Weekly Outlook: 2015, September 13 - 20

USD trading strategy going into next week's FOMC meeting - Morgan Stanley

Morgan Stanley estimated thew probability for Fed hike in September vs December meetings, and it was stated that a 30% chance only of a hike in September, so there is more chance to expect this events in December this year. And in this case, it may be more opportunity for EUR and JPY with related to USD: those pairs may be in bullish condition during the September 17th meeting for example.

Thus, there are 3 basic scenarios concerning Fed hike:

Base-Case: December. "The Fed has entered its pre-meeting silent period, which means there are no speakers on the agenda to move market expectations of the first hike before the September 17th meeting. Comments from the Fed thus far suggest the central bank wants to make the first hike as well flagged as possible and avoid surprising the market. With markets pricing in less than a 30% chance of a hike in September, it therefore is unlikely that the Fed will hike now. Indeed, our US economists have maintained their view for a December hike."

Get It Done: "A hike next Thursday would lead to accelerated EM weakness, in our view. Current account surplus and net foreign asset-supported FX such as EUR and JPY may rally should the Fed hike; these currencies have developed an increasingly tight inverse relationship with the performance of risky assets."

Or Wait: "The Fed delaying action would be in line with current market pricing. In this scenario, USD would likely soften somewhat and the Fed would remain data-dependent in the statement and in the Chair’s press conference. Nonetheless, USD dips still represent buying opportunities as the reason for USD strength is mainly USD-supportive repatriation flows."


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Euro Forecast- Euro ‘Funding-Currency’ Status at Risk on Hawkish Fed Outlook
The Federal Reserve’s September 17 interest rate decision may heavily impact the near to medium-term outlook for EUR/USD especially as the European Central Bank (ECB) shows a greater willingness to further embark on its easing cycle.

British Pound Forecast- British Inflation Could Bring a New Trend to the Pound
Rate expectations in the United Kingdom have been on a similar, albeit more consistent rollercoaster as that of their American trading partners.

Japanese Yen Forecast- JPY Bears Rejoice on BoJ Advisor’s QE Recommendation
The following headlines caused JPY bears to rejoice this week and were a key reason the JPY ended the week weaker against AUD & EUR by ~3.75% and ~2.95% respectively.

Gold Forecast- Gold Sell-Off Approaches Familiar Territory – FOMC to Pave the Way
Gold prices are weaker for a third consecutive week with the precious metal off by 1.5% to trade at 1104 ahead of the New York close on Friday.

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EUR/USD managed to enjoy a nice recovery, ending the week on a positive note. Is it set for more gains? The big event of the week in Europe are the ZEW survey and inflation data. Here is an outlook for the highlights of this week and an updated technical analysis for EUR/USD.

Talk from the ECB on QE wasn’t news for the euro and didn’t really have a negative effect. Data-wise, we had little in the way of surprises, but the strong German trade balance reminded us that the euro is bid. In the US, we had some good JOLTs news but disappointing consumer confidence ahead of the big event: the all important Fed meeting coming now. Will the mounting tension result in an explosion of the pair?

1. Industrial Production: Monday, 9:00. Industrial output in the euro-area disappointed with a slide of 0.4% in June. With German production falling short of predictions for July, a bounce of only +0.3% is on the cards.
2. French CPI: Tuesday, 6:45. Prices in the continent’s second largest economy dropped by 0.4% in July. The publication for August feeds into the final euro-zone data published later in the week. A rise of 0.4% m/m is expected for August.
3. German ZEW Economic Sentiment: Tuesday, 9:00. This early survey from ZEW has been on the fall in the past 5 months, yet the score remained positive, reflecting optimism. For the month of September, another fall from the 25 points listed in August is likely, given the global gloom: a score of 18.3 is on the cards. The all European number will likely fall as well from 47.6 seen in August to 42.1 points.
4. Trade Balance: Tuesday, 9:00. Germany’s huge trade surplus shapes the figure for the full euro-zone. A positive figure of 21.9 billion was seen in June and a similar result is on the cards for July: 21.4 billion.
5. Employment Change: Tuesday, 9:00. This quarterly official figure lags the unemployment rate, but is still of note. A rise of 0.1% was seen in Q1 and a repeat is predicted for Q2.
6. Final inflation figures: Wednesday, 9:00. The preliminary inflation data for August showed a poor 0.2% y/y gain in prices, far below the ECB’s “2% or a bit below” target. Also when excluding volatile items, Europe has seen a meager 1% rise in prices. The data will likely be confirmed.
7. ECB Economic Bulletin: Thursday, 8:00. The European Central Bank has already lowered its forecasts and President Mario Draghi dragged down the euro in a masterful act. Nevertheless, this deeper insight provides a broader view into the ECB’s state of mind.
8. Current Account: Friday, 8:00. Similar to the trade balance, also the wider current account measure shows a huge surplus. A positive 25.4 billion in June beat expectations, and narrower surplus of 21.3 billion is expected now.

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EUR/USD trong daily closing last Friday and strong upward momentum suggest that the upward pressure is incomplete, argues UOB Group.

• "The break above 1.1255 late last week has shifted the outlook for EUR to bullish with a target of 1.1475," UOB projects.
• "In order to maintain the current nascent momentum, any pull-back should not move back below the break-out level of 1.1250/55," UOB adds.

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Citigroup made a forecast for Fed hike for today in technical and fundamental ways:

• "Citi’s baseline is for a 25bps hike, but there remains considerable scope for surprise, as well as hifting communication to play a role. Ultimately we think the decision boils down to how the FOMC sees market conditions, and whether the recent volatility could lead the FOMC to temporarily postpone hiking."
• "In our view we place a 25% chance of a hike, and 75% for no hike. Still, the risk/reward favors a more hawkish outcome. We think the next most likely possibility would be for the committee to signal the October meeting as live, a hawkish outcome for the bond market."

From technical points of view

If September hike - Buy USD/CAD
"Initial reaction is clearly USD positive through the rates channel. Distance on USD rally depends on how market extrapolates the tightening path (after SEP/Yellen signals). We like USDCAD higher under a Fed hike, signaling a more hawkish reaction function, supporting the yield differential and dampening the external demand impulse to Canada."

If September skipped - Buy AUD/JPY
"If September is skipped, the reaction in FX is going to depend on the motivation. If it was market volatility, EM uncertainty and the USD, then October is more likely to be in play. Instead, if its inflation and a view the NAIRU is considerably lower, 2015 could be off the table."

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