Dollar Traders Look Ahead to Jackson Hole, Eye Volatility Warily
Fundamental Forecast for Dollar:Neutral
The Jackson Hole Symposium and CPI data look to revive rate speculation – for better or worse
Volatility has eased, but the general trend is still moving higher
Watch the volume on dollar-based majors with the release of NFPS using the FXCM Real Volume indicator
The two headline themes for dollar watchers – the Fed’s place in the rate forecast and appetite for safe havens – offered the greenback little fundamental bid this past week. And yet, the dollar held up well. This stability through unfavorable circumstances is unlikely to hold out forever however. In the past month-and-a-half, the currency has reversed from a significant escalation of a bearish trend bearing and subsequently marked impressive gains. Yet, without fundamentals to support the move, the speculative drive can easily collapse on itself.
If we were to refer to the indicators used to track the major fundamental themes, it would seem that the dollar’s greatest fundamental concern would be the diminished sense of fear in the financial system. The S&P 500-based VIX Volatility Index dropped sharply from the rapid climb over the previous weeks. This deflated ‘risk’ was not unique to equities, but the retreat was far more moderate for asset classes like FX and rates. What is interesting though is that the greenback has not suffered substantially from the rebalance. This is likely because the currency’s advance was not particularly dependent on the swell in the first place. The reserve currency is considered a liquidity haven – a more extreme measure of safe haven.
Furthermore, though much of the edge was dulled in the volatility indicators, the underlying trends are still rising. From positioning in the capital markets, we also see a reticence to return to the same level of exposure and leverage that have become the hallmarks of complacency and contentedness. US equity indexes (S&P 500 and Dow) are slow to return to record highs, while European benchmarks haven’t even put up a convincing recovery. Elsewhere, one of the more popular short-term speculative trades – selling jumps in volatility via ETFs, futures and options – has substantially abated. This isn’t evidence that a wholesale unwinding of risk is imminent, but it does show a crack in speculative build up.
While risk trends can override all other themes when active, the dollar is more likely to find an active driver in interest rate expectations. This past week, data pertaining to policy speculation was light. However, there were a few Fed opinions that show how contentious the debate over stimulus and interest rates is amongst the FOMC. Known-dove Kocherlakota remarked that the economy is still far from its policy objectives and a hike in the near future was unwarranted. A direct contrast, regular hawk Bullard said they were closing in fast to their employment and inflation objectives, which has shaped his expectations for a hike in the first half of next year.
According to economists polled by Reuters and Bloomberg, the timing for the first rate hike still projects a mid-2015 move. That is similar to the Fed’s own time frame. And yet, the market continues to discount those forecasts. Is the market truly skeptical for the timing of the first move and subsequent pace, or is it simply a reflection of speculative positioning holding out? As evidence mounts one way or the other, we will reconcile this question.
In the week ahead, rate speculation will be fed by two important updates: July CPI and the Jackson Hole Symposium. The consumer price index is not the central bank’s favored inflation reading, but it is the one that the market is more prone to speculate around. Moderation could trip up the dollar, but it is unlikely to ignite a new trend. Alternatively, a pickup in price pressures can close the gap between market and Fed forecasts. The Kansas City Fed’s sponsored event to discuss economic, monetary and financial issues will generate a lot of interest. This meeting often offers up candid forecasts and opinions that we don’t normally see in normal policy channels. Fed Chair Janet Yellen is on the docket, but the global central banker tone can carry serious weight for general investor sentiment as well.
Euros Potential Capped as Regional Growth Grinds to a Halt
Fundamental Forecast for Euro: Neutral
- European growth data was surprisingly bad over the course of the week…
- …but market participants haven’t decided to send the Euro lower just yet.
- 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 rarely been a top or worst performer over the last several weeks, treading water as several other major currencies’ problems have cropped up in the interim. This week was no different: EURGBP, the top performing EUR-cross, finished up by +0.41%; and EURCAD, the worst performing EUR-cross, finished down by -0.77%. EURUSD was little changed, up by +0.07% to $1.3401.
Certain factors influencing the Euro haven’t proved to be negative. Liquidity conditions, for example, remain ample. Euro-Zone excess liquidity rose to €134.9B on the week, and the interbank lending rate (EONIA) was pinned at 0.014%. Fears of a sovereign debt crisis are nothing but a memory at this point; sovereign yields across the continent are at or near all-time lows, regardless of duration.
The lack of change in Euro exchange rates can be partially attributed to the limited movement in the corresponding futures market: non-commercials/speculators net-short positions were reported at 126.0K contracts per the CFTC’s report issue on Friday, a hair lower than the 128.7K net-short contracts held at the end of the prior reporting period. This was the first decline in net-short positions since the week ended July 8.
Unfortunately, the Euro’s midweek hiccup, resulting from the surprisingly poor French, German, and broader Euro-Zone Q2 GDP data, isn’t reflected in the CFTC’s positioning update (the reporting window closed on Tuesday; the GDP figures came out on Thursday).
What we can tell though is that European data momentum slumped once again, which offers little reason for speculators holding net-short Euro positions to ease off their bias. The Citi Economic Surprise Index slipped back to -35.2 at the end of this past week, barely above the yearly low set on July 21 at -43.3.
The upcoming preliminary August German and Euro-Zone PMI surveys aren’t forecast to see the weak growth trend get any better. The reports, released on Thursday, across each the Manufacturing, Services, and Composite indexes for Germany and the Euro-Zone are expected to decline from their July readings. You can view all six forecasts in the DailyFX Euro Economic Calendar.
When we take a step back, the bad has outweighed the good, and we haven’t even discussed the Russian sanctions. Truth be told, there is probably some feedback into the weak Q2 GDP figures as tensions from the Russia-Ukraine conflict evolved, and there will be going forward.
Considering the Q2 GDP figures were so flat and inflation at +0.4%y/y was the tenth consecutive month below +1.0%y/y, the ECB might overlook the pristine liquidity conditions it created. As the Russian-Ukrainian crisis wanes on business relationships and the sudden stop of trade between two significant partners (EU and Russia), there is bound to be economic fallout. Put simply, the ECB may be forced to compensate a bit more for exogenous risks, and speculation of additional easing action on these premises may be enough to prevent a true comeback by the Euro. –CV
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USD/JPY Opening Monthly Range in Focus Ahead of Fed Symposium
Fundamental Forecast for Yen:Neutral
The USD/JPY pared the decline from earlier this month, with the pair trading back above the 102.00 handle ahead of the Fed’s Economic Symposium in Jackson Hole, Wyoming, but the dollar-yen may continue to carve a string of lower-highs in August as it preserves the opening monthly range.
Despite the 1.7% contraction in Japan’s 2Q growth rate, the better-than-expected GDP report may keep the Bank of Japan (BoJ) on the sidelines at the September 3 meeting, and it seems as though the central bank will retain its current approach for monetary policy throughout 2014 as Governor Haruhiko Kuroda remains confident in achieving the 2% target for inflation.
With that said, the Federal Open Market Committee (FOMC) Minutes and the Economic Symposium highlights the biggest event risks for the week ahead, and the fresh batch of central bank rhetoric are likely to spark increased volatility in the USD/JPY as market participants weigh the outlook for monetary policy. With Fed Chair Janet Yellen scheduled to speak on August 22 at 14:00 GMT, we would need to see a greater willingness to normalize monetary sooner rather than later to favor another run into the 103.00 handle, but the Fed conference may do little to boost the appeal of the greenback should we get more of the same from the central bank head.
In light of the recent commentary from Fed Vice-Chair Stanley Fischer, it seems as though the majority of the FOMC remains in no rush to move away from the zero-interest rate policy (ZIRP), and a new wave of dovish commentary may generate a near-term decline in the U.S. dollar as market participants push back bets for a rate hike. As a result, we would need to see the Fed boost interest rate expectations to see a further advance in the USD/JPY, but the pair may ultimately target fresh monthly lows in the week ahead should the central bank sounds more dovish this time around.
British Pound Heads into Critical Week - Could it Finally Bounce?
British Pound Heads into Critical Week - Could it Finally Bounce?
Fundamental Forecast for Pound: Bullish
The British Pound fell for the sixth-consecutive week, matching its longest streak since setting key lows near $1.43 in 2010. Yet there are signs that the move may be overdone, and key data ahead promises big moves for the GBP.
Upcoming UK CPI data could drive important volatility in the British currency. Analysts expect that the numbers will show inflation remained below the Bank of England’s official target, and indeed low price pressures have limited expectations of future BoE interest rate hikes. And indeed the bank’s recent Quarterly Inflation Report forced an important GBP sell-off as officials talked down the likelihood of tightening policy through the foreseeable future.
Expectations have fallen so much that any higher-than-expected CPI inflation figures could spark an important GBP bounce. The subsequent BoE minutes and Retail Sales figures are less likely to move markets but remain worth watching for potential surprises.
We thus head into a potentially pivotal period for the fast-falling British currency, and we have to go back to the heights of the global financial crisis in 2008 to find when the GBPUSD last fell for seven consecutive weeks. This fact in itself hardly guarantees that the Sterling could finally reverse, but we have seen concrete signs it may have set an important low through recent trading.
We’ll look to key economic data to act as the catalyst for big moves in the GBP. - DR
Gold Rebounds Off Support on Rising Tensions in Ukraine- $1292 Key
Fundamental Forecast for Gold:Neutral
Gold prices are softer at the close of trade this week with the precious metal off by 0.40% to trade at $1304 ahead of the New York close on Friday. Bullion had held a tight range below key resistance at $1321 for the majority of the week before tumbling to key support at $1292 on Friday. The losses were short lived however with headlines over the escalating situation in Ukraine prompting a reversal that saw prices pare more than half the day’s decline. With geopolitical tensions on the rise, gold could remain supported with key US data next week and the Jackson Hole Economic Symposium likely to drive prices.
Weaker than expected US retail sales, empire manufacturing and consumer confidence this week has continued to cap USD advances near-term with the Dow Jones FXCM Dollar Index struggling to close the week above key resistance at 10,564. The August Preliminary University of Michigan Consumer Confidence survey released on Friday fell short of market expectations with a print of 79.2, missing calls for a read of 82.5 and weaker than last month’s print of 81.8. The data marks the lowest read on the survey since November of last year and follows a string of weaker-than-anticipated metrics for the US.
Looking ahead to next week traders will be closely eyeing the return of more pertinent US economic data with CPI, housing metrics and the release of the FOMC minutes from the July 30th meeting on tap. Inflation data on Tuesday is expected to show a slight softening in the annualized rate with consensus estimates calling for a down tick to 2% y/y with core inflation widely expected to hold at 1.9% y/y. Minutes from the latest FOMC policy meeting are released on Wednesday and investors will be closely eying the transcript for clues as to the committees outlook on interest rates and the economy. Look for gold to trade heavy if the minutes show a greater willingness amongst policy makers to begin normalizing sooner rather than later with headlines out of Jackson Hole next week also likely to spur added volatility in gold and USD crosses.
From a technical standpoint, gold remains within the confines of a well-defined descending channel formation off last month’s high. Friday’s sell-off took gold into key support at $1292 before rebounding sharply mid-day in New York after reports that Ukrainian forces had destroyed an armed Russian convoy that was crossing the border into Ukraine. This level is defined by confluence of the 50% retracement from the advance off the June lows and the 61.8% extension from the decline off the July high. The sheer magnitude of the rebound took gold back into the initial weekly opening range and as such we’ll maintain a neutral bias heading into next week’s event risk while noting that our bearish invalidation level remains unchanged at $1321. A break sub-$1292 is needed to re-assert our bearish outlook with such a scenario eyeing key support at $1260/68. A breach of the highs targets channel resistance dating back to the yearly high with subsequent resistance objectives seen at $1334 and the July high at $1345.
---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 Range To Remain On Status-Quo RBA Minutes And Lift In Chinese Data
Fundamental Forecast for Australian Dollar: Neutral
AUD/USD Rebounds As Local Data Recovers Amidst Return To Yield
RBA Minutes and Chinese PMI Figures To Offer Regional Event Risk
Path of Least Resistance Remains For The Pair To Stay Range-Bound
The Australian Dollar managed to reclaim lost ground over the week to finish marginally higher. A lift in local business and consumer confidence figures offered a positive signal for the domestic economy and kick started the Aussie’s recovery. Further gains were afforded by a broad return to high-yielding instruments as traders looked past disappointing Chinese economic data and Ukrainian tensions eased.
Over the coming week, the RBA’s August Meeting Minutes and the HSBC China Flash Manufacturing PMI data are the most noteworthy pieces of regional event risk for the Aussie. The Reserve Bank has held steadfast in its preference for a ‘period of stability’ for rates and the Minutes are unlikely to reveal any major revelations. In the absence of a more dovish tone from the central bank the Aussie could remain elevated.
Meanwhile, another upside surprise to the Chinese manufacturing data could offer the Aussie a source of support. A string of recent improvements in the leading indicator have helped alleviate fears of a further deceleration in economic growth within the Asian giant. A rebound in Chinese economic data bodes well for the Australian economy via the two country’s close trading ties.
Geopolitical tensions will likely remain in the background over the coming week. Although the embers of the latest flare-up are still glowing, the Australian Dollar may continue to demonstrate resilience in the absence of a material escalation of regional conflicts.
The scarcity ofsentiment-shifting regional catalysts over the coming week suggests the Australian Dollar’s path of least resistance may be for it to remain range-bound between 92 and 95 US cents. 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 to Fall if Fed Rate Hike Fears Fuel Risk Aversion
Fundamental Forecast for New Zealand Dollar: Bearish
Soft Second-Quarter PPI Data May Undermine RBNZ Rate Hike Bets
NZ Dollar to Decline if US CPI, FOMC Minutes Trigger Risk Aversion
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A relatively timid domestic calendar is led by second-quarter PPI figures. New Zealand price-growth data has increasingly underperformed relative to consensus forecasts since February, suggesting economists have tended to overestimate inflation and opening the door for a soft print. Such an outcome would suggest the RBNZ may be relatively slow to resume raising interest rates after signaling a pause, weighing on the exchange rate.
External factors may prove to be a more robust catalyst as hefty event risk emerges from the US by way of July’s CPI figures as well as the release of minutes from last month’s FOMC policy meeting. The headline year-on-year inflation rate is expected to tick slightly lower to 2.0 percent, down from 2.1 percent in the prior month. A steady stream of above-consensus readings since the beginning of the year seems to put surprise risk on the upside.
As for the Fed, it notably upgraded its language on price growth in July’s FOMC statement, saying the “likelihood of inflation running persistently below 2 percent has diminished”. Indeed, it will be the reasoning behind this seemingly subtle but nonetheless significant change in verbiage that investors will be most concerned with as they comb through the Minutes document. If policymakers are turning more sanguine about inflation, that means the time gap between the end of QE3 – expected in October – and the first subsequent interest rate hike may prove relatively short. An upbeat CPI print would only reinforce such thinking.
On balance, such a scenario bodes ill for the New Zealand Dollar. 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 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, and in so doing sink the New Zealand Dollar.