalyst is needed that has yet to be uncovered.
Traders may have good reason to be increasing pressure on the Euro. In light of the region’s weak growth, inflation, and employment readings of late, European Central Bank President Mario Draghi said that the central bank may be ready to do more on the easing front. Speaking at the Jackson Hole Economic Policy Symposium, ECB President Draghi said that investor speculations on Euro-Zone inflation “exhibited significant declines at all horizons” in August.
ECB President Draghi pointed to one gauge in particular that exhibited the decline of inflation expectations in the Euro-Zone – which might be enough to push the ECB towards a more aggressive non-standard easing program such as QE. The 5-year, 5-year inflation swap rate fell below +2.00% this month for the first time since October 2011, when the Euro-Zone was in the midst of the sovereign debt crisis.
Inflation data due out this coming week isn’t expected to shift the trend in disappointing data for the ECB. On Friday, both German and broader Euro-Zone CPI readings for August will be released. The Euro-Zone CPI Estimate is expected at +0.3% from +0.4% (y/y), the weakest inflation reading since October 2009. Out of Germany, the monthly CPI gauge is expected flat from +0.3%, and the yearly reading due at +0.8% unchanged; these are not evidence of economic growth proliferating. See the DailyFX Euro Economic Calendar for the week of August 24 to 29, 2014.
The time may be approaching for the ECB to act, even though 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). Now that business confidence has started to ebb on the Russian-Ukrainian crisis, weak growth in the region may be dragged lower. Whereas the sovereign debt aspect of the Euro-Zone crisis is currently dead, the economic and political issues are very much alive, keeping the Euro in traders’ crosshairs for at least in the short-term. –CV
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Japanese Yen at Make-or-Break Levels Ahead of Key Data
Japanese Yen at Make-or-Break Levels Ahead of Key Data
Fundamental Forecast for Yen: Bearish
US Dollar might finally be breaking versus Japanese Yen
USDJPY resistance extends into ¥104.30 and ¥104.54
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The Japanese Yen tumbled towards yearly lows versus the US Dollar, and key data in the week ahead could decide whether the USDJPY makes a sustained break of its year-to-date trading range.
Traders sent the Yen steadily lower despite a relatively empty economic calendar and limited market-moving news headlines. Event risk picks up as we look to the Jackson Hole Economic PolicySymposium over the weekend, while Japanese Jobless Rate figures as well as National Consumer Price Index inflation results could drive moves through late-week trading.
Early indications suggest that the Jackson Hole conference may prove far less significant than expected. Yet it’s worth noting Bank of Japan Governor Haruhiko Kuroda will join Bank of England Deputy Governor Ben Broadbent and Central Bank of Brazil Governor Alexandre Tombini on a panel to discuss “Labor Markets and Monetary Policy” on Saturday morning. Any important policy announcements or changes in forecasts seem unlikely, but we can’t rule out any gaps in JPY and GBP pairs through Sunday’s market open.
It may subsequently take major surprises out of upcoming Japanese inflation and jobless figures to drive a more substantial Yen breakdown. Traders have shown little interest in anything except sharply worse-than-expected domestic economic data, and the week ahead will likely prove no exception.
It seems cliché to claim that a specific currency is “at a crossroads”, but it is no exaggeration to claim that it may be a make-or-break week for the Yen as it trades near critical support. Major currency reversals often coincide with the beginning and end of the calendar month, and the fact that we’re headed into the final week of August puts special focus on the fast-falling Yen.
Traders for their part remain positioned for a USDJPY breakout; futures data show large speculators are near their most short JPY (long USDJPY) since December. FX options show that Yen volatility prices remain near multi-week highs but remain fairly low by historical standards. It may take a significant build in FX volatility to drive the next leg of Japanese Yen weakness. – DR
GBP/USD Remains Oversold Despite BoE Dissent- RSI in Focus
GBPUSD [2HR – 08/22/2014]. Chart created using FXCM Marketscope
Fundamental Forecast for Pound:Neutral
The GBP/USD slipped to a fresh monthly low of 1.6560 even as the Bank of England (BoE) Minutes showed Martin Weale and Ian McCafferty voting for a 25bp rate hike at the August 7 meeting, but we may see the British Pound regain its footing ahead of the next interest rate decision on September 4 should the fundamental developments coming out of the U.K. further boost interest rate expectations.
Even though the BoE anticipates the strength in the British Pound to dampen the risk for inflation, the ongoing improvement in the labor market may continue to boost the scope for stronger wage growth in the U.K., and it seems as though the Monetary Policy Committee (MPC) will do little to halt a further appreciation in the sterling as it helps to deliver price stability.
With that said, a further expansion in private-sector lending along with a pickup in household confidence may generate an improved outlook for the U.K. economy, and a slew of positive developments may put increased pressure on the BoE to normalize monetary policy sooner rather than later as the central bank anticipates a stronger recovery in the second-half of 2014. Credit Suisse Overnight Index Swaps are current pricing a 40bp rise in the benchmark interest rate over the next 12-months, and it seems as though we would need a further pickup in price growth to boost rate expectations as the headline reading for U.K. inflation cools to an annualized 1.6% from 1.9% in June.
Nevertheless, the technical outlook continues to highlight a risk for a further decline in the GBP/USD as the Relative Strength Index (RSI) pushes deeper into negative territory, and the descending channel carried over from the previous month may continue to take shape over the near-term as the BoE softs its hawkish tone for monetary policy.
Gold Tumbles to Fresh Two Month Lows on Fed Outlook- $1271 Support
XAU/USD [2HR – 08/22/2014] Chart created using FXCM Marketscope
Fundamental Forecast for Gold: Bearish
Gold prices are sharply lower this week with the precious metal off by more than 2.1% to trade at $1276 ahead of the New York close on Friday. The decline marks the second weekly loss and takes bullion into fresh nine-week lows as the greenback continued to rip higher with the Dow Jones FXCM Dollar Index climbing nearly 1% in its single largest weekly range since mid-April.
A string of strong reports out of the US coupled with a slightly more hawkish tone to the minutes from the latest FOMC policy meeting has kept the dollar bulls in control with gold trading heavy as easing geopolitical concerns and a more upbeat assessment of the economy continued to buoy risk higher alongside the greenback. All eyes fell on Jackson Hole Wyoming on Friday for the Kansas City Economic Symposium with Janet Yellen’s keynote speech largely striking a balanced tone. The Fed Chair noted significant under-use of labor resources while citing room for wage increases that would remain rather benign on inflation. She seemed to play both side when it came to interest rates, noting that slower progress on goals may delay rate increases while faster progress would bring hikes sooner. The result offered little direction for gold prices which traded sideways into the close of the week after posting 5-days of consecutive declines to break into fresh monthly lows.
Looking ahead to next week, traders will be closely eyeing the second print for 2Q GDP with consensus estimates calling for a slight downward revision to an annualized pace of 3.9% from 4% q/q. July durable goods orders, pending home sales, and the final read for the August University of Michigan Confidence survey are also on tap next week and we’ll look for stronger data to broadly remain supportive of the dollar / limit gold advances. The biggest possible supportive variable for gold would be a more substantial sell-off in stocks with such a scenario likely to fuel risk-off flows into the perceived safety of the yellow metal. That said, the technical picture remains rather bleak.
From a technical standpoint, gold remains within the confines of a well-defined descending channel formation off last month’s high and our focus remains lower while below the 200-day moving average at $1284 with interim support seen at $1271. A break below this level eyes a key support zone at $1251/58 backed by $1233 and $1206. We’ll reserve $1292 as our bearish invalidation level with a breach above targeting key resistance at $1321.
---Written by Michael Boutros, Currency Strategist with DailyFX
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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 Remain Resilient Amid Drive To Yield and Void of Local Data
AUDUSD [2 HR – 08/22/2014] Chart created using FXCM Marketscope
Fundamental Forecast for Australian Dollar: Neutral
AUD/USD Consolidates As Dovish Policy Bets Diminish Amidst Return To Yield
Void of Major Regional Data To Leave ‘Period of Stability’ Rates Scenario Intact
Carry Demand May Support AUD As Traders Look Past Geopolitical Tensions
The Australian Dollar is heading for another relatively flat finish to the week ahead of the Jackson Hole Symposium. The currency was afforded some support as RBA policy expectations shifted away from the more dovish end of the spectrum. This came on the back of a status-quo set of RBA Meeting Minutes and a relatively optimistic set of comments from Governor Stevens on the domestic economy. Additionally, a broader return to high-yielding instruments helped offset some of the negative cues provided by a deterioration in Chinese economic data.
Looking ahead, RBA policy bets as well as general market risk appetite remain the dominant themes to monitor for the Aussie. On the policy front; a void of local economic data is on the calendar heading into the end of the month. This is likely to leave the ‘period of stability’ baseline scenario for rates intact. Which in turn could keep the currency supported via its yield spread over its major counterparts.
Of course, the appeal of the currency’s interest rate advantage is intrinsically linked to broader risk sentiment. Implied volatility remains near multi-year lows despite a small recovery for the gauge over the past month. This suggests traders are pricing in a relatively small probability of major market swings in the near-term. Such an environment raises the attractiveness of carry trades and bodes well for the Aussie.
Further, the threat posed to investor optimism by ongoing geopolitical turmoil appears to have diminished in recent weeks. Storm clouds continue to loom over Eastern Europe and the Middle East. Yet traders seem to have become desensitized to the latest flare-ups. This suggests it would likely take a material escalation in the regional turmoil to threaten the resilience of the Australian Dollar.
Given the lack of major local events the main risks of the AUD/USD breaking from its recent range are likely to stem from its US counterpart. Refer to the US Dollar outlook for insights into how the USD side of the equation may influence the pair.
Written by David de Ferranti, Currency Analyst, DailyFX
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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.