Forex Trading

US Dollar Could Succumb to Weak Fundamental Forces This Week

Fundamental Outlook for US Dollar: Bearish

- US ISM services index showed that business activity continues to contract in the sector
- US personal income growth surprisingly rose, but gain was due to increased social security, unemployment payments
- US non-farm payrolls fell by 651,000 in February, sending the unemployment rate to a 25+ year high

The US dollar ended last week mixed across the majors as the currency gained against the British pound, euro, Japanese yen, Canadian dollar but fell versus the Swiss franc, New Zealand dollar, and Australian dollar.

Looking ahead to data releases this week, the big indicator to watch will hit the wires on Thursday at 08:30 ET. The Commerce Department is forecasted to report that US retail sales fell negative for the seventh time in the past eight months in February, as the surging unemployment rate, tight credit conditions, and a year-long recession weigh heavy on the minds of consumers. More specifically, advance retail sales are anticipated to have contracted 0.5 percent during the month, and excluding auto sales are expected to have slumped 0.2 percent, marking what may end up being a consistent trend through the first half of 2009. The impact of a disappointing result may be mixed for the US dollar, as the Federal Reserve has already cut the fed funds target to a record low range of 0.0 percent - 0.25 percent and has no room to cut further. As a result, it will be important to gauge the impact of the news on DJIA or S&P 500 futures, as a sharp shift could suggest either flight-to-quality or a pickup in risk appetite.

Other indicators to watch that may not be as market-moving, but just as important as a gauge of economic health include: jobless claims, the trade balance, the import price index, and the University of Michigan (U of M) consumer confidence survey. On March 12 at 08:30 ET, both initial and continuing jobless claims are anticipated to rise further, with the latter forecasted to hit fresh record highs of 5,150,000. On March 13 at 08:30 ET, low oil prices could help lead the trade deficit to narrow slightly to $38 billion from $39.9 billion while the annual rate of import price growth could plunge to a new record low of -13.6 percent. Finally, the U of M sentiment index is projected to fall to 55.0 from 56.3, which would mark the lowest level since May 1980.

Euro On Edge As Eastern European Countries Threaten Renewed Crisis

Fundamental Outlook for Euro This Week: Bearish

- The ECB meets market expectations by cutting rates 50 bps; yet warning of further reductions unanticipated
- European Union leaders deny request for a 180 billion aid package for Eastern Europe
- German PM Merkel says $145 billion liquidity fund open to largest firms

The euro is at a fundamental and technical cross roads. In price action, the currency has taken to congestion that is on the verge of confirming a major bearish reversals against the US dollar, British pound and Japanese yen. So, what has prevented the market from confirming – or reversing – the next dominant trend? Fundamentals. This past week, increasingly critical traders looked for tangible evidence that the Euro Zone was truly stronger than its global counterparts. Doubts have lingered and developed for months; but the ECB’s decision to maintain its dovish policy and the growing financial troubles for some members of the Union that have been dubbed the ‘emerging market’ economies of Europe have put the superpower on the same level as the United States and United Kingdom.

Through its troubles are growing, the euro’s primary market driver over coming week will likely be the financial cracks that are developing within the member-state economy. For months, the Euro Zone has been suffering from the effects of the global recession and credit crisis. However, to this point, the contractions in the coalition’s individual economies and the frozen credit markets were tolerable through economic diversification and significant nation-specific bailout efforts. However, the pain is outlasting the government’s efforts; and the fact that this is a patchwork of individual economies is becoming blatantly clear. The true nature of the beast was revealed when Hungary was rejected by European Union leaders for a 180 billion euro bailout for Eastern European economies that were on the verge of collapse. Instead, German Prime Minister Angela Merkel said aid would be by given on a case-by-case basis. Should any of these economies (small or not, Union members or not) fail, it could severely undermine confidence in the entire region. Officials will no doubt act should it be clear that such a failure was imminent; but from a broader perspective, this further highlights the reality that little has been done to stabilize all of Europe. More than likely, for the world’s leaders to be successful in curtailing a deeper recession, there will need to be an effort made on a global scale. This will be the milestone for the G20 meeting on April 2nd; but until then, doubt will always be present.

Looking outside of this long-term and vague market theme, there is little on the fundamental docket that can define a major trend in the euro on its own. However, there is plenty of data that could contribute to general forecast for growth and interest rates. For economic activity, readings on German factory orders and Euro Zone retail spending will start to form expectations for first quarter GDP. For market moving potential, the Sentix investor confidence report won’t likely rouse much in the way of volatility; but it will confirm the rising sense of concern that a group of pessimists do not need to be reminded of. Also, the ECB monthly report for March will establish benchmarks for economic activity and interest rate expectations from policy makers point of view.

Japanese Yen's Safe Haven Roll Reviewed As Sentiment Fails

Fundamental Outlook for Japanese Yen: Bearish

- Citi, AIG and Lloyd’s testing the definition of nationalization and the limits of sentiment
- Chinese Premier fails to deliver expansion to stimulus plan in annual testimony sending risk appetite tumbling
- Fear is growing as government bailout and spending efforts fall short of reviving consumer and investor confidence

What defines a safe haven currency? This is a questions that has been sidestepped many times by financial participants in the past. Back when conditions were optimal, there was little doubt that US Treasuries, gold and the Japanese yen were key harbors for rough financial weather. However, with an economic recession evolving into a depression and a financial crisis testing the limits of government reserves, anything and everything is being reevaluated. And, for a fundamentally-unstable and crisis-prone financial center like Japan, there may be a good reason for cutting its currency from the list.

Looking ahead to next week, there are few, global scheduled releases that promises to redefine general risk trends. This may actually prove a stroke of good luck for the yen as traders will be able to reconsider its sharp plunge over the previous two weeks and come up with a reasonable argument to label it a safe haven. To this point however, there are few lines of reasoning to support capital flowing into Japan seeking shelter. Through the first leg of the financial crisis, the yen was rising as traders deleveraged direct or indirect carry trades through a need for cash, natural repatriation and frequently forced liquidations. Even though this was such a prevalent strategy during the height of the market’s risk appetite, it naturally has limits to which the capital will be fully exercised. No doubt, there is still a considerable amount of capital behind the carry trade, but most of it will be through pension funds and other bulk investors that weather long-term trends. Aside from carry, there was also weak support through Japan being the second largest economy in the world with benchmark rates that had extremely low volatility. Now, however, it is more than evident that primary cash targets are going to experience low volatility across the global as the world’s central banks near zero. More importantly though, a semblance of safety is hard to hold when an economy is suffering as stark a recession as the one Japan has been pitched into. With BoJ economists forecasting a worse slump than the one recorded through the 4Q of 2008, memories of the bank failures and crisis of the 1980s and 1990s are called to mind.
When it comes down to it though, the severity of a panic can send traders back to the yen regardless of the fundamental debate. For this reason, we should keep an eye on developments in the Eastern European crisis. A failure in any one of these economies can send ripples through the global financial space similar to the Russian bond default back in 1998. Also, the trend towards nationalization of major financial firms indicates lingering problems that could eventually overwhelm a government and/or destabilize fragile confidence (it’s hard to feel safe when policy officials have to constantly disarm bombs).

Considering the Japanese economy is already expected to suffer a debilitating recession, the market will also look for confirmation from the economic calendar. Among the notables, bank lending and bankruptcy numbers will be particularly important considering the plight of policy makers. The final reading on 4Q growth will also offer adjustments to sector readings; but the leading economic indicators index for January and consumer confidence figures for February will take the trend into the current year.

British Pound Outlook Worsens on BoE Cuts, Quantitative Easing

Fundamental Outlook for British Pound: Bearish

- British Pound drops as Bank of England announces Quantitative Easing
- GBP/USD Nonetheless Continues to hold Major Support Levels
- UK Government Reportedly takes 75 Percent Stake in Lloyds

A tumultuous week for financial markets left the highly risk-sensitive British Pound sharply lower through Friday’s close, and major Bank of England monetary policy decisions further hurt outlook for the downtrodden currency. The BoE moved closer to the near-zero percent interest rate policy of its US counterpart, slashing overnight targets by a full 50 basis points to 0.50 percent. Central bankers likewise moved to increase money supply by effectively printing money via “Quantitative Easing”. The announcement had little short-term effect on the British Pound, but it is important to highlight the potential for GBP depreciation through a pickup in inflationary pressures.

Fundamental outlook for the British Pound remains fairly bleak. Economists widely predict that the British economy will continue to be one of the worst affected by the ongoing global financial crisis. Such sentiment effectively limits external demand for British Pounds, and the crisis in confidence for UK financial markets likewise removes a key pillar of GBP support. Just this past weekend, the UK government reportedly took a 75 percent stake in Lloyds Banking Group. A hodge-podge of financial market intervention and the fourth-such major nationalization hardly bodes well for jittery investors. We would expect the highly risk-sensitive British Pound to continue to languish under such poor financial market conditions.
The week ahead promises little in the way of foreseeable event risk, but it will be critical to monitor overall risk trends in global financial markets. For the time being, the British Pound continues to decline against its US counterpart through times of market distress. Absent a shift in dynamic, we would expect the GBP/USD to continue moving off of the US S&P 500, the FTSE 100, and other key risk barometers.



Written by John Kicklighter, David Rodriguez, Terri Belkas, John Rivera, Ilya Spivak and David Song, Currency Analysts
Article Source - Forex Trading Weekly Forecast - 03.09.09