US Dollar Sharply Lower as S&P Surges - What Could Change That?
Fundamental Forecast for Dollar: Neutral
The US Dollar finished the week sharply lower against major FX counterparts, but a better-than-expected labor market report forced it off of multi-year lows into Friday’s close. What’s next for the Greenback?
A relatively quiet US economic calendar in the days ahead leaves focus on broader financial markets and Dollar drivers. Fresh record-highs in the US S&P 500 hurt demand for the US currency, and we may need to see an important pullback in ‘risk’ for the Dollar to stand a chance at meaningful recovery.
It initially looked as though stocks would take a hit as rising tensions between East and West simmered to a boil in Ukraine over the weekend. An ease in rhetoric nonetheless sparked a dramatic comeback in the S&P and a sharp drop in the US Dollar. Suffice it to say, however, the situation remains fluid and the end game is not clear.
Vested economic and geopolitical interests in Ukraine (from both Russia and the West) should be enough to have cooler heads prevail. It is arguably for that reason that Eastern European troubles have not sparked broader emerging market contagion and financial market distress. Yet we need only remember comparatively minor problems in Argentina sparked significant Emerging Market and Developed Market sell-offs—leading to important US Dollar strength.
A mixed bag for US economic data results otherwise leaves USD forecasts less clear. On the one hand, the world’s largest economy has clearly seen a slowdown in growth through early 2014. On the other, modestly positive labor market trends and other factors suggest that the US remains on firm footing.
The Greenback may continue to benefit from expectations that the US Federal Reserve will continue the so-called “Taper” of its Quantitative Easing policies at its March 19 meeting, but is it enough? US Treasury Yields have fallen considerably from recent peaks, which hurts the USD particularly against the yield-sensitive Japanese Yen. It might take a substantial improvement in US economic results to force a meaningful bounce in domestic yields and interest rate forecasts.
The Dollar remains out of sorts as safe-haven demand seems non-existent, and even the potential for armed conflict in Eastern Europe hasn’t been enough to force a meaningful pullback. Our forex sentiment data warns that the US currency may be at a substantial sentiment extreme versus the Euro, Swiss Franc, and New Zealand Dollar.
Yet sentiment can and has remained extreme for longer than any trader can remain solvent. We’re watching for Dollar weakness at these levels, but it may take relatively little to force a significant pullback in “risk” and a similarly important Dollar bounce.
ECB Unlocks Door for Further Euro Strength - Will Data Allow?
Fundamental Forecast for Euro: Neutral
- Forex seasonality over the past 20 years favor a stronger EURUSD in March.
- A better than expected February Nonfarm Payrolls report stunted a potential major EURUSD breakout.
- 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 resiliency continued to shine this week as a bout of mixed economic data took a backseat to the European Central Bank’s policy meeting on Thursday. On a cooling of tensions in Eastern Europe and seemingly diminished outcome of military conflict, the higher yielding currencies led the pack as risk appetite surged: the EURAUD depreciated by -1.08% and the EURNZD eased by -0.38%. The Euro’s strength came through in the last two days of the week, and its gains elsewhere are constructive going forward.
While the ECB’s meeting on Thursday helped the Euro realize its pent up bullish potential, it may have just paved the way for further gains over the coming months. The window in which to ease further may be closing, and as a result, the door to a period of monetary stability may have been opened.
As ECB President Mario Draghi made clear in the press conference on Thursday, the ECB does not want to simply just inject more liquidity into the Euro-Zone banking system; there is little need right now. Interbank lending rates (EONIA) are stable below the ECB’s overnight reference rate of 0.25%, which means funding stresses are low. Sovereign yields are stable at multi-year lows (bond prices at highs) and equity markets are buoyed; the linkages between the Euro-Zone banking system and her sovereigns are being strained.
With the PMI surveys pointing to continued modest growth and Euro-Zone inflation starting to tick higher, any new non-standard dovish policies could send the wrong signal as the ECB undertakes role as supervisor of the Euro-Zone banking system; economic data has been generally improved recently, even consumption. As the ECB prepares its stress tests (AQR), announcing a liquidity injections before the results come out might signal to the market that the ECB discovered something unknown and materially negative once they began to review banks' balance sheets.
Instead, so as to prevent unnecessary confusion about the health of the banking system, the ECB is stuck in neutral. To be clear: the ECB stands ready to act if necessary, and quite frankly, it seems that the Governing Council would like to do more. But at present time, short-term economic momentum doesn’t dictate that necessity. This is not inaction; this is a deliberate attempt to do nothing and see where the chips fall. Only if data falls back with the ECB act – crisis conditions don’t exist.
Eventually, a BoE-styled Funding for Lending Scheme (FLS) seems like the most palatable outcome for the market is crisis conditions remain absent. This could address credit concerns at the consumer and small business level (SMEs), and it wouldn’t put the Euro at risk of a massive ECB balance sheet expansion that another LTRO or a Fed-styled QE would bring (this would please the German influence). For now, data needs to remain sturdy as the door remains open for further Euro gains. – CV
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Yen Crosses Jump but Distrust Remains for Risk Trends, BoJ Plans
Fundamental Forecast for Japanese Yen: Neutral
Bullish risk trends are critical for sustaining – much less progressing – the yen crosses bullish lean
Speculation of a QE upgrade is still embedded in yen pricing, but the BoJ is unlikely to increase it this week
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There are two primary concerns for yen cross traders: is risk appetite supporting these over-valued carry trades and will the Bank of Japan follow through on its tacit vow to drive its currency lower? Doubt has crept in on both fronts over the past months as the correlation between risk-sensitive assets has slackened and the central bank has backed off its threats to pursue inflation at any cost. Yet, speculative appetite perked up this past week with the yen crosses rising between 3.1 and 1.2 percent (AUDJPY to CADJPY). With a BoJ rate decision and a contentious and sentiment on trial this week, expect anxiety and volatility.
At their foundation, the yen crosses are carry trades. If there weren’t this investment connection; it is unlikely that Japan’s government and central bank would be very successful in driving its currency down. Yet, in the risk-reward balance found in this particular speculative endeavor there is a severe imbalance. Where the ‘risk’ column is still very low (the FX-based volatility index slipped to a 14-month low this past week), the ‘reward’ is far weaker. Looking at short-term yield differentials on these crosses, the carry is still dragging around near historical lows.
This unattractive FX dividend, however, has been supplemented by a grab for anything and everything that is expected to appreciate during bullish market cycles. Whether we label this irrational exuberance, moral hazard or just a bullish market; the yen crosses have benefit to the tune of 15 to 43 percent appreciation over the past 18 months across its liquid pairings. As of last week, the medium-term correlation between USDJPY and the Nikkei 225 (the Japanese equity index is a good, local measure of risk appetite) stood at 0.66 on a 20-day rolling basis – meaning the two tend to move in the same direction at generally the same pace.
While there is relatively little risk that yen will lose its tether to traditional risk trends, there is serious concern over the health of sentiment itself. Exceptionally low levels of implied volatility (insurance premium) and record high US equity benchmarks belie a fading economic outlook, excessive use of leverage and viscosity in the funding market. Yet, these have been issues for some time. More tangible and immediate threats to our picture of tranquility are the situations in Ukraine, Chinese trusts and US monetary policy.
As we keep a cautious eye on the potential for risk trends, a different requirement for continued USDJPY appreciation will be put to the test this week: the Bank of Japan’s commitment to fight inflation with stimulus. While the central bank has maintained a near $75-billion-per-month, open-ended program, this program may not be enough to engage the next leg up. With the initial introduction of this program, most of the progress from the market was founded in the lead up to the announcement. The drive quickly fell stalled after the program was realized. Over the past weeks, we have heard language that policy officials would do ‘everything necessary’ to meet their inflation targets, but there seems to be a sense of contentment with their hitting those objections within the given time frame. If that is the case, there isn’t a need for an upgrade to stimulus. If the BoJ confirms this approach, they may quickly find it was the expectation for an ‘undefined more’ that pushed the market – not the QE program itself.
According to yields and economists’ expectations, there is little expectation that changes will be pursued by the policy committee at this upcoming meeting. Consistent with the first QE effort, fiscal year end and tax hike; those hoping for a stimulus upgrade suspect April would be the opportunity. If a move is imminent though, we would expect to see some sort of warning – explicit or implied – at this gathering. Other key event risk to watch includes the 1Q business sentiment survey and January trade figures. - JK
GBP to Target 1.6850-60 on Hawkish Bank of England (BoE) Testimony
Fundamental Forecast for the British Pound: Bullish
The GBPUSD pulled back from a fresh monthly high of 1.6784 following the better-than-expected U.S. Non-Farm Payrolls report, but the British Pound may continue to coil up for a move higher as the Bank of England (BoE) moves away from its easing cycle.
Indeed, the Monetary Policy Committee (MPC) refrained from releasing a policy statement after retaining its current policy in March, but it seems as though the central bank will do little to halt the appreciation in the sterling as it helps to achieve the 2% target for inflation.
Beyond the U.K. data prints on tap for the week ahead, Governor Mark Carney, Paul Fisher, David Miles and Martin Weale are scheduled to testify in front of Parliament’s Treasury Committee on March 11, and the fresh batch of central bank rhetoric may spur a bullish reaction in the GBPUSD should we see a growing number of BoE officials show a greater willingness to normalize monetary policy sooner rather than later.
With that said, we will retain a bullish outlook for the GBPUSD as it appears to be carving a higher low above the 1.6600 handle, and will continue to look for a move into the 1.6850-60 region, the 78.6% Fibonacci expansion from the October advance, as the Relative Strength Index (RSI) preserves the bullish trend carried over from the previous year. - DS
Post NFP Break Below $1330 May Signal Gold Top in Place
Fundamental Forecast for Gold:Bearish
Gold is firmer at the close of trade this week with the precious metal up by nearly 1% to trade at $1335 ahead of the New York close on Friday. Tensions regarding the ongoing geopolitical dispute in Ukraine propped up gold prices early in the week with spot turning just ahead of technical resistance at $1357. Gold has since traded within the March 3rd range with major US economic data on Friday offering little support for the 2014 rally.
The US employment report on Friday was the highlight of the week with non-farm payrolls adding 175K jobs last month, toping expectations for a print of just 149K. The unemployment rate unexpectedly rose to 6.7% from 6.6% and while this would typically be seen as a negative, the move was accompanied by a broadening in the civilian labor force- a factor that will inherently elevate the headline rate. Gold immediately came under pressure on the release as concerns over the widely debated impact weather had on jobs abated. That’s said, it’s likely the Fed will continue tapering QE purchases as expected and the bid for gold (at least from an inflation standpoint) is likely to be limited barring any additional geopolitical risk.
Looking ahead to next week, investors will be closely eying retail sales data and the preliminary March University of Michigan confidence numbers. Gold prices are likely to take direction from broader market sentiment with our attention shifting on the USDOLLAR’s recent rebound at key Fibonacci support on Friday at 10,508. Should this rebound materialize into a more substantial advance, look for gold prices to remain under pressure.
From a technical standpoint, gold remains at risk below key resistance at $1357/61 with a clean monthly opening range highlighting support into $1330. Look for a decisive break of this range mid-next week to offer clarity on a medium-term bias heading into March with our immediate focus against the $1357/61 resistance range. A daily RSI support trigger looks to have been broken on Friday’s decline and a move below the March opening range puts support targets into view at $1320 and $1300/06 where more substantial demand is expected. Only a break below the $1268/70 support level would put the broader decline off the 2012 high back into play while noting that a break above the $1361 threshold suggests that a much more significant low was put in place last December. Such a scenario would eye topside objectives towards the August highs at $1433.
---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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Forex: Australian Dollar Facing Conflicting Domestic, External Forces
Fundamental Forecast for Australian Dollar: Neutral
Upbeat Jobs Data May Reinforce Positive Shift in the RBA Policy Outlook
Fading Doubts About Fed “Taper” Continuity May Undermine the Aussie
Help Time Key Turning Points for the Australian Dollar with DailyFX SSI
The Australian Dollar launched a brisk recovery last week, pushing to the highest level in three months against its US counterpart. While the RBA monetary policy announcement repeated the now-familiar status quo, a round of supportive economic data proved to be a potent catalyst. The central bank once again argued in favor of a sustained period of stability in monetary policy. That has re-framed speculation to focus on which direction rates are likely to go once that period runs its course, and last week’s news-flow seemed to argue for tightening.
The fourth-quarter GDP report topped economists’ forecasts, showing the year-on-year growth rate accelerated to 2.8 percent and marked the highest reading since the three months through December 2012. Meanwhile, retail sales unexpectedly jumped 1.2 percent in January to yield the largest increase in 11 months. Investors’ RBA policy expectations notably shifted following these upbeat outcomes, with a Credit Suisse gauge of the priced-in outlook jumping to a three week high. While an outright interest rate hike is still not being telegraphed over the coming 12 months, a meaningful hawkish shift in the underlying bias for what the RBA’s next move will be is clearly perceptible.
Looking ahead, speculation will be further informed by February’s employment figures. The economy is expected to have added 15,000 jobs, which would amount to the largest gain since November. Data from the Australian Industry Group showed hiring in the service sector, which employs close to three quarters of the labor force, expanded for the first time in three months in February. This increases the probability of an upbeat outcome, bolstering bets on a rate hike cycle to be initiated after the current standstill. A strong-enough result may even hasten the timeline for its expected commencement in the minds of investors. Needless to say, such a scenario would bode well for Aussie.
External factors remain an important consideration however and may undermine the Australian unit’s prospects. The US economic calendar is expected to yield a pickup in retail sales and an improvement in consumer confidence. On the “fed-speak” docket, the spotlight will be on Senate confirmation hearings for Stanley Fischer, Lael Brainard and Jerome Powell. The former is nominated for Fed Vice Chair while the latter two are to be Governors.
Comments from Mr Fischer – until recently the Governor of the Bank of Israel and formerly a high-ranking official at both the IMF and the World Bank – will be in focus. He has vocally supported US monetary policy normalization in recent months, suggesting he will add to the chorus of pro-“taper” rhetoric from other Fed officials. Taken together, the arrival of these catalysts on the heels of Friday’s upbeat US payrolls data has scope to significantly reduce speculation about a possible deceleration of the QE cutback cycle. That may undermine risk appetite, weighing on the Aussie in the process. -IS
New Zealand Dollar to Hold Range Ahead of RBNZ
New Zealand Dollar to Hold Range Ahead of RBNZ
Fundamental Forecast for New Zealand Dollar: Neutral
The New Zealand Dollar ended the week nearly 2.0 percent lower, a dramatic turnaround from previous weeks. After disappointing Chinese data showed slower than expected growth in New Zealand’s biggest business partner, investors were forced to reconsider their positions in the kiwi. In addition, weak US data and a collapse in the prices of precious metals dragged down risk-linked currencies like the New Zealand Dollar. On the other hand, New Zealand’s first-quarter Consumer Price Index met economists’ forecasts and has grown at a steady pace. Looking forward, given this positive and negative momentum, we may see the kiwi rebound within range.
The main event risk for the New Zealand Dollar next week comes in the form of the central bank rate decision scheduled for Tuesday. Currently, the country’s overall inflation pressures remain subdued, growing at a pace below the Reserve Bank‘s bottom target range for the third consecutive quarter. Recently, the currency’s high exchange rate has placed downward pressure on the price of traded goods such as imported household items. According to the RBNZ there are some growing concerns over the “current escalation of house prices”, which continue to climb, particularly in the country’s two largest cities, Auckland and Christchurch. However, the increase in rents and construction costs are not as significant as expected and there is little sign of a spillover in rebuild-related inflation in other regions of New Zealand outside of Canterbury. Domestic inflation is expected to rise gradually with the economic recovery, but is likely to remain in the bottom half of the central bank's target zone throughout the rest of this year. Consequently, the RBNZ’s inflationary concerns are minimal and the RBNZ may hold interest rates at record lows in order to boost jobs and help exporters who are hampered by a strong kiwi.
On the Chinese data front, the April Manufacturing PMI and Business Sentiment Indicator reports will be the top drivers for the New Zealand Dollar. New Zealand’s small market size limits its global competitiveness and the nation’s economy has become closely correlated with that of China, similar in nature to the relationship between Canada and US. Despite China’s first-quarter GDP shortcomings, the nation’s recovery continues to be lead by improving domestic demand. As we discussed last week, signals continue to suggest that China is moving away from export-led growth to import-led growth. During this transition period, we may see some volatility and a subsequent economic slowdown in the short term. In the long term, however, China’s enormous population (1.3 billion) has the potential for significant consumption should individual savings be reduced from their current levels of 50% of income. This long term perspective adds positively to the outlook of New Zealand and its currency.
The pace of the kiwi's weekly decline slowed following a Bloomberg News report concerning a G-20 draft statement, which affirmed a commitment, among the 20 nations, to avoid purposely weakening their currencies in order to gain a trade advantage. Previous gains in the Kiwi were largely driven by the increasing demand among investors who were looking for positive returns outside of Japan. As a result, traders should focus on the G-20 meeting over the weekend, as markets will look for any comments about Japanese currency intervention.
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