US Dollar Wobbles But Fed Speculation and Liquidity Keep a Bid
Fundamental Forecast for Dollar: Bullish
The probability of a December 16 FOMC rate hike according to Fed Funds futures Friday is 74 percent
Monetary policy is a steady fundamental current, but the true engine for the Dollar may prove liquidity and volatility
See how retail traders are positioning in the majors in your charts using the FXCM SSI snapshot
The US Dollar this past week thwarted what could have been a nasty reversal that changed the balance of sentiment. Having already stretched to 12-year highs, a number of surveys mark long-Dollar as one of the most oversaturated trades in the market. Yet, the market is there for a reason…for good reason. Whether we are looking forward to steady markets where the glint of yield attracts investors or liquidity-levered volatility that sends a current of fear through the system, the Greenback will be a favored vehicle for investors. The key variable is one of intensity, and that will be put to the test with the holiday trading conditions.
On Thursday, the United States will celebrate the Thanksgiving holiday. While this is specifically a market holiday for the US, the anticipated drain historically bleeds liquidity and dulls volatility globally. This will present a serious change in timbre for the currency and markets, but that doesn’t mean we can just shut down and expect our exposure to be safe through the four-day downtime.
From a speculator’s position, rate speculation is an international driver and it is building in intensity despite our heading into a traditionally ‘quiet’ period of the year. In the past three to four weeks, we have seen rate speculation around the Fed – and the contrast it draws to its peers – show more intensity than we have seen in months. According to Fed Fund futures traded on the CME, the market is pricing in a 74 percent probability that the central bank will lift rates on next month. Meanwhile, speculation of a QE upgrade from the ECB has seen similar confidence while traders waffle on the chance of a second BoJ stimulus upgrade.
For the just the coming week, there are a number of Fed speakers and top tier economic indicators (like the PMI figures and consumer confidence survey), but the most incisive update will be the PCE deflator for October. That is the Fed’s preferred inflation figure and it offers one of the last definitive readings on a key policy metric before the group deliberates at its final meeting this year. The November NFPs number due the first Friday of December will carry similar wait for the same reason. After the uptick in CPI (given perhaps too much coverage) and the multi-year high in wage growth in the last labor report (given too little), the PCE will not be taken lightly.
This coming week’s activity dip may pose the greater disservice for accelerating the sense of complacency that is commonly associated with the year-end period. Drained of liquidity by various holidays, the normal expectation is for quiet and steady gains (often called the ‘Santa Claus’ rally). However, this time around, the thin market conditions can lead to serious trouble as the threat of volatility remains dangerously high.
A number of big-picture financial risks hang over the markets including China’s economic cooling and financial stability; emerging market capital flows; and global growth trends among others. These threats lurk just in the background and can be set off by a range of sparks. Yet, there is one catalyst that carries with it a specific date and time: the December Fed decision. Not only can this cater to the Dollar’s relative appeal as a key FX pricing metric, but it can prove a trigger for some of the other threats. If we see a serious jolt moving forward, the combination of seasonal and systemic depressions in market depth can turn a bout of volatility into a financial shock. In that case, a Dollar driver can prove the source of a much more comprehensive demand for the currency.
Amid Holiday, EUR/USD Prepares for Huge First Week of December
Fundamental Forecast for EUR/USD:Bearish
- EUR/USD continues to track its daily 8-EMA lower as the downtrend from October 22 remains intact.
- EUR/JPY may be well positioned for a break to yearly lows during the rest of 2015.
- Have a bullish (or bearish) bias on the Euro, but don’t know which pair to use? Use a Euro currency basket.
With European Central Bank policymakers, in particular President Mario Draghi, paving the way for dovish action at their meeting on December, the Euro took another hit across the board last week. EUR/USD, after briefly flirting with a move towards $1.0800, closed the week at $1.0643. Markets are have been pricing in the events at the end of the first week of December, and for good reason: the ECB has its last policy meeting of 2015; Federal Reserve Chair Janet Yellen gives testimony in front of Congress; and the November US Nonfarm Payrolls report will be released. It’s going to be a very important few days.
Before then, we have an abnormal week ahead of us, with the US Thanksgiving Day holiday on Thursday, shuttering US bond and equities markets and leaving markets lacking liquidity all the while. In recent years, as is typical, the low liquidity conditions have led to sporadic price movements. These choppy conditions can prove to be a difficult environment to trade in. As such, especially given the expectations for the first week of December around the EUR-crosses, it's worth reviewing principles that help protect your capital. We call these principles the "Traits of Successful Traders."
The next few days bring only a light smattering of data relating directly to the Euro, but as they are not of the inflation variety, there impact may only prove passing for a brief few moments; it’s highly unlikely that any print, of even the data collectively this week, will be considered significant enough to have a material impact on the ECB policy meeting on December 3.
Preliminary November PMI data for Germany, France, and the broader Euro-Zone will be released on Monday and should prove only minor intraday catalysts. On Tuesday, the final Q3’15 German GDP report will be released, as will the November German IFO survey; the latter of these two data sets brings more “new” information table than the former, so we’ll be looking to that for a market concerted market response. Unlike last week, which was replete with ECB policymakers speaking, this week the calendar is largely absent of meaningful commentary.
As we keep our attention turned for the first Thursday and Friday of December, one aspect of the Euro’s recent decline worth watching is positioning among speculators in the futures market. As of the week of November 17, there was a build up to 164.2K net-short contracts from 142.9K net-short contracts for the week ended November 10. In context of prices, right after EUR/USD fell into its yearly low around $1.0460, speculators held 226.6K net-short contracts. It’s getting crowded in the short Euro trade, which means if the ECB disappoints, EUR/USD could be ripe for a short covering rally. –CV
To receive reports from this analyst, sign up for Christopher’s distribution list.
USD/JPY Stuck in Continuation Pattern Ahead of Japan GDP, BoJ Meeting
Fundamental Forecast for Yen:Neutral
The long-term outlook for USD/JPY remains bullish as the Federal Reserve remains on course to remove the zero-interest rate policy (ZIRP), but the key developments coming out of Japan may produce a larger correction in the exchange rate should the Bank of Japan (BoJ) continue to endorse a wait-and-see approach at the November 19 interest rate decision.
Despite forecasts for a widening trade deficit in Japan, the region’s 3Q Gross Domestic Product (GDP) report may encourage the BoJ to carry its current policy into 2016 amid expectations for an upward revision in the growth rate. As a result, signs of a stronger recovery may prompt BoJ to keep its asset-purchase program JPY 80T, and Governor Haruhiko Kuroda may continue to highlight an upbeat outlook for the world’s third-largest economy as the central bank head remains confident in achieve the 2% inflation goal over the policy horizon.
Nevertheless, the major data prints coming out of the U.S. may fuel expectations for a December Fed rate-hike as the Consumer Price Index (CPI) is expected to show a rebound in the headline reading for inflation, while the core rate is anticipated to expand an annualized 1.9% for the second-consecutive month in October. Sticky price growth may generate a growing dissent within the Federal Open Market Committee (FOMC) as Chair Janet Yellen sees the central bank on course to meet its dual mandate for full-employment and price-stability, but an unexpected slowdown in consumer price growth may undermine bets for a 2015 liftoff amid the ongoing 9-1 split within the central bank.
In turn, the fundamental developments coming out US/Japan are likely to spark increased volatility in USD/JPY as market participants gauge the next move by the Fed/BoJ, but the pair may consolidate ahead of the major event risk as it appears to be stuck within a bull-flag formation. Nevertheless, the deviating paths for monetary policy accompanied by the continuation pattern in price continues to highlight a long-term bullish outlook for the dollar-yen especially as the pair breaks out of the range carried over from back in September.
GBP/USD Rebound to Succumb to Dovish BoE Testimony, Strong US GDP
Fundamental Forecast for British Pound:Bearish
GBP/USD extended the rebound from earlier this month as the Federal Open Market Committee (FOMC) Minutes warned of a potential three-way split within the central bank, but the pound-dollar may struggle to hold its ground in the week ahead should the Bank of England (BoE) show a greater willingness to further delay its normalization cycle.
With the BoE scheduled to testify on its quarterly inflation report next week, the fresh batch of central bank rhetoric may dampen the appeal of the sterling should Governor Mark Carney highlight a more neutral outlook for monetary policy. Even though the preliminary U.K. Gross Domestic Product (GDP) report is expected to show the economy growing an annualized 2.3%, the disinflationary environment may continue to generate an 8 to 1 split within the Monetary Policy Committee (MPC) as the central bank anticipates price growth to hold below 1% until Spring 2016. In turn, the BoE may make further attempts to buy more time as the majority remains in no rush to lift the benchmark interest rate off of the record-low.
In contrast, an upward revision in the U.S. GDP print may fuel expectations for a December FOMC rate-hike as the central bank remains upbeat on the economy, and signs of a stronger recovery may boost the appeal of the greenback as market participants anticipate the core Personal Consumption Expenditure (PCE), the Fed’s preferred gauge for inflation, to uptick to an annualized 1.4% from 1.3% in September. Sticky price growth accompanied by a 2.1% expansion in the growth rate may keep the Fed on course to remove the zero-interest rate policy (ZIRP) in 2015 as the U.S. economy approaches full-employment, while Chair Janet Yellen remains confident in achieving the 2% inflation target over the policy horizon.
As a result, the long-term outlook for GBP/USD remains tilted to the downside as the Fed is widely expected to shift gears ahead of its U.K. counterpart, and the pair may largely fail to retain the rebound from the monthly low (1.5026) as market participants push out bets for a BoE rate-hike. Moreover, the advance from the April low (1.4565) may continue to unravel over the coming weeks as Fed Funds Futures show a 68% probability for a rate-hike at the December 16 interest rate decision.
Gold Prices Down for a Fifth Week- Outlook Hinges on US GDP
Fundamental Forecast for Gold:Neutral
Gold prices continued to fall for the fifth consecutive week with the precious metal down 0.6% to trade at 1076 ahead of the New York close on Friday. The losses come amid expectations that the Federal Reserve will move to raise interest rates in December for the first time since 2006.
Looking ahead to next week, traders will be closely eyeing the second read on 3Q GDP. Consensus estimate are calling for an uptick in the annualized pace of growth to the tune of 2.1%, up from a previous read of 1.5%. On the back of last month’s stellar Non-farm payroll report, stronger U.S. data is likely to continue propping up the greenback at the expense of gold. Should the data surpass growth expectations, look for gold to remain under pressure on increased speculation for higher rates next month.
From a technical standpoint, gold rebounded off the 100% extension of the decline off the 2015 high at 1067- a level not seen since February of 2010. The trade has been quite extended on the downside marking a 5th straight week of declines with 15 of the past 18 sessions marking losses for bullion prices. A bout of short-covering this week offered a short reprieve to the battered precious metal before turning over again on Friday.
We may yet see some upside for the trade in the near-term after this tumble- look for resistance at 1096-1100 where the July low-day close, the September low and this week’s high converge. A breach above 1112 needed to shift the focus back to the topside. A break of this week’s low targets more significant support at the confluence of the lower median-line parallel & a longer-dated .618% extension at 1053. Bottom-line: gold is responding to downtrend support & while the rebound may push a bit higher from here, the broader focus is weighted to the short-side sub 1112.
BoC Governor Poloz Says Data Makes Rate Hike Miles Away
Fundamental Forecast for CAD: Bearish
Canada’s Dollar Remains Bidless Despite Other Commodity Reliant Currencies Catching a Bid on Suspect USD Strength
Canada Sept. Retail Sales Fell 0.5%, Est. 0.1% Causes BoC Governor Poloz To Say Data Makes Rate Hike “Miles Away.”
For up-to-date and real-time analysis on the CAD, Oil and market reactions to economic factors currently ‘in the air,’ DailyFX on Demand can help.
In an ideal economy, which doesn’t exist anywhere, weakness in one sector would be followed or balanced by strength in another sector. For the Canadian economy, the hope would be that weakness in the energy market would be offset by the strength of Canadian households to spur demand thanks in part to the money saved by lower energy prices. However, that’s not happening, and it’s causing frustration at the Bank of Canada. It turns out that the oil-dependent Canadian economy isn’t having the resilience that the Bank of Canada would like to see, and that was shown via Retail sales this morning Dollar has continued to see weakness as the price of Oil sitting near $40 has put the country in a tough fiscal position. Specifically, the finance department showed Canada is on pace to end the year in the red to the tune of C$3 Billion as the economy has failed to revive itself due to the Oil Slump.
Earlier this week, we saw a dismal print in Canada Manufacturing Sales on Monday at -1.5% vs. 0.2%. This argues that the weakness in the economy is yet to be fully realized and that the shift to Non-Resource industries will be rough (a la Australia). Other domestic data last week was the Bank Canada Consumer Price Index Core (YoY) that slightly beat expectations at 2.1% vs. 2.0% exp. Next week, we will turn focus again to the direction of WTI Crude Oil to see if a breakout could potentially spur buying of the Canadian dollar as a value play. Outside of the reliance of Oil, the more important news event on Friday will be Industrial Produce Price MoM that expected to improve to -0.1% vs. prior readings of -0.3%. However, if Oil further pushes toward the August 24th low and Industrial Produce Price misses expectations, we could see CAD make another run at YTD lows.
On the charts this week, the Canadian Dollar failed to find the buyers that found other commodity currencies like the Australian and New Zealand Dollar. Even the Oil reliant Norwegian Krone ended the week up 0.5% to the USD. If Oil can catch a bid next week, we could see CAD play a game of catch-up in which the Canadian Dollar strengthens fast against the USD/CAD in a game of Fear of Missing Out (FOMO). After failing multiple attempts to break and hold above 1.3355 resistance, USD/CAD could test 1.3220 support. US Dollar trading will likely be thin next week due to the American holiday week so Oil will likely be the key driving of CAD until the economic calendar’s come back to life.
Sign Up For a Practice Account and Receive Your Free Trading Guides Here.
Australian Dollar Outlook Clouded as Prices Break from Policy Bets
Fundamental Forecast for the Australian Dollar: Neutral
Australian Dollar Rebound Continues as Prices Rise Most in 6 Weeks
Outlook Clouded as Aussie Decouples from Relative Rates Policy Bets
Find Key Turning Points for the Australian Dollar with DailyFX SSI
The Australian Dollar continued to recover against its US counterpart, putting in the largest five-day advance in six weeks. Curiously, the currency rallied even as relative RBA vs. Fed monetary policy expectations shifted against it. The domestic side of the equation held largely static while the probability of an FOMC interest rate hike at the December policy meeting continued to swell, with traders now putting the probability of “liftoff” at 73.6 percent.
This makes for a clouded outlook in the week ahead as a quiet economic calendar on the homegrown front keeps external forces in the spotlight. Fed policy speculation seems likely to continue preoccupying traders. An upgrade of third-quarter US GDP figures as well as improvements in measures of consumer confidence and durable goods orders are expected ahead. That seems likely to offer additional fodder for December rate hike bets, amplifying the projected policy divergence between the US central bank and its G10 counterparts.
At surface level, one might suspect that this would bode ill for the Aussie Dollar even as traders question the likelihood of further RBA easing on the horizon. Last week’s counter-intuitive response to an analogous fundamental backdrop casts doubt on this however. A clear-cut explanation for prices’ apparent decoupling from policy trends is elusive at this point. Theories assigning blame to profit-taking or portfolio reallocation ahead of the year-end seem flimsy thus far. A likely liquidity drain ahead of the US market closure for the Thanksgiving holiday may only exaggerate ambiguity, so investors would be wise to tread carefully for now.
Kiwi Catches its Footing Despite Another Spill in Milk Prices
Fundamental Forecast for the Kiwi: Bearish
In previous pieces on the New Zealand Dollar, we’ve discussed the correlation between Milk prices and the spot rate on the Kiwi-Dollar. This is kind of like a ‘soft commodity’ correlation, similar to how we’ll often see similar types of moves in metals and the Australian Dollar, or Oil and the Canadian Dollar. For economies that have considerable exposure to these commodity classes, it only makes sense that they price roughly in-line with the source commodity. Should prices go up, that means producers make more. With this additional profit, they can reinvest in their business; they can hire more people and that leads to lower unemployment. Wages then need to rise to attract workers to offset this competitiveness in the economy, and then we have inflation. At this point, Central Bankers will usually look at hiking rates (think of that!), and this could drive trade and capital flows into the market to get this new, higher rate. This is that beautifully synergistic impact of a growth story within an economy.
Well, that’s the opposite of what’s going on in New Zealand and, in turn, the rest of the world right now. Milk prices have been on a steady trajectory lower along with many other commodities, and as we had discussed last month, this has driven the New Zealand Dollar lower. For four consecutive dairy auctions starting in mid-August (auctions take place every two weeks), milk prices were on the rise. This increase lasted all the way to the October 20th auction, and this saw prices in the Kiwi-Dollar rise from a base of price action support at the .6250 area in early September, all the way up to just shy of the .6900-handle. But that October 20th auction showed a decline of -3.1% in dairy prices, and the Kiwi hastened its descent lower. From .6800, to .6700, to .6600 and finally knocking in support at the .6500-handle; and that’s how we started this week, having just caught support at a new major psychological support level.
But the Dairy auction on this Tuesday wasn’t very encouraging as prices spilled (pun intended) by -7.9%, sending the Kiwi even lower to find new support at .6425. A move higher towards the end of the week looks to be more positioning based, as the US Dollar put in considerable weakness on Thursday and this reflects in the NZD/USD spot.
With a holiday-shortened week in the US coming up, and with no major Kiwi data and no dairy auctions until we get into that first week of December that is just absolutely loaded with data, we may be nearing an attractive entry point for a short-side resumption play. Traders can look to base stops at .6650 to get risk levels above recent highs, with targets set towards those previous lows of .6200. With so little news on the docket, the week after next looks significantly more attractive for trend-continuation plays, but the ranges produced ahead of the data could offer adequate entry opportunities with an eye on the following week.
The forecast on the Kiwi-Dollar remains bearish.