Forex Trading

US Dollar Could Strengthen if Advance Retail Sales Data Disappoints

Fundamental Outlook for US Dollar: Bullish

- US Dollar starts the week strong as Dow Jones tumbles push it to highs vs. Euro
- Subsequent rebound in US S&P 500 weighs on the US Dollar
- View our monthly Euro/US Dollar Exchange Rate Forecast

The US Dollar traded slightly higher against major forex counterparts in an uneventful week of trading, showing little impetus to break important support or resistance levels on similarly lackluster price action across broader financial markets. A pickup in US economic event risk promises stronger volatility in the week ahead, however, and it seems only a matter of time before currency pairs break out of narrow ranges. Relatively steady gains in the US S&P 500 and a multi-month downtrend in the US Dollar suggest that risks remain to the downside. Yet a fragile recovery in financial market risk sentiment could just as easily falter and send the safe-haven USD higher against the Euro and other currencies.

Calendar highlights in the week ahead include an often market-moving Advance Retail Sales report, Industrial Production numbers, Consumer and Producer Price Index inflation results, and University of Michigan Consumer Confidence survey data. The Retail Sales release may be especially contentious given its strong influence on the US S&P 500 and broader risk sentiment; recent fears of faltering US economic recovery could make disappointments especially market-moving. CPI and PPI data could likewise influence market expectations on the future of US Federal Reserve monetary policy.

The US Dollar lost substantially when the Fed first announced and implemented Quantitative Easing measures to boost monetary supply and stave off the risk of deflation. Fed Chairman Ben Bernanke has openly discussed various tools at the central bank’s disposal to counteract sluggish growth and promote price stability. If CPI and PPI surprise to the downside, pressure may increase on the Fed to announce fresh QE measures—likely driving the US Dollar lower against major counterparts.

One gets the sense that risks remains to the downside ahead of these key US consumer-centric economic releases, and significant disappointments could easily jolt the fragile recovery in financial market risk sentiment. Any such deterioration in ‘risk’—especially as seen through the S&P 500—could be enough to force the US Dollar through key resistance levels against the Euro and British Pound in the week ahead. Yet traders should likewise watch CPI and PPI data; any significant downgrades in inflation could just as easily force US dollar declines.

Euro Won’t be able to Hold Back the Fundamental Tide for Much Longer

Fundamental Forecast for Euro: Bearish

- Ireland to split Anglo Irish Bank in an effort to defuse a financial bomb
- Norway Sovereign Wealth Fund invests in shunned Greek and other trouble EU countries’ debt
- Greek consumers and businesses withdraw 4.2 billion euros from national bank accounts

It would be a stretch to simply imply that the euro experienced elevated volatility this past week. Considering European traders were returning from their summer holidays and US-based speculators rushed back after an extended holiday weekend, there was wave of risk-sensitive capital that washed over the market and offered the best opportunity for a meaningful breakout that we have seen in a month. And yet, EURUSD would hold its sideway track. Now we turn to the coming week and attempt to gauge the potential of that long-awaited breakout that will provide finally establish a meaningful direction for the capital markets and shared currency. Considering the euro’s bearing is heavily dependent on its performance against the US dollar and risk appetite in general, the fundamental trends to encourage this market along are perhaps larger than the currency itself. That being said, global investor sentiment itself could actually establish its bearings on European financial and economic developments.

It should come as no surprise that policy officials are singing the praises of their respective economists and financial markets. It is their job to be cheerleaders and encourage confidence as much as possible. However, these assurances ring hollow when we consider the growing troubles of the region. At the forefront of our concerns for Europe are the cracks in the effort to balance economic growth and fiscal prudence. From Ireland, the deputy director of the country’s debt office said the nation was fully funded until June of 2011; but does this assessment account for the burden that the Anglo Irish bank could place on the coffers? The plan to split the troubled back (which has already required 22.9 billion in bailout capital) is a design that has failed in other instances and will not magically erase the costs of nationalization. For Greece, the IMF’s approval of another 2.57 billion euros tranche of its three-year bailout program should serve to remind of the incredible level of capital it will have to repay in the future, the economic pain the nation will have to suffer to reach fiscal targets and the inequity of countries with higher debt costs having to bailout this particular nation. To add to the precarious picture, Greece is scheduled to auction off short-term bills. Then there is the Basel III capital ratio. There is a reason Germany has loudly rebuffed calls for higher reserves and a five-year implementation; because this and other European nations are the furthest from meeting the suggested targets. If the bar is raised, European banks (dependent on ECB liquidity) could be forced to raise more capital and suffer painful yields.

If we are looking for the spark to feed fear of a financial crisis or accelerant to an economic slowdown, we have an entire fuse box in Europe. However, speculators’ attention is a fickle and unpredictable thing; and they can remain unfocused for longer than we would expect. So, we must wait. In the meantime, it will be worthwhile to keep an eye on scheduled event risk to see if there any volatility to be had from the docket. The top tier data for the period is Tuesday’s investor sentiment survey’s imperative to establishing the market’s tolerance for the region’s financial instability. One step down, we have Eurozone employment and inflation for the ECB to consider as bearings for monetary policy. After that trade, industrial production and factory prices will struggle to garner attention.

Japanese Yen: Will FX Traders Curb Speculation For BoJ Intervention?

Fundamental Forecast for Japanese Yen: Neutral

- BoJ Holds Rate at 0.10%
- Japanese Yen Traders Still Not Convinced of Invention as Noda Says Simulated Manipulation Tested
- Forex Strategy Outlook: Breakout Strategies Favored on Indecisive Currency Price Action

The Japanese yen rallied to a 15-year high against the U.S. dollar and the low-yielding currency may continue to gain ground over the following week as the Bank of Japan holds off on intervening in the foreign exchange market. The central bank’s attempt to talk down the appreciation in the exchange rate has certainly failed to materialize throughout the third-quarter, and investors may curb speculation for a currency intervention going forward as policy maker weigh various options to address the downside risks for the region.

The Japanese government unveiled a JPY 915B stimulus packaged to boost the domestic economy, and the expansion in fiscal policy could lead the central bank to stay out of the currency market over the near-term as BoJ Governor Masaaki Shirakawa sees the recent strength in the Japanese yen coming from the rise in safe-haven flows. However, there have been increased pressures on the BoJ to tackle the marked appreciation in the exchange rate, with Japan Finance Minister Yoshihiko Noda recently announcing that the central bank will jump into the currency market if conditions warrant. In addition, market participants see scope for the BoJ to expand monetary policy further over the coming months as the Organization for Economic Cooperation and Development expect a “more pronounced” slowdown in the recovery, and the central bank may look to increase its liquidity programs as it struggles to stem the risks for deflation.

However, speculation for an intervention could intensify if the USD/JPY tests 83.00 over the following week. As the dollar-yen maintains the downward trend from earlier this year, it seems as though the pair could fail to find psychological support around the 83.00 level as investors continue to scale back their appetite for risk. If investors become more risk adverse over the following week, we will favor a bearish outlook for the dollar-yen, but trading the pair may become increasingly difficult as the risks for a currency intervention remain on tap.

British Pound Volatility Depends On Slower Price Growth

Fundamental Forecast for British Pound: Neutral

- BoE Leaves Benchmark Rate, Asset Purchase Program Unchanged
- Industrial and Manufacturing Production in July Rose 0.3%, Led by Textiles
- Producer Prices Grow at Slowest Pace in Six-Months

The British pound remains range bound against most its counter parts as the Bank of England left their bench mark rate on hold for an eighteenth straight month. Policy makers also refrained from adding to their asset purchase program, which economists are expecting the MPC to re-start as credit conditions remain tight. The non-action wasn’t accompanied by a statement, leaving markets to guess whether Andrew Sentence remains the lone voice for tightening. The voting member’s concern over inflation above the government’s 3.0% threshold has raised the possibility that a rate hike could come in early 2011. However, if consumer prices follow the slower factory gate price growth seen in August, then more market participants could start to move into the “additional QE” camp.

The U.K. trade deficit in July widening to 8.7 billion pounds from 7.5 billion pounds as export demand slowed, will put added pressure on policy makers to fuel domestic growth. The central bank will face a difficult task as they have lowered growth forecasts, as they anticipate austerity measures from the new coalition government will become a weighing factor. Indeed, we may have seen a three way split at the last rate decision, with some members calling for a resumption of QE measures, as they look to ensure the recovery sustains. Industrial and manufacturing production growing 0.3% in July has helped erase fears of a double dip recession, potentially leaving the monetary authority on the sidelines through the end of the year. However, the National Institute of Economic and Social Research is forecasting growth slowed to 0.7% in the three months through August, from 1.3% the month prior, a trend that could spark action.

The upcoming economic calendar is full of event risk which could spark volatility but may not be enough to inspire breakouts for sterling crosses, with the BoE minutes scheduled for September 22nd. The most market moving release will be the consumer price report which is forecasted to ease to 3.0%, placing it at or above the government’s threshold for an eighth straight month. Inflation slowing below the level would open the door for additional QE and could be a catalyst for Sterling weakness. The employment report could stem pessimism, with forecast for jobless claims to decline for a seventh straight month by 3,000. Retail sales growth of 0.3% is also expected adding to sign that the recovery is sustaining. However, in line employment and consumption figures would reflect a lower measure of improvement for a third straight month, supporting broader growth concerns.

Canadian Dollar at Risk of Declines as it Fails to Set Fresh Highs

Fundamental Forecast for Canadian Dollar: Bearish

- Canadian Employment Report tops forecasts, Canadian Dollar bounces
- Bank of Canada raises interest rates and does not rule out further hikes

The Canadian Dollar finished the week marginally higher as the Bank of Canada raised interest rates and domestic employment numbers beat expectations. Yet a Friday reversal suggested traders are thus far unwilling to push the Loonie to fresh monthly highs against its US namesake. BoC officials matched consensus forecasts in raising their benchmark interest rates a further 25 basis points to 1.00 percent, and the bank struck a relatively hawkish tone in showing few signs it would pause in its tightening cycle. Whether this will be enough to push the Canadian Dollar to further highs is questionable, however; the USDCAD correlation to Crude Oil remains near record-highs and Canadian Dollar strength will almost certain depend on the trajectory of commodity prices.

Canadian economic event risk will be minimal in the week ahead, and traders are more likely to focus on movements in broader financial markets than individual pieces of fundamental data. A marginal exception may be Wednesday’s Manufacturing Shipments report. Though said news release has not historically forced noteworthy volatility in CAD pairs, a Canadian Trade Balance deficit at record highs means negative surprises may elicit CAD declines. An otherwise fairly empty calendar leaves the USDCAD at the whims of Crude Oil prices and a similarly slow week of US economic event risk.

The Canadian Dollar’s inability to hit fresh highs amidst an upward revision to interest rate expectations raises doubts on future gains. A key factor in determining the USDCAD’s next step will undoubtedly be the direction of Crude Oil prices, and the NYMEX WTI Contract’s close near monthly highs leaves momentum in the Canadian Dollar’s favor. Yet we will likely need to see a USDCAD break below key support near 1.0250 to instill confidence in the downtrend. According to our Senior Strategist, however, the USDCAD may have recently bottomed and is set to go higher through the medium term.

Australian Dollar May Appreciate Further as Growth Prospects Improve

Fundamental Outlook for US Dollar: Bullish

- Reserve Bank of Australia Keeps Rate on Hold
- Employment Rises More-Than-Expected
- Australian Dollar Risk of Reversal Increased

The Australian dollar rallied against its U.S. counterpart for the third week and the exchange rate looks poised to test the yearly high at 0.9383 as the economic recovery in the isle-nation gathers pace. The AUD/USD rallied to a fresh monthly high of 0.9276 following a larger-than-expect rise in employment paired with a rebound in mortgage lending, and the pair may continue to retrace the decline from earlier this year as the economic docket for the following week is anticipated to reinforce an improved outlook for future growth.

The Reserve Bank of Australia held a positive attitude toward the economy after holding the benchmark interest rate at 4.50% for the third time in September and said that monetary policy remains appropriate “for the time being” as the global outlook remains clouded with uncertainties. Central bank Governor Glenn Stevens expects the recovery to strengthen going forward as the labor market improves, with businesses investments increasing, and the central bank may tighten policy further in order to stem the risks for inflation. The RBA sees price growth rising above the 3% limit for a few quarters and the central bank may turn increasingly hawkish going forward as it maintains its dual mandate to ensure price stability while promoting full-employment. As the outlook for growth and inflation improve, market participants may raise speculation for a rate hike in October, and an upward shift in interest rate expectations would support a bullish outlook for the AUD/USD as investors weigh the prospects for future policy. Investors are currently pricing a 24% chance for a 25bp rate hike next month according to Credit Suisse overnight index swaps, and further increases

Nevertheless, the economic docket for the following week is expected to show a gradual improvement in the private sector, but a fifth consecutive drop in consumer inflation expectations could weigh on the exchange rate and bring the recent appreciation in the AUD/USD to a halt. If we see a consolidation in the aussie-dollar, price action may fall back towards the lower bounds of its recent range at 0.9100 to test for short-term support. However, as the 50-Day SMA (0.8952) crosses above the 200-Day SMA at 0.8939, the golden cross formation remains favorable for the high-yielding currency as it reinforces a bullish outlook for the exchange rate.

New Zealand Dollar Awaits RBNZ Rate Decision For Direction

Fundamental Forecast for New Zealand Dollar: Bearish

- New Zealand Manufacturing Activity increased 3.1% in the second quarter, led by meat and dairy
- NZD/USD Threatening Resistance Levels

The New Zealand dollar benefitted from broader trends as firm risk appetite on the back of easing concerns over a double dip recession benefitted the high yielder. However, the domestic picture may dictate upcoming direction with the RBNZ rate decision on tap. The second quarter increase in manufacturing activity of 3.1% is evidence that the commodity driven economy continues to enjoy solid growth. Strong demand for meats and dairy helped drive activity and improved the Terms of trade index for the period by 2.1%. However, a slowdown in manufacturing sales outside of the country’s main exports fell 2.2%, raising concerns that domestic growth is slowing. Therefore, it is expected that the central bank will keep their benchmark rate on hold at 3.00%.

The RBNZ rate decision will present major event risk for the “kiwi” as it could dictate medium term direction. An expected rate hold and dovish commentary could sink the commodity dollar as markets have been looking for the central bank to follow its Australian counterpart on a path of several increases. Policy makers in general have started to take a more cautious stance, as developed economies are struggling to maintain the current recovery pace, at a time when emerging markets begin steps to cool domestic growth. A rate hike and concerns over inflation could add to prevailing bullish momentum and have the pair look to test the channel bound. Retail sales data beforehand could shape the outlook for the rate decision and provide short-term volatility.

Gold Finally Breaks its Bullish Trend but Does that Guarantee Reversal?

Fundamental Forecast for Gold: Neutral

- Gold finally breaks is consistent bull trend after suffers its biggest daily loss in six weeks
- Is this commodity set to reverse just before setting a fresh record high?

After six weeks of a steady and unencumbered advance, gold seems to have finally reached the limits of its temperate momentum. Just this past week, not $5 from testing its record high, the precious metal would suffer its biggest daily loss since the exhaustion move jump started the bull wave. Subsequently, with this move, the rough technical trendline that defined the positive drift was broken. Is this a surefire sign that the commodity is set to reversal dramatically this coming week? After more than a month, there is certainly significant room for retracement; but the fundamental pressure for such a move is not necessarily there.

While gold represents a key safe haven asset for global investors – one of the few that can claim a low correlation to most of the other major asset classes and perhaps the only viable security that sets itself outside the influence of fiat (currency) fluctuations – the commodity doesn’t necessary follow sharp bullish or bearish moves in the broader capital markets. Therefore, if there is a breakdown in the S&P 500, EURUSD or some other risk-defined market; gold will not necessarily be encouraged back onto its trend. This is a discouraging development considering there are so many fundamental uncertainties (the European fiscal/growth balance, China’s trouble in deflating its bubble and the slowdown in global activity) that could trigger a mass exodus from the capital markets. On the other hand, it could help as a recovery in confidence will be buffered for its bearish influence on the metal.

What has hurt gold is the general stability in risk appetite trends this past month. While the commodity is not particularly sensitive to short-term fluctuations in risk appetite, there does need to be the general buzz of long-term uncertainty that encourages investors to seek the shelter of the recession, deflation and fiat instability-hedge. It is likely this extended bought of congestion that has broken the conviction of the gold bugs before the critical level. Therefore, we will need to find systemic troubles and tribulations to put this market back on pace. This kind of driver happens to be the type that does not often have foreseeable cues. Therefore, we will have to keep our eyes open for major financial news headlines and monitor cross market correlations that help to identify major shifts in speculative capital.

Written by David Rodriguez, Quantitative Strategist; John Kicklighter, Currency Strategist; John Rivera, Currency Analyst and David Song, Currency Analyst
Article Source - Forex Weekly Trading Forecast - 09.13.10