Usd Aiming Higher as Upbeat Jobs Data Fuels Fed Hike Bets
Fundamental Forecast for US Dollar: Bullish
US Dollar to Advance as Upbeat Payrolls Data Fuels Fed Rate Hike Bets
Softer ISM Data May Be Offset by “Fed-Speak” Pointing to Steady Outlook
Help Identify Critical Turning Points for the US Dollar Using DailyFX SSI
The US Dollar continued to reassert itself in the final days of October, rising for a second consecutive week to produce the largest advance in over a month against its leading counterparts. The move was primarily driven by a comparatively hawkish FOMC monetary policy announcement. The markets were positioned for a dovish rhetorical shift reflecting a desire to safe-guard the US recovery from knock-on effects of slowing growth in the Eurozone and Asia. As we suspected, Janet Yellen and company opted to stay the course, concluding the QE3 asset purchase program and delivering a broadly status-quo policy statement.
This makes for a data-sensitive environment going forward as speculation about when normalization will commence continues. Priced-in expectations telegraphed in Fed Funds futures shifted one month forward in the aftermath of the FOMC meeting, with investors now expecting the first rate hike by December 2015 compared with a call for January 2016 prior to the policy announcement. The week ahead will offer ample opportunities for this to evolve further as a slew of high-profile economic data points cross the wires.
Needless to say, the spotlight will be on Friday’s Employment report. Nonfarm payrolls are expected to register an increase of 235,000 in October, marking a bit of a slowdown following the 248,000 gain in September. The unemployment rate is seen holding steady at 5.9 percent. Leading surveys suggests that the pace of hiring across the manufacturing and services sectors was unchanged compared with the prior month however. Furthermore, data compiled by Citigroup shows that US economic news-flow has broadly outperformed relative to consensus forecasts since August, hinting analysts are under-appreciating the recovery’s vigor. On balance, this opens the door for an upside surprise.
A medley of activity indicators will precede the jobs report, with October’s factory- and service-sector ISM readings, September’s Factory Orders data and the leading ADP estimate of hiring activity taking top billing. The twin ISM reports may prove most problematic, reflecting a slowdown in economy-wide activity. A dip in the pace of expansion compared with the peaks seen in the second quarter is not news at this point however, emerging leading survey figures some months ago and confirmed in last week’s third-quarter GDP report.
The Fed has clearly opted to look past this deceleration and will likely tolerate a steeper slowdown still before adjusting policy considering its steady hand through a far more dismal first quarter. A packed schedule of commentary from Fed officials including Chair Yellen will probably help hammer this point home in the days ahead. With that in mind, the greenback looks poised to continue higher (albeit not in a straight line) as firmer jobs data suggests stimulus withdrawal may arrive sooner rather than later.
Short-term Euro Rebound Due as Data Improves, Stress Tests Pass
Fundamental Forecast for Euro: Neutral
- The Euro’s performance has been broadly mixed the past month, but there are selective opportunities both long and short.
- EURUSD may be setting a higher low as the economic data drought ended with surprise German, EZ PMIs.
- Have a bullish (or bearish) bias on the Euro, but don’t know which pair to use? Use a Euro currency basket.
The Euro continued its process of stabilization for the third consecutive week, although a slightly more negative tone was apparent in the run up to the release of the European Central Bank’s asset quality review (AQR, stress tests) The 18-member currency posted gains against only two of the major currencies covered by DailyFX Research, with EURUSD falling by -0.71% to $1.2671. A culmination of factors over the last few days and weeks may be gathering for Euro strength in the near-term
Aided by much better than expected preliminary October German and Euro-Zone PMI data, gauges tracking Euro-Zone economic momentum have turned sharply higher from their lowest levels of the year. While the yearly low was set on October 14 at -57.3, the Citi Economic Surprise Index shot up to -36.8 by the end of this past week. Relatively speaking, data has been less disappointing and even positive in select cases.
Following the small improvement in data momentum, medium-term inflation expectations rebounded slightly this week as well. The 5Y5Y breakeven inflation swap, the European Central Bank’s preferred market measure of medium-term inflation expectations, edged higher from 1.779% to 1.791% - not a terrific rebound, but still moving in the direction the ECB’s policy is hoping for. The yearly low was set on October 15 at 1.541%.
These improving economic data trends are now bolstered by what should be considered a better than expected round of stress test results. The AQR was released on Sunday at 12 CET, and showed that while 25 Euro-Zone banks failed the tests totaling €24.2B in capital shortfall, 12 banks have already raised enough capital to cover their respective shortfalls.
The total shortfall after the 12 banks raised capital fell to €9.5B – a much more manageable figure. Various banks’ estimates pegged the cumulative shortfall from anywhere to low tens of billions to as high as €100B.
If there was ever a chance for the Euro to take advantage of near-term conditions, the moment may be ripe for the elusive Euro short covering rally. The fuel here, of course, is the stretched futures market positioning. Non-commercials/specs held 159.4K net-short contracts for the week ended October 21, an increase from the 155.3K net-short contracts held a week earlier.
Outside of the very immediate time horizon, the outlook is still fairly bearish: sovereign QE is still widely expected from the ECB next year while other major central banks (BoE, Fed) winddown their expansive stimulus policies. –CV
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USD/JPY to Eye Fresh Highs on Less-Dovish FOMC, More BOJ Easing
Fundamental Forecast for Japanese Yen: Bullish
The fundamental outlook for USD/JPY remains bullish as Federal Open Market Committee (FOMC) moves away from its easing cycle, but the dollar-yen may struggle to press fresh highs next week should the Bank of Japan (BoJ) refrain from further expanding its asset-purchase program.
With the Fed’s QE exit largely priced-in, the forward guidance for monetary policy is likely to have a greatest impact on the USD/JPY, and we will favor a further appreciation in the greenback should the central bank show a greater willingness to remove the zero-interest rate policy (ZIRP) in 2015. On the other hand, the fresh batch of central bank rhetoric may drag on interest rate expectations as the majority remains in no rush to normalize policy, and we may see a larger correction in the reserve currency should the central bank look to retain its highly accommodative policy stance for an extended period of time.
In contrast, market participants are still looking for a further expansion in the BoJ’s asset-purchase program as lower energy costs curb the outlook for inflation, and the Japanese Yen may face additional headwinds over the near-term should Governor Haruhiko Kuroda take additional steps to stimulate the ailing economy. However, the BoJ may stick to its current policy as the central bank head remains confident in achieving the 2% target for price growth, and the Yen may outperform against its major counterparts should market participant pare bets of seeing additional monetary support in Japan.
With that said, the USD/JPY may extend the recent series of higher highs & lows on more easing from the BoJ along with a less-dovish statement from the Fed, but the pair may fail to retain the rebound from 105.18 should both central banks disappoint. - DS
British Pound Holds on by a Thread - What to Watch in Week Ahead
Fundamental Forecast for Pound:Neutral
The British pound finished the week notably lower versus the resurgent US Dollar, but a busy week of economic event risk ahead suggests the GBP/USD may see big moves and could very well stage a reversal.
Watch for any surprises out of an upcoming Bank of England Rate Decision and/or the highly-anticipated US Nonfarm Payrolls report to drive the lion’s share of Sterling/Dollar moves in the week ahead. Traders are clearly preparing for big volatility across the major FX pairs as 1-week volatility prices have hit their highest since the Scottish Referendum vote in September.
We do not expect the Sterling will see the same level of turmoil on a simple BoE rate announcement. Yet we need only look to the past week’s Bank of Japan interest rate decision to see the effects of a truly surprising central bank meeting. Analysts widely expect that the Monetary Policy Committee will leave interest rates unchanged and therefore produce no post-decision statement. To that end we’ll watch earlier-week PMI figures to gauge sentiment ahead of next week’s Bank of England Quarterly Inflation Report.
Beyond UK event risk it remains important to watch how the US Dollar and British Pound start the new month. Through September it seemed as though the US Currency was unstoppable as it hit fresh peaks against almost all major counterparts. Yet the month of October brought considerable consolidation. Late volatility suggests that November could produce a material change in market conditions. And indeed historical seasonality studies have shown that major currencies are more likely to see important reversals at the beginning and end of a given calendar period. Let’s watch and see how the Sterling starts to gauge whether a more significant breakdown is likely. - DR
Gold Plummets to 4-Year Lows as Fed Ends QE- $1206 Resistance
Fundamental Forecast for Gold:Bearish
Gold prices plummeted this week with the precious metal off by more than 5.2% to trade at $1166 ahead of the New York close on Friday. The loss mark the largest single day decline since December 19th 2013 with prices now at the levels not seen since April 2010. Strength in the USD, improving US economic data and a fresh round of easing from the Bank of Japan is likely to keep gold prices under pressure with a near-term support structure coming into focus as we close out October trade.
The FOMC policy decision was central focus this week with the central bank announcing the cessation of QE operations amid an improving economic backdrop. The accompanying policy statement noted that, “The Committee judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program,” and “Although inflation in the near term will likely be held down by lower energy prices and other factors, the Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.” The remarks fueled a substantial rally in the greenback with gold breaking support at $1222 on the move. The next hit to bullion came on Friday after the BoJ announced a new round of quantitative easing. The surprise move sparked strength in risk assets with the Nikkei 225 advancing more than 4.8% on the session as gold continued lower into fresh 4-year lows.
Looking ahead to next week investors will be closely eyeing the US data flow with ISM, Factor Orders, and the highly anticipated Non-Farm Payrolls report on tap. Although the focus for Fed officials has seemingly shifted more so towards the inflation side, traders will be looking to confirm the central bank’s assertion of a substantiated recovery in the labor markets with consensus estimates calling for a print of 234K as unemployment holds at 5.9%. Look for stronger than expected US data points to continue fueling the dollar rally at the expense of gold. However, although our broader focus remains weighted to the short-side of the trade, near-term an upcoming technical feature around $1160 may offer some support for gold as we head into November trade.
From a technical standpoint, gold continues to trade within the confines of a well-defined Andrew’s pitchfork formation off the 2014 highs, with Friday’s low coming just shy of the bisector line. (note that this reaction line caught the October 6th low almost to the pip) Key support rests in the zone between $1151/60 where a longer-dating 1.618% extension off the all-time record highs stands. Subsequent support targets are eyed at $1125 and $1091/99. Initial resistance is eyed at former support at $1178/80 with key resistance now seen at $1206. We will reserve this level as our medium-term bearish invalidation level with breach above likely to prompt a period of consolidation in the bullion prices. Look for the November opening range to offer some clarity on our directional bias with our broader outlook remaining weighted to the downside sub-$1206. – MB
---Written by Michael Boutros, Currency Strategist with DailyFX
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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 Poised For Intraday Volatility On Torrent Of Top-Tier Data
Fundamental Forecast for Australian Dollar: Neutral
AUD/USD Swings Within Its Trading Band At The Mercy Of General Risk Trends
Top-Tier Economic Data May Catalyze Intraday Volatility Yet Limited Follow-Through
Positive Cues From Risk Sentiment May Be Offset By Elevated Volatility Expectations
The Australian Dollar kept traders in suspense over the past week as it swung at the mercy of its counterparts and broader risk appetite. The coming week will bring a medley of top-tier local economic events including the RBA decision, jobs numbers, manufacturing survey figures, building approvals and trade data.
The abundance of domestic releases holds the potential to catalyze plenty of intraday volatility on surprise readings. However, the scope to deliver a lasting impact on the Aussie may be limited amid steadfast RBA policy expectations.
The central bank is widely anticipated to once again leave rates on hold when it meets on Thursday. Moreover, recent data suggests the Board will deliver another rehashed statement that notes the need for a ‘period of stability’ for rates.
Until we see consistent signs of improvement in the local labour market the Reserve Bank is likely to retain its highly accommodative stance over the near-term. Yet further rate cuts remain off the cards for the time-being, given the need to manage risks posed by speculative lending in the housing market. A lack of fresh insights into policy makers’ thinking is likely to leave the AUD to take its cues from elsewhere.
An improvement in general risk appetite may offer the high-yielding currency a source of support. This is amid the concerns over Ebola and slowing growth in Europe being overshadowed by healthy US economic data. Yet implied FX market volatility remains elevated near its October peaks, suggesting traders are anticipating some large swings to occur in the market over the near-term. This in turn detracts from the carry appeal of the AUD.
Heavy selling pressure remains evident at the 89 US cent barrier, which may limit the scope for a recovery for AUD/USD. Meanwhile, the downside risks remain centered on the pair’s 2014 lows near 0.8660. For insights into the US Dollar side of the equation read the weekly forecast here.
Written by David de Ferranti, Currency Analyst, DailyFX
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New Zealand Dollar at Risk on Dovish RBNZ, Status-Quo FOMC
Fundamental Forecast for New Zealand Dollar: Bearish
NZ Dollar Vulnerable if RBNZ Opts to Augment Future Rate Hike Pledge
Status-Quo FOMC May Send Kiwi Lower as Fed Tightening Bets Rebuild
Help Identify Critical Turning Points for NZD/USD Using DailyFX SSI
The New Zealand Dollar is in for a volatile period in the week ahead as a hefty dose of domestic fundamental event risk is compounded by high-profile macro-level developments. On the home front, the spotlight is on the RBNZ monetary policy announcement. September’s outing marked a shift into wait-and-see mode after four consecutive rate increases. The central bank is widely expected to maintain the benchmark lending rate unchanged again, putting the policy statement under the microscope as traders attempt to infer where officials will steer next.
Last month, the RBNZ argued that while “it is prudent to undertake a period of monitoring and assessment before considering further policy adjustment…some further policy tightening will be necessary.” Since then, CPI inflation has plunged to the weakest in a year while the exchange rate – a perennial source of concern over recent months – arrested a three-month decline and began to recover. This may prompt the central bank to withdraw language signaling renewed rate hikes are on the horizon after the current “assessment period” runs its course, an outcome which stands to undercut yield-based support for the New Zealand Dollar and send prices lower.
Externally, the central concern preoccupying investors is the ability of a resurgent US economy to underpin global growth, offsetting weakness in China and the Eurozone. That puts the FOMC monetary policy announcement in the spotlight. Janet Yellen and company are widely expected to issue one final $15 billion reduction in monthly asset purchases to conclude the QE3 stimulus program. The probability of a surprise extension seems overwhelmingly unlikely. That means the announcement’s market-moving potential will be found in guidance for the timing of the first subsequent rate hike inferred from the accompanying policy statement.
Recent weeks have witnessed a moderation in the Fed tightening outlook as global slowdown fears encouraged speculation that the central bank will want to safe-guard the US recovery from knock-on effects of weakness elsewhere by delaying normalization. Indeed, fed funds futures now reveal priced-in expectations of a rate hike no sooner than December of next year, far later than prior bets calling for a move around mid-year. A change FOMC statement reflecting renewed concerns about persistently low inflation would validate this shift. Alternatively, a restatement of the status quo would hint the markets’ dovish lean has over-reached, triggering a readjustment and putting pressure on the Kiwi. Considering the Fed’s steady hand through the first-quarter US slowdown, the latter scenario seems more probable.