Weekly Outlook: 2015, June 14 - 21

Morgan Stanley Chart Of The Week - EURUSD

On the long-term EUR/USD Chart

"Despite the corrective rebound developed since early March, EURUSD remains within a long term down trend, which accelerated from June of last year. Indeed, this move lower over the past year forms part of a C wave decline within a broad multi year corrective structure which has developed since the 1.6038 peak of 2008. The pace of decline over the past year is typical for a C wave. This suggests upside potential is limited for EURUSD," MS notes.

On the 2-Year EURUSD Chart

"The sub-structure of the decline from June of last year has been “impulsive”, with a 3 rd wave within the C wave now developing. The subsequent recovery since March has developed a clear 3-wave corrective structure, which now looks to have been completed at the 1.1467 mid-May peak (4th wave top within wave (3). This implies the next stage of the EURUSD decline (5th wave within wave (3)) is now likely to unfold," MS projects.

On the 90-Day EURUSD Chart

"This bearish interpretation will be confirmed by a move below 1.1005, suggesting the next impulse decline is set to take EURUSD below the 1.0854 level and back to the 1.0458 March low. This even implies a move to new lows with potential for a decline below parity over the medium term. Near-term risk to this scenario is a move above 1.1467, which would suggest another corrective leg higher before the downtrend resumes." MS argues.

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EUR/USD: And now? With yesterday’s downside correction out of the way there’s a big question mark over what the next step from here will be. However as long as the hourly pattern with lower highs remains in place (i.e. staying below 1.1278) we will hold a light downside bias.

EUR/JPY: 3RD Attempt to break below 138.44. With a relatively high probability we’re now in for a third attempt to break below the 138.44 support. The key question will of course be whether the break will be sustained or not. A sustained break lower will increase the probability that we prematurely have ended the C-wave (theoretical target = 143.96) and hence the entire correction from the April low.

EUR/GBP: Broke and closed below 0.7267. With the latest development, the break and close below 0.7267, we can with a lot higher confidence call for wave C to now have been put in place. More losses are expected near term with focus at the ideal point for wave D, 0.7127.

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The US dollar did not lick honey against most currencies despite some OK data. The focus now moves to the all-important Fed decision. In addition we have housing and inflation numbers in the US, rate decisions in Japan and Switzerland and the ongoing Greek crisis. These are among the main events on forex calendar for this week. Here is an outlook on the market movers coming our way.

The released positive economic data with better than expected retail sales figures. American consumers increased their purchases in May, especially for autos, clothes and building materials, suggesting the improvement in the labor market boosted sales. Alsoconsumer sentiment for June beat expectations, but most market analysts doubt this is enough for an early rate. In the euro-zone, Greek headlines had a growing impact on the common currency as the clock is ticking. The Aussie enjoyed a good employment report while the kiwi fell sharply on a rate cut.

1. UK Inflation data: Tuesday, 8:30. UK inflation turned negative in April, reaching -0.1%. This was the first negative figure ever recorded. Bank of England governor Mark Carney forecasted low inflation in the coming months, but expects a gradual pick up towards the end of 2015. The sharp fall in oil prices is the major reason for low inflation. However, this global trend is positive for UK households despite concerns of weaker business investments. UK inflation is expected to rebound in May and rise 0.1%.
2. German ZEW Economic Sentiment: Tuesday, 9:00. German investor sentiment plunged in May, amid the Greek debacle and lack of growth. Economic sentiment fell to 41.9 from 53.3 in April considerably lower than the 48.8 estimated by analysts. Responders were concerned about the sluggish growth data of only 0.3% growth in the first quarter compared to 0.7% in the last quarter of 2014. Furthermore, Greece’s inevitable default raises fears over the Eurozone economic outlook. German investor climate is expected to decline further to 38.6.
3. US Building Permits: Tuesday, 12:30. U.S. building permits edged up to their highest level in nearly 7-1/2 years in April, reaching a seasonally adjusted annual pace of 1.14 million units, following 1.04 million in March. Additional positive construction data suggest a possible rebound in the housing sector. The rise in demand for new houses is a positive trend following the harsh winter of 2015. The strong housing data is expected to have a positive effect on GDP growth in the second quarter. The number of building permits is expected to reach 1.10 million units this time.
4. UK Employment data: Wednesday, 8:30. The UK labor market continued to improve in April. Unemployment fell and the number of people employed continued to rise. The number of people claiming jobless benefits declined by 12,600 in April to 764,000. Government officials were pleased with the positive data, claiming their government is working. Rising demand for workers pushed regular pay growth to 2.2%. Weak inflation and higher wages are welcome news for the UK households. This will also have a positive effect on consumer spending and economic growth.
5. Fed decision: Wednesday, 18:00, press conference at 18:30. This is the first meeting that does not carry any forward guidance regarding rates. In addition, it is accompanied by fresh economic forecasts, the “dot plot” and of course, a press conference by Fed Chair Janet Yellen, all making this meeting a very big event. The baseline scenario is that the Fed will wait just a bit more before raising the rates, with economists focusing on the September meeting. However, a rate hike is possible already now and in July. On on hand, the Fed would like to start the “lift off” and prevent bubbles. On the other hand, it would not like to act prematurely, choking the recovery and having to reverse. Every word in the statement and every word that Yellen will say carry a lot of weight. Worries could send down the dollar while upbeat sentiment about the positive data in the spring could be dollar positive. A repeat of the “hike in 2015″ stance would be generally positive.
6. NZ GDP: Wednesday, 22:45. New Zealand economy expanded 0.8% in the fourth quarter of 2014, in line with market forecast, following a 0.9% growth in the third quarter. Retail and accommodation edged up 2.3% in the last quarter of 2014 while international tourist spending increased by 15%. Retail trade also climbed 1.8%. Year-on-year, the economy grew 3.5%, the highest level since the fourth quarter of 2007. New Zealand Q1 GDP is expected to reach 0.6%.
7. Switzerland rate decision: Thursday, 7:30. The Swiss National Bank decided to keep interest rates at negative 0.75%, waiting to see the full impact of its unexpected move in January. The change in the monetary conditions was made in an effort to depreciate the Swiss franc, but had a negative effect on household savings and pension funds becoming a matter of concern for the Swiss population. SNB President Thomas Jordan noted that the franc was still overvalued and that there was room for an even lower rate in the future. The Swiss National Bank is expected to maintain the negative rate of -0.75%.
8. US inflation data: Thursday, 12:30. U.S. inflation excluding energy costs edged up 0.3% in April amid a rise in shelter and medical care costs. Analysts expected a 0.2% climb as in March. Meanwhile, the overall CPI climbed 0.1% after rising 0.2%in March. The rise was held back by a 1.7% decline in gasoline prices and no change in food prices. April’s figures support the Fed’s decision to raise rates, showing signs that inflation was moving toward the Fed’s target. CPI is forecasted to rise 0.5% while Core CPI is expected to gain 0.2%.
9. US Unemployment claims: Thursday, 12:30. The number new claims for unemployment benefits increased mildly last week, reaching 279,000, still remaining below 300,000. This was the 14th week that claims held below the 300,000 threshold, indicating the labor market continues to strengthen. Economists expected the number of claims will reach 277,000. The four-week average of claims increased 3,750 to 278,750 last week. The number of jobless claims is forecasted to reach 278,000 this week.
10. US Philly Fed Manufacturing Index: Thursday, 14:00. Manufacturing in the Philadelphia area weakened in May, according to responders. Philadelphia Fed’s manufacturing business outlook fell to 6.7 in May from 7.5 in April. New orders rose 0.3% following 0.7. Current shipments index also rise 3 points to a reading of 1 and Employment conditions weakened by 5 points to 6.7, from April’s reading of 11.5. The manufacturing sector in the New York region found some momentum late last week with the Empire State manufacturing survey bouncing back into positive territory. However, the 3.1 reading in May remained weaker than expected. Manufacturing sentiment in the Philadelphia area is expected to rise to 8.1.
11. Japan rate decision: Friday. the Bank of Japan voted to maintain its monetary policy stance unchanged in May and continue implementing money market operations to ensure a monetary base of JPY 80 trillion a year. The decision, which was in line with market forecast. The BOJ noted that Japan’s economy is continuing to improve. Exports increased boosting growth in the manufacturing sector and increasing business investments. However, the Bank also stated that inflation is likely to remain close to 0% in the near term due to the energy price decline. No change in rates is expected.

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US Dollar Up or Down? That’s the Question Next Week May Answer
US Dollar fell across the board but FOMC meeting next week promises big moves for USD pairs.

Australian Dollar May Drop as Fed Hints at Sooner Interest Rate Hike
External risk may dominate the Australian Dollar spotlight in the week ahead

Gold Range at Risk on Bets for Fed Liftoff-Resistance at 1200
All eyes on FED next week with FOMC policy decision, which may alter Gold range

USD/JPY Risks Larger Pullback on Fed/BoJ Policy Shift
FOMC and BoJ interest rate decisions are likely to heavily impact USD/JPY pair


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Next week’s Eurogroup meeting maybe the last real chance to avoid a Greek default. Recent official discussions seemed to have focussed on providing Athens with a bailout extension in exchange for the implementation of piecemeal reforms. Such an outcome, while not a comprehensive solution, could help ease the worst of the Greek default fears. This should reduce the safe haven appeal of CHF. The upcoming SNB meeting on 18 June should further underscore the bank’s policy divergence vs the Fed and support USD/CHF.

G10 smalls could struggle to perform against a background of growing Fed rate hike expectations. Going into next week’s Norges Bank meeting, it seems that many negatives are in the NOK price despite its high beta to oil. A heavy data week for the GBP could leave rate expectations unchanged, offering no support for GBP/USD.

What we’re watching:

EUR: Lower despite a potential Greek deal – a potential Greek deal next week need not be the comprehensive solution many are hoping for. In addition, a dovish ECB should be a bit of a drag on EUR across the board.

USD: FOMC in focus – the outcome of next week’s FOMC policy meeting will be the greenback’s main driver. A more constructive statement and press conference should help the currency.

GBP: Test– next week’s CPI and labour market data, as well as the BoE minutes are unlikely to push rate expectations higher from current levels. GBP/USD remains vulnerable.
CHF: The focus turns to SNB – the SNB seems less likely to turn more aggressive any time soon. CHF will likely still be driven by external factors like (abating) Greek deposit outflows.

NOK: Further easing anticipated – we expect Norges Bank to ease further next week. The currency impact should only be limited h



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Govt spokesman on the wires

• technical talks have now been completed
• pensions data cited by IMF is wrong
• IMF departure is " nothing more than pressure towards everyone"

No pension or wage cuts ? So what else is going to bring an agreement any time soon?

It appears that well supported BoE rate expectations continue to keep currency downside limited from current levels. In that respect it must be noted that medium-term inflation expectations, as measured by 5Y forward breakeven rates, remain close to multiweek highs.

Unless forward looking indicators suggest moderating price developments it appears unlikely that the BoE will turn more cautious anytime soon.

However, at the same time it must be considered that it will be difficult for rate expectations to rise more considerably unless incoming data makes a case of accelerating growth momentum.

From that angle next week’s main focus will be on labour data and retail sales. Considering the somewhat more muted business activity, it cannot be excluded that jobs growth weakened in April.

Elsewhere, we believe that the Fed remains on track to considering higher rates in September.

As a result of the above outlined conditions we advise against buying GBP/USD around current levels.

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The impact of the Eurogroup’s failure to achieve a Greek settlement over the weekend will be temporarily supplanted as investors turn their attention towards tomorrow’s FOMC announcement. We remain USD bulls as the FOMC should strike a more constructive tone raising rate hike expectations. Latest soft US data have not changed our opinion.

To the contrary, our call remains for Fed lift-off in September with a bias towards further FOMC front-loading. Such front loading behaviour post-FOMC should push USD funding costs higher thereby dragging EUR/USD lower. Even USD/JPY should be ‘pulled off the side-lines’ after Kuroda’s overnight clarification to see the pair re-test and then break 124.0 in the week ahead.

Returning to the Eurozone and the stakes surrounding the June 18 EMU finance ministers are now even higher. With many acknowledging Greece to now hold the superior bargaining position, investors will be looking for further potential creditor concessions this week to stave off fears of a default.

Are such concessions realistic? ‘Yes’ would be our answer and thus the probability of a EUR relief-rally remains high. However those bearish EUR investors with all but the shortest outlooks need not be overly worried, as such a relief-rally would likely trigger renewed selling.

Indeed we envisage such selling could quickly reemerge before 1.15 in EUR/USD and 1.30 in EUR/JPY.


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