Forex Trading Weekly Forecast - 06.22.09

US Dollar Consolidation Continues – Watch for Breakouts This Week

Fundamental Outlook for US Dollar: Neutral

- The annual rate of US CPI growth fell to the lowest level since 1950 in May
- US continuing jobless claims fell for the first time in 6 months during the first week of June
- US housing starts, building permits surged from their record lows during May

The US dollar ended week up against most of the majors, with the exception of the British pound and Japanese yen, but for what it’s worth, the currency really did little but consolidate. Looking to the DXY index, we see that the greenback’s decline on Friday was ultimately supported by a rising trendline near 80 connecting the June 3 and June 11 lows. With resistance looming just above at 81.35, this period of tight range-bound trade leaves the currency susceptible to breakouts this coming week, especially since there will be quite a bit of event risk on hand from the US.

On Tuesday, the National Association of Realtors (NAR) is anticipated to report that existing home sales rose for the second straight month at a rate of 2.6 percent in May to an annual pace of 4.80 million from 4.68 million. While not always a reliable leading indicator, there are encouraging signs that existing home sales could improve in line with expectations, as the Commerce Department reported on June 16 that housing starts and building permits rebounded from record lows.

On Wednesday morning, the release of US durable goods orders is projected to show a 0.8 percent decline in May following a 1.9 percent jump in April, and excluding transportation the index is forecasted to fall 0.5 percent, all of which would signal broad declines in domestic demand. Also on Wednesday at 14:15 ET, the Federal Open Market Committee (FOMC) is widely expected to leave the fed funds target range at 0.0 percent - 0.25 percent, and this should remain the case throughout much of the year. In fact, the FOMC started saying in January that they continue “to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time,” and they went on to say something similar in March and April. Furthermore, the last statement highlighted that the Committee's policy focus is to support the functioning of financial markets via quantitative easing (QE) and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. As long as we see these sorts of statements continue to be published, the news shouldn’t be too market-moving.

On Thursday, the third and final round of US Q1 GDP estimates are due to hit the wires, and the results could be market-moving if they miss expectations. At the time of writing, a Bloomberg News poll of economists reflected consensus forecasts for GDP is forecasted to go unrevised at -5.7 percent, which marks an improvement when compared to the Q4 2008 result of -6.3 percent. However, if Q1 GDP is revised higher, the news would likely provide a huge boost to risk appetite as it make the US economy appear to be in a better position to stage a recovery later in the year. On the other hand, downward revisions would have the potential to take FX carry trades and equities lower.

Finally, on Friday, personal income and personal spending results for the month of May are anticipated to yield improvements, but traders should be skeptical of the income result: past increases have been purely the result of rising transfer payments, which include retirement, disability, and employment insurance, while wage and salary compensation has either fallen or stagnated since September 2008.

Euro: Are European Officials Over Zealous In Projecting a Recovery?

Fundamental Outlook for Euro This Week: Bearish

- Regional inflation stalled yet investor sentiment hits a three-year high
- European Community finance ministers looking for an economic recovery, government exit after G8
- Will EURUSD resume its declines? Get the technical perspective on the outlook

Are the signs of growth in the Euro Zone already so bright that the government can’t start removing is financial stimulus and the ECB start discussing rate hikes? Though they are retaining their sense of caution, the region’s finance ministers seem to be leaning this way; and even a slight lean from official can be translated into certainty by speculators. Looking out to the week ahead of us, there is plenty of economic fodder on the docket – and much of it is influential enough to spark volatility and alter timing on the eventual economic recovery – but the real fundamental theme will be in determining whether policy officials’ determination to facilitate a recovery is commendable or setting the economy up for another crisis should the rebound fall apart.

Though there are no specific events or speeches scheduled next week that can trigger a debate monetary policy, there will no doubt be commentary to speculate against. While the general consensus among European authority figures is more hawkish than the global average, there is still a notable divide between the European Central Bank and the Union’s politicians. Over the past few months, the ECB has taken a neutral turn and capped the benchmark lending rate at 1.00 percent. The greatest point of contention (both within the member ranks and outside) has been the covered bond purchasing program, which central bank President Jean Claude Trichet has said has been put on a ‘full stop.’ Language from the policy officials leaves the door open to loosening the monetary reins in the future should it be warranted; but debate over the next steps run high. In contrast, the collective governments present themselves as confident that positive growth is just around the bend. Recently, officials said the first signs of a ‘sustainable economic recovery’ are already visible. However, forecasts still point to a 4.0 percent contraction in GDP through 2009 and a 0.3 percent slump next year.

The more intense debate between Europe and the some other major economies is how much government support should be used to prop up a recovery and how long it should be kept in place. At the G8 meeting this past weekend, UK and US officials were adamant on focusing on the economic recovery and defer efforts to deflate budget deficits until the recovery is more tangible and global. However, French and German Finance Ministers were clearly more interested in rolling back government aid. Currently, deficits are expected to average 6 percent of GDP this year and government spending will total 5 percent of GDP through 2009 and 2010. If the global economy is indeed in experiencing a lasting resurgence, this approach will put the European area in a more stable financial position. On the other hand, if the recession is more deeply seated and financial troubles are still in the pipeline, they will find themselves removing the support beams on an already comparatively small cushion too early. The ECB has projected regional banks are looking at another $283 billion of write downs going forward (dwarfing numbers to this point) and the IMF projects much more. With worries of default in Eastern European countries and losses from banks expected to grow, there is reasonable concern that a financial crisis is brewing in this region. Each member of the Union has performed a stress test of their respective banking system, but officials not been forthcoming with the results and neither do they favor a look at the exposure and health of major, individual banks. Is this a bomb waiting to go off?

Outside of the grander fundamental themes, there are plenty of indicators to watch for volatility as market participants benchmark growth. The best, leading indicator for growth in the Euro Zone is the monthly PMI data. The preliminary service and factory numbers for June will be released on Tuesday. Aside from these, German business and consumers sentiment, Euro Zone trade figures, Community industrial orders and German inflation have all been known to move markets.

Japanese Yen to Rise as Risky Assets Extend Losses

Fundamental Outlook for Japanese Yen: Bullish

- Bank Of Japan Keeps Rates at 0.10%, Upgrades Economic Forecast
- Japanese Consumer Confidence Tops Expectations But Outlook Remains Bleak

The Japanese Yen may continue to outperform in the week ahead as risky assets reverse lower, boosting demand for the safety-linked currency. Indeed, last week saw the Japanese unit add over 1.4% against the US Dollar, topping the gains scored by the other majors. Short-term studies reveal that a trade-weighted average of the Yen’s value against a basket of top currencies is now -87.3% inversely correlated with the MSCI World Stock Index. For its part, the MSCI metric looks to be carving out a double top at resistance marked by the November 2008 swing high having reversed lower to break out of a rising channel that has guided prices higher since March. This suggests that continued weakness in risk appetite awaits ahead, giving impetus for Yen bulls to retain momentum.

Turning to the economic calendar, the April’s Tertiary Index is expected add 2.3% having dropped -4.0% in the previous month. Although an improvement in percentage terms, such a result would still put merchant sentiment at the lowest level in 5 years and firmly within the downward trajectory that has held since the index topped out in August 2007. The Trade Balance surplus is expected to grow to 215.4 billion yen in May from 67.7 billion in April. This would imply that Japan’s external position deteriorated about 37% from a year prior, a relative improvement from -91.8% in average annualized losses recorded over the past three months. That said, the trade surplus has trended lower since September 2007 and is likely to continue to do so. Global demand is expected to remain lackluster, with The International Monetary Fund forecasting that world trade volumes will contract by a whopping -11% this year and recover just 0.6% in 2010, spelling continued trouble for exporters. Indeed, a survey of economists conducted by Bloomberg suggests that the share of overseas sales in Japan’s overall Gross Domestic Product will to the lowest level in 7 years in 2009. Rounding out the week, the Consumer Price Index is set to drop -1.1% in the year to May, the largest decline since April 2002 and just a hair off the record low at -1.6%. Deflation looks set become entrenched once more in the world’s second-largest economy, keeping a lid on a meaningful rebound in economic activity as consumers and businesses are encouraged to wait for the best possible bargain and perpetually delay spending and investment.

British Pound Outlook Sours on Potential S&P 500 Reversal

Fundamental Outlook for British Pound: Bearish

- UK Jobless Claims results far better than analysts’ forecasts
- Higher-than-expected CPI results likewise bolster outlook for GBP yields
- GBPUSD Technical Forecast shows clear risk of reversal

The British Pound finished the week marginally higher against the US Dollar, but the GBPUSD’s inability to cross above range highs leaves the pair at clear risk for noteworthy reversal. Fundamental data proved largely better than expected and generally bolstered economic outlook. Officials announced that UK Jobless Claims gained “only” 39.3K in the month of May—far better than expectations of a 60.0K gain. Yet the slowdown in job losses hardly signals that the sharp domestic recession is over, and virtually no one expects growth to turn positive through the foreseeable future. Fundamental outlook for the British Pound remains somewhat bearish, and a relatively empty economic calendar is unlikely to force shifts in economic sentiment. It will be instead more important to monitor general trends in risk sentiment and effects on the British Pound and key counterparts.

The correlation between the British Pound/US Dollar pair and major global equity indices has pulled back to recent trade, but we expect that said link would greatly strengthen on any signs of financial market duress. Our Senior Strategist predicts that the US S&P 500 topped at its very recent high, and a late-week reversal in the index adds credence to such predictions. Other important risk barometers are showing noteworthy signs of stress: the spread between US Treasuries and highly-speculative junk bonds has recently increased after several months of contraction. Though these two examples hardly tell the entire story, there is a general sense of unease across financial markets and optimism is waning. A true turn in the tide would likely be enough to sink the British Pound and other key currencies against the safe-haven US Dollar.

The UK economic calendar remains almost exactly empty for the week ahead, and we expect little event-driven volatility for most major currencies. It may be important to watch for any especially noteworthy shifts from the US Federal Reserve. The decision-making Federal Open Market Committee is expected to commit to historically low interest rates through the coming year—quashing speculation over potential Fed rate increases. Their words could influence global equity indices and, by extension, the British Pound/US Dollar currency pair.

Written by Terri Belkas, John Kicklighter, David Rodriguez, Ilya Spivak and David Song, Currency Analysts
Article Source - Forex Trading Weekly Forecast - 06.22.09

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