Weekly Outlook: 2014, March 30 - April 6

Australian Dollar at Risk on Static RBA, Upbeat US News-Flow

Fundamental Forecast for Australian Dollar: Neutral

• RBA Rate Decision May Be a Nonevent as “Period of Stability“ Continues
• AUD/USD May Fall as Upbeat US Data Erodes Aussie’s Yield Advantage

The Australian Dollar faces a whirlwind of event risk in the week ahead, with high-profile event risk lining up domestically and on the external front. A monetary policy announcement from the RBA uncharacteristically represents the least impactful of the week’s major inflection points. The central bank has advocated a period of policy stability for two consecutive meetings and there is little reason to suspect its calculus has materially changed.

Data from Citigroup shows Australian economic news-flow materially improved relative to expectations in March, but performance seems far from broad-based. Leading indicators from the Australian Industry Group (AiG) point to strength in services but likewise reveal an anemic manufacturing sector and slumping construction activity.

At the very least, the RBA is likely to want to see several months of robust outcomes to rethink the economy’s medium-term trajectory. With that in mind, the April rate decision is likely to do little besides reinforcing the status quo.

Where the RBA may fall short, the US economic calendar offers plenty of opportunities for volatility. A busy docket featuring manufacturing and services ISM figures and February’s Factory Orders report culminates in the much-anticipated Employment data set. Improvements are expected across the board, with the closely monitored Nonfarm Payrolls print expected to hit the pivotal 200,000 monthly jobs gain threshold once again. That would amount to the strongest outcome since November.

US economic data outcomes have noticeably stabilized relative to consensus forecasts over the past two weeks having deteriorated dramatically since mid-January. That hints the soft patch in the recovery noted in the first half of the year has been priced in to analysts’ outlook, opening the door for news-flow to surprise on the upside.

This against a backdrop of standstill at the RBA may erode the Aussie’s perceived policy advantage against its US namesake. AUD/USD has noticeably rebuilt its correlation with the Australia-US front-end bond yield spread, meaning such a scenario stands to push the pair lower.

US Dollar Prepares for Impact of NFPs Release, S&P 500 Breakout

Fundamental Forecast for Dollar: Bullish

• The transition into the second quarter can expose risk trends and investors’ bubbling fears
• NFPs may be less effective to bolstering the dollar than the ECB decision, Japanese tax hike and Chinese data

Over the past weeks, the dollar has generated little strength from its safe haven status while its yield buoyancy following the FOMC’s third Taper lost traction. In periods of complacency and moderation, the greenback is at risk of retracing event-driven short-term gains – just like volatility has quickly deflated swell after swell. But through this oscillation, the currency has refused a full bear shift. Resilience through unfavorable conditions is an inherently bullish reflection. But what happens when the tides turn and the fundamentals start to supply outright support? In the week ahead, we will see the dollar’s rate outlook leveraged by March NFPs and speculation surrounding its counterparts’ policy bearings. Furthermore, the specter of a risk collapse should keep greenback traders at the ready.

While there is a more material probability to see the dollar’s activity level and direction change via a shift in monetary policy expectations, the impact of a market-wide shift in risk appetite would carry far more weight. Probability versus potential. Speculative appetites are not attuned to ‘optimism’ now. They are fully set into complacency and a scramble to make a benchmark-beating return at any cost. Anecdotally, the bulls that have trumpeted the market’s climb to record highs are second guessing the foundation under the capital market’s current highest and are questioning what could make it project further. A view of investing in value, growth, earnings and yields contradicts the fundamental backdrop and current market highs.

An effort to bid any dip in mature trends from the likes of US equities has been the primary means of gains for bulls so far this year, and the limitations of that strategy are growing more and more obvious. A shift in sentiment will quickly reveal the level of exposure market participants have taken (record leverage, exceptionally low participation, positioning in low yielding but historically high-risk assets) and encourage deleveraging. Yet, the question has long been: what will set the blaze? In the week ahead, we have the rollover in the quarter. On April 1, we move into the second quarter. The periodical transitions are important in the financial world as this is an opportunity for many passive capital market participants – retirement accounts, governmental funds, etc – to make changes for another full quarter’s holding period. Are investors really that confidence? We will see.

There are plenty of other calendar items throughout the week that can stir sentiment, but the spark will likely be just that: a spark. A purposeful shift in sentiment will materialize through underlying conditions that have steadily developed over time. But, it is that catalyst that breaks the trance of hope that remains elusive. Ahead, we have Friday’s March NFPs, a speech from Fed Chair Janet Yellen, trade figures, and manufacturing and service sector activity readings. All of these are individually important, but their greatest role would come as the inspiration to touch off a deeper misgiving amongst speculators.

This round of data will also feed interest rate speculation behind the dollar. Despite a third Taper and a better timeline for hikes delivered with the FOMC’s meeting on March 19, we have seen the greenback’s yield advantage ease in the FX market this past week. Yet, looking at the Treasury yield curve; we find rate expectations building. The disconnect is that we are dealing with a relative market. If EU, UK and other regions’ rates are building more aggressively, the dollar still loses ground.

For the dollar to perform via its monetary policy bearings, the most reliable scenario would be a broad drop in global financial and economic optimism what would immediately pressure the likes of the ECB, BoJ and BoE to ease back on hawkish moves and maybe even spur more stimulus. In that situation, the Fed’s vow that the threshold to change Taper is high would act as a prow to market corrections. Otherwise, an ECB decision, Chinese growth readings and the BoJ’s tax hike are all indirect highlights for the USDollar.

Gold Primed to Rip or Dip Ahead of Key Event Risk- $1268 Key Support

Fundamental Forecast for Gold: Bearish

• Crude Oil Hits 3-Week High, Gold Selloff Continues
• Post-FOMC Gold Price Breakdown Gathers Pace under $1320

Gold was sharply lower with the precious metal off by more than 3% for the second consecutive week to trade at $1293 ahead of the New York close on Friday. The losses have persisted despite continued weakness in the greenback with the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) closing the week just above key support at 10,500. The technical damage done to the gold rally is suggestive that further losses are likely heading into the start of the second quarter. But with major event risk on tap next week, the immediate outlook remains at clouded a bullion closes the week just above near-term support.

Heading into next week traders will be closely eyeing an array of event risk with the start of Q2 trade, the new fiscal year in Japan (Japanese tax hike takes effect April 1st), the ECB rate decision and the US non-farm employment report on tap. With end of month/quarter flows coming into play early next week, look for portfolio adjustments/rebalancing to possibly impact price play heading into the start of April trade. The main event nex week will likely be the highly anticipated NFP report on Friday where consensus estimates are calling for the addition of some 200K jobs last month with unemployment widely expected to shed another 0.1% to 6.6%. Look for an at-expectations print or better to keep the pressure on gold with only a more substantial miss on the print likely to offer some near-term support for the bulls.

From a technical standpoint, gold closed the week just above Fibonacci support at the 50% retracement of the advance off the December low at $1285. We’ll look to the April / weekly opening ranges to offer further guidance on a near-term bias while noting that the broader outlook remains weighted to the downside below last month’s opening range low at $1327. Look for a break sub-$1285 to open up a decline into a critical inflection point we have been noting for months now at $1268/70 with a move below the 61.8% retracement of the 2014 rally at $1260 targeting the 61.8% extension off the August 2013 high at $1234. Interim resistance stands at $1310 with only a move surpassing $1327 invalidating our medium-term outlook on gold.

British Pound Lining up for Significant Turn – What Could Warn Us?

Fundamental Forecast for Pound:Bearish

• Our Senior Strategist sees Price & Time studies favor an important GBP reversal
• The US Dollar itself is at a potentially significant turning point

The British Pound finally showed signs of life as it finished the week at its longest-consecutive daily rally in two months. Yet the Sterling remains below important price levels, and a number of technical factors favor GBP weakness into a big week for forex markets.

A relatively empty UK economic calendar will leave the GBPUSD and EURGBP to trade off of a highly-anticipated US Nonfarm Payrolls report as well as a European Central Bank interest rate decision in the days ahead.

The past two months of British Pound trading have been marked by a steady decline in day-to-day price swings, and indeed we’ve seen the US Dollar stick to similarly tight ranges across the board. Yet the pickup in event risk has pushed 1-week volatility prices to their highest levels since mid-February.

It can’t be pure coincidence that the February surge in vols likewise coincided with fresh multi-year highs in the British Pound and important lows in the Dow Jones FXCM Dollar Index. To that end it will be interesting to watch if history repeats itself—particularly as our Senior Strategist points out that the GBPUSD is at special risk of reversal lower, while the US Dollar itself is setting up for something big.

Correlations between the British Pound and traditional drivers such as interest rates and the FTSE 100 remain weak by historical standards. The breakdown makes the next catalyst less obvious, but we suspect that any big shifts in the US Dollar may dictate moves across the board.

We’ll keep an especially close eye on market reactions to the US Nonfarm Payrolls report and effects on the GBP. The signs of potential reversal are becoming too difficult to ignore, and it should prove to be an especially interesting week of British Pound trading.

USD/JPY at Risk for Key Break- U.S. NFPs, Japan’s VAT in Focus

Fundamental Forecast for Japanese Yen: Neutral

• USD/JPY Fails to Break Above Range Despite Strong Rise in Consumption
• Forex Trading Video: Yen Crosses and S&P 500 Checked Lower, Break Risk?

Japan’s consumer-tax hike, which takes effect April 2014, certainly clouds the fundamental outlook for the Japanese Yen, while the technical formations highlight the risk for a major move as the USD/JPY remains stuck in the wedge/triangle from the beginning of the year.

Indeed, fears that the value-added tax (VAT) will slow the economic recovery may put increased pressure on the Bank of Japan (BoJ) to further embark on its easing cycle, and a meaningful shift in the policy outlook may generate a bullish breakout in the USD/JPY as it retains the upward trend carried over from 2013.

However, we may continue to see positive developments coming out of the Japanese economy as BoJ Governor Haruhiko Kuroda retains a positive outlook for the region, and the board may preserve its current policy throughout the medium-term as the central bank head sees scope to achieve the 2% inflation target as early as the end of FY 2014. With that said, easing bets for a further expansion in the BoJ’s asset-purchase program may continue to limit the topside for the USDJPY, and the pair may make another run at the 101.00 handle should it continue to carve a series of lower highs.

Beyond Japan’s economic docket, U.S Non-Farm Payrolls (NFP) may heavily impact the technical outlook ahead of the BoJ meeting on April 8 as the world’s largest economy is expected to add another 197K jobs in March, but we would need a meaningful deviation from the current forecast to see an impressive reaction as market participants weigh the outlook for monetary policy. In turn, we will stay flat and wait for a meaningful break on the USDJPY as it continues to consolidate with the wedge/triangle.

Forex Trading Video: Yen Crosses and S&P 500 Checked Lower, Break Risk? :

Forex Weekly Outlook Mar 31-Apr 4

The US dollar gained against the euro and the yen, but lost ground against the other currencies. the ECB rate decision, Janet Yellen’s speech, US ISM Manufacturing PMI, important employment data culminating in the all-important Non-Farm Payrolls and rate decision in the Eurozone are the highlights of this week. Here is an outlook on the main events awaiting us this week.

Final US GDP growth for the final quarter of 2013 was slightly revised to the upside, reaching 2.6%. In the meantime, weekly jobless claims surprised with a 10,000 drop to 311,000, beating forecast for a 326,000 reading, indicating the US job market continues to improve. Will this trend continue? In the euro-zone, dovish comments by the ECB pushed the euro down, while UK retail sales gave a boost to the pound. NZD/USD reached the highest levels since 2011 and also the Aussie and the loonie enjoyed significant gains.

1. Eurozone inflation data: Monday, 9:00. Inflation in the Eurozone eventually increased by only 0.7%. The initial reading was 0.8%, better than the 0.7% increase predicted by analysts, but this changed in the final read. The core CPI figure, excluding energy, food, alcohol & tobacco, edged up 1% in February, following 0.8% posted in the previous month. Markets had expected the pace of price acceleration to remain steady for the month. Eurozone inflation is expected to reach 0.6%. The low expectations are due to the weak German inflation numbers.
2. Canadian GDP: Monday, 12:30. Gross domestic product in December fell more than expected, dropping 0.5% after a 0.2% gain in the previous month. Analysts expected a smaller decline of 0.2%. This was the biggest monthly decline since March 2009. Weakness was visible across the board however; Bank of Canada Governor Stephen Poloz said this could be a temporary relapse due to weather related factors. Nonetheless real gross domestic product grew by 2.0% in 2013 compared to 2012. Gross domestic product is expected to expand 0.4%.
3. Janet Yellen speaks: Monday, 13:55. Federal Reserve Chair Janet Yellen is scheduled to speak in Chicago. Yellen may explain the Fed’s latest decision to continue tapering, cutting another $10bn from its economic stimulus. The Federal Reserve Chair may also elaborate on the rate hike intentions for 2015. Volatility is expected.
4. Australian rate decision: Thursday, 3:30. Australia’s central bank maintained its cash rate at a record low of 2.5% in March, in line with market consensus. The weakening of the Australian dollar will help boost growth. The RBA kept an accommodative monetary policy with credit growth rising gradually. Domestic demand showed signs of improvement and the labor market is expected to grow in the coming months. Rates are expected to remain unchanged.
5. US ISM Manufacturing PMI: Tuesday, 14:00. Manufacturing activity expanded more rapidly than expected in February, emerging from the harsh winter weather rising to 53.2 from 51.3 in January. The manufacturing expansion could have been stronger, if it had not been for a shortage of parts. However, orders have improved, ensuring larger growth in the coming months. Another improvement to 54.2 is anticipated now.
6. US ADP Non-Farm Employment Change: Wednesday, 12:15. U.S. private sector added 139,000 jobs in February, lower than market forecast of 159,000 gain. The weak result was blamed on difficult winter conditions. Economists believe employment will pick-up in spring. The ADP figures give an early estimate for the government’s much more comprehensive labor market report on Friday, which includes both public and private sector employment. U.S. private sector is expected to gain 192,000 jobs.
7. Eurozone rate decision: Wednesday, 12:15. The European Central Bank kept interest rates on hold leaving monetary policy unchanged to help boost the euro zone recovery. ECB President Mario Draghi said the ECB will take bold policy action if the outlook deteriorates, but assured the euro area is on a recovery track. However one of the biggest downside risks is low inflation, below 1%. ECB policymaker Ewald Nowotny said that he and his colleagues were nearing unanimity on the option to end the so-called sterilization operations. The ECB is expected to keep rates unchanged at 0.25%.
8. US Trade Balance: Thursday, 12:30. The U.S. trade deficit changed slightly in January, reaching a $39.1 billion gap from December’s revised shortfall of $39.0 billion. The release was in line with market consensus. Exports rose 0.6% to $192.5 billion and imports edged up 0.6% to $231.6 billion in January. Domestic demand weakened mildly, increasing businesses’ inventories which will in turn constrain import growth in the first quarter. US Trade Balance is expected to reach 0.2 billion.
9. US Unemployment Claims: Thursday, 12:30. The number of Americans filing initial claims for jobless benefits declined last week by 10,000 to a seasonally adjusted 311,000, indicating the US job market is continuing its recovery process. Analysts expected claims to rise to 326,000. The four-week moving average fell to 317,750 last week, the lowest level since last September. US jobless claims are expected to rise to 319,000.
10. US ISM Non-Manufacturing PMI: Thursday, 14:00. US service sector activity fell to 51.6 in February from in 54.0 January mainly due to contraction in the survey’s employment section. The Non-Manufacturing Business Activity Index dropped to 54.6% from 56.3 posted in January. The New Orders Index climbed to 51.3, from 50.9 registered in January. The Employment Index fell to 47.5 from 56.4 indicating in employment for the first time after 25 consecutive months of growth. A rise to 53.5 is anticipated this time.
11. Canadian employment data: Friday, 12:30. Canadian job market lost 7,000 jobs in February after gaining 29,400 in the previous month; however, the unemployment rate remained unchanged at 7%. This unexpected decline was contrary to analysts’ expectations of a 16,900 job growth. The public sector shed nearly 51,000 jobs, offset by gains of 35,000 and 8,000 in the private sector. However, the majority of the jobs lost were part time, while full-time positions increased, which is a good sign for the Canadian employment market. Canadian job market is expected to gain 23,500 jobs, and unemployment rate is expected to remain at 7%.
12. US Non-Farm Payrolls and Unemployment rate: Friday, 12:30. The US economy added more jobs than expected in February adding 175,000 positions, while economists expected a job gain of 151,000. However, the unemployment rate increased slightly to 6.7% from 6.6% in January. The labor force participation rate was unchanged at 63%. The job addition in February came after weeks of slowdown due to unusually tough weather conditions, indicating the US job market returns to recovery. US job market is expected to add 196,000 jobs, and unemployment rate is expected to decline to 6.6%.

Forex Strategy Video: Stick to the Plan...Especially When the Trade is On

• Many trading pitfalls occur after the trade is already on
• When the reason for taking the trade has evaporated, probabilities fade fast
• We look at the temptations, hazards and making the right calls with GBPUSD and EURUSD examples





A trade that has been put through the ringer for its fundamental, technical and market conditions merits should skew probabilities in our favor. When we make exceptions, our strategy starts breaking down. Tantalizing technical setups with no fundamental chance or event-driven volatility with no definable guidance in price cater to our emotions rather than our bottom line. But sticking to the plan isn't just for the pre-flight check. Many will alter the plan mid-trade or decide to ignore changing circumstances to revert to hope. Hope is not a trading plan. We look at how sticking to the plan both before and during a trade is important using GBPUSD and EURUSD examples in the weekend Strategy Video.

Crude Oil forecast for the week of March 31, 2014, Technical Analysis

The light sweet crude market rose during the week, breaking well above the $100 level again. The fact that the previous week had formed a hammer was a clue that we could be going higher, but the actual confirmation came once we cleared the top of that candle. It looks as if the market is still somewhat bullish, and as a result we will more than likely head towards the $104.50 level given enough time. We think that this market will be one that can be bought on dips, simply because there’s so much in the way of support below.

With that being said, we believe that the $105 level will continue to be massive resistance, and as a result we feel that the area will more than likely cause a bit of selling. A break above that area of course would be significant in the sense that it would free the market to go much higher, but at the end of the day we still believe that there’s a bit to go before even get to that issue. We are bullish.



Brent

The Brent markets rose during the week as well, but don’t look quite as bullish of the light sweet crude market. Nonetheless, it appears that we are heading towards the $112 level given enough time, although we would expect some choppiness right around the $108.50 level, an area that did in fact cause a bit of resistance this past week.

Any pullback at this point time should end up being a relatively positive thing, as buyers should step into the marketplace. The $105 level offered enough support to push the market higher last time, and we believe that will continue to be the case. So having said all of this, even if we pullback at this point time, we would fully anticipate this market been somewhat supported. With that in mind, we are not interested in selling, and believe that ultimately we will hit the aforementioned $112 level, but it may take quite a bit of chopping around.

Nikkei forecast for the week of March 31, 2014, Technical Analysis

The Nikkei as you can see rose during the week, breaking above the top of the shooting star from the previous week. That being the case, we believe that this market will more than likely continue to at least go sideways, if not go higher. We have no interest in shorting this market until we get below the ¥14,000 level, something that probably isn’t going to happen in the short-term. That being the case, we are buyers on a break of the ¥15,000 level, but recognize the fact that the move to the ¥16,000 level will probably be relatively choppy

DAX forecast for the week of March 31, 2014, Technical Analysis

German index initially fell during the week, but found the €9200 level to be supportive enough to turn things back around and bounce high enough to clear the €9500 level. Because of this, we believe that the market will continue to go higher, but it might be a bit of a choppy affair. If we can clear the €9800 level, we believe that there isn’t much standing between that and the €10,000 level. Ultimately, it doesn’t matter, we are buyers of the DAX nonetheless. With that, there is no selling opportunity as far as we can tell and we believe that the €9000 level will continue to be the “floor” in this market.