Weekly Outlook: 2014, April 6 - 13

Gold Monthly Fundamental Forecast April 2014

Gold lost momentum this month after Janet Yellen took the reins at the Federal Reserve and began to talk about interest rate increases. Gold ended at 1284.50 down for the month after its high of 1392.50 hit on geopolitical tensions. Gold is slowly recovering from its lowest price in some years. By December last, gold had dropped below 1,200 but three months in to the New Year and it has recovered slightly to 1,312.

In 2013 consumers generated exceptional levels of demand for gold, with prices somewhat dependent on supply and demand like any commodity. However, precious metals are more complex and generally speaking no one event is likely to affect the price. The Crimean crisis and the threat of war did contribute to buying pressure which has eased towards the end of March with prices coming back significantly. Conversely, gold demand has been relatively bullish during the first three months of 2014 with a few flat patches thrown in. Investors have been a mix of local and international with a reasonably equal split.

Highest: 1392.50

Lowest: 1283.00

Difference: 109.50

Average: 1336.23

Change %: -4.02

Gold steadied on Wednesday after two days of losses but the precious metal remained near its lowest in seven weeks as strong U.S. factory data boosted optimism about economic growth, diminishing bullion’s safe-haven appeal. Physical demand from top consumer China rose slightly, with local prices trading at a premium to spot London prices for the first time since early March.

Though some in the market believe gold prices could head lower due to stronger equities, others say emerging physical demand and geopolitical tension in Ukraine could support prices.

Central Bank – Fed Reserve
Date of next meeting: April 30, 2014
Current Rate: 0.00% – 0.25%

ECB Sets Table for Lower Euro Prices – Here’s How

Fundamental Forecast for Euro: Bearish

• The Euro saw its highs early in the week but was generally weaker into the ECB rate decision.
• The ECB rate decision carried a heavy dovish connotation, leading to bearish opportunities in several EUR-crosses.

The European Central Bank’s (ECB) patience with the region’s lackluster recovery may be running out, if one is to believe the rhetoric deployed by President Mario Draghi at the April press conference. Although the ECB held its main refinancing rate on hold at 0.25%, a record low, it was clear that the downturn in economic data over the past several weeks, highlighted by the headline March CPI figure coming in at +0.5% y/y, a four-plus year low, and far beneath the ECB’s medium target of +2%.

There were several tweaks in ECB President Mario Draghi’s tone on Thursday that suggested a more dovish consensus is forming among the Governing Council Members. It was made clear that the council voted unanimously to explore the use of unconventional monetary policy measures, even as President Draghi noted that all the conventional tools hadn’t yet been deployed. Negative interest rates and a round of the ECB’s own version of quantitative easing (QE) was discussed.
The implication that the ECB stands ready to act in the face of a deflating price environment and soft economic horizon inherently suggests an air of credibility to the idea that the ECB could implement non-standard accommodative policy measures. In meetings past, any such commentary that implied the desire for a weaker Euro or hope for continued improvement in growth was met with skepticism by the market; the Euro had developed the reputation for bouncing back after the past several meetings, including the November rate cut (an important low for EURUSD formed that day).

Now that it’s been made clear by the ECB that it recognizes jawboning is losing gravitas – threats of action but no such specific action (see: the ECB’s success with bringing down PIIGS sovereign bond yields without having to operate within the scope of the OMT, not even once) – the path forward will require more explicit details of what measures the ECB might take going forward.

In recent weeks, several policymakers have expressed their displeasure with the elevated Euro exchange rate, and it’s of little surprise that a threat of implementing negative deposit rates would be utilized in order to stem speculative inflows into the currency. The other threat, a full blown QE program, saw its first trial balloon float by on Friday, when German media outlet FAZ reported that the ECB had modeled a €1 trillion QE program, with results seeing anywhere from a +0.2% to +0.8% increase in inflation.

For now the table is set for the Euro to fall but several things will need to develop in the coming weeks and months in order for weakness to flourish – and that’s because there is a trade cushion supporting a higher Euro exchange rate. First, as noted by President Draghi, the stress tests (AQR: asset quality review) have resulted in curbed risk taking by Euro-Zone banks; and to avoid creating a panic about the system before the tests in November, the ECB will try to avoid another liquidity injection.
Accordingly, the economic data picture must remain soft for the ECB’s dovish threats to carry any weight insofar as the threat of non-standard policy measures doesn’t seem legitimate in the face of improving growth prospects and elevated price pressures. Neither of those conditions exist presently (Citi Economic Surprise Index hit a fresh yearly low at -9.0 on Thursday, and was at -8.3 at Friday’s close; both headline CPI and PPI readings are at their lowest levels in over four years). With several EUR-crosses showing technical patterns that would indicate lower Euro prices, continued weakness in economic data will be the only fuel needed to weigh down the once-resilient currency.

US Dollar’s Next Run Requires a Much Stronger Push

Fundamental Forecast for Dollar:Neutral

• Though the S&P 500 and yen crosses retreated Friday, it too early to call a full-fledge risk aversion move
• NFPs keep the market’s time frame for the first Fed hike on track, stimulus expectations for others may offer more support

The US Dollar is a favored safe haven currency. That is a good role to play given the slide in US equities and other ‘risk’ benchmarks to close this past week. Furthermore, the market suspects the Fed is committed to deescalate its extraordinary QE3 program which sets a definable timeframe for the return to rate hikes. Both of these major themes seem to be moving in the greenback’s favor. Yet, to break months of trend and complacency, a greater level of conviction is needed than a mere bias. And, that is what could hold the dollar back from breaking below 1.3600 on EURUSD, 1.6500 with GBPUSD and generally developing a more substantial trend.

Starting – as always – with the aspect that carries the most market-moving potential, risk trends are without doubt the dollar’s most intense sponsor. When a pullback in capital markets escalates into a panic, the liquidity the currency represents (via Treasuries and money markets) drives capital through the exchange rate in waves. Yet, there is a broad intensity gap between a pullback and panic. At what level does fear solicit the world’s most liquid currency for harbor?

While equity markets’ tumble this past Friday (S&P 500 down 1.3 percent and the Nasdaq Composite 2.6 percent) was substantial, it has hardly built the breadth and momentum that normally represents a destructive deleveraging effort. Stock indexes are only modestly below record highs. Volatility measures show little demand for insurance or expectations of adverse market movement - however you want to read it. And, bouts of cross-asset ‘flight to safety’ have proven short-lived and have fallen well short of the intensity that revert the dollar to its primal state.
To generate the kind of anxiety that leverages the greenback’s liquidity over the diversification theme to the euro, the yield focus on the sterling, the carry trade unwind behind the yen; we need either a lasting ‘risk off’ run to infect the broader financial system or a spark that creates a severe market dislocation. From the docket itself, there are few scheduled events that present that boast that kind of influence. On the other hand, such shocks are rarely telegraphed or the progeny of simple data. Keeping track of the level of bearish pressure behind a benchmark – like the S&P 500 – and seeing the dollar revert to ‘safe haven’ against progressively better-balanced counterparts (emerging market currencies, NZD, CAD, AUD, GBP, EUR and JPY - in that order) is the best confirmation.

We are more likely to see progress from the dollar develop around interest rate expectations. While yields the world over are still extremely low and we are still one foot in stimulus programs, the FX market is forward looking. Should the market believe the US is due a rate hike before its counterparts, the rise in market rates and inflow of capital will follow. The US labor statistics for March released this past week reinforce the view already assessed by the market: maintaining the Taper through October or December and then the first FOMC hike by mid-2015. Payrolls were in-line at 192,000, unemployment held at 6.7 percent and the participation rate rose to 63.2 percent.

On the docket for next week, there are a few stand-out releases rate watchers should keep tabs on. The minutes from the FOMC’s March 18-19 meeting (which generated so much market response) can offer further insight as to what thresholds the group is implicitly following and their assumptions. Economic health will be measured by the University of Michigan Consumer Confidence survey, NFIB Small Business sentiment report and consumer credit statistics. Inflation, meanwhile, will see updates via producer and important price indexes.
And, given that this is a relative assessment; it is always important to assess the strength of the dollar’s largest counterparts. This is a particularly important evaluation against the euro and pound. Given the runaway capital inflow in the Eurozone and elevated rate forecast for the UK, a correction on their part could prove a substantial booster for the greenback.

Gold NFP Rally Likely to be Short Lived- $1327 Key Resistance

Fundamental Forecast for Gold:Neutral

• Gold and Silver Face Breakouts On Surprise NFP Print
• Gold Holding on to 1280 for Dear Life

Gold prices are firmer on the week with the precious metal rallying 0.5% to trade at $1302 ahead of the New York close on Friday. The move snaps a two week losing streak that saw prices plummet more than 8.2% off the highs and although the rebound may yet have further upside, the magnitude to the rally is likely to remain limited.
The March non-farm payrolls report took center stage on Friday with the data coming in slightly below expectation at 192K with the headline unemployment rate holding steady at 6.7%. Expectations for a strong employment read had been building all week with some estimates calling for a print as high as 270K after a strong upward revision to the February ADP report. The result saw the US dollar give back a portion of the week’s rally with gold breaking out of a tight weekly range on the release.
Despite the miss on NFPs and the headline unemployment rate (which was expected to fall to 6.6%) a sizeable bounce in the labor force saw the participation rate climb to 63.2% from 63.0%, its highest level since July of last year. Similarly upward revisions to the February print also painted an improving picture for the labor markets, albeit slightly weaker than consensus estimates. Still risk assets took no solace with US equity indices selling off sharply into the close of the week.

Looking ahead, traders will be closely eyeing the release of the FOMC minutes form the March policy meeting on Wednesday. With the latest quarterly projections showing a growing number of Fed officials showing a greater willingness to raise interest rates in 2015, investors will be looking for further details on the timing and methods by which the central bank may look to begin the normalizing policy. Gold is unlikely to see significant upside on the back of this week’s reversal as the fundamentals remain broadly unsupportive for the bulls. The two largest risks to our outlook remains if A- the recent sell-off in equities materializes into a larger correction or B- unforeseen geopolitical threats re-emerge.
From a technical standpoint, the broader focus on gold remains weighted to the downside after breaking below key technical barriers last month. Interim resistance is eyed at $1310 with only a breach above the March opening range low at $1327 invalidating our medium-term bias. Key support rests at $1268/70 with a break below the 61.8% retracement of the late December advance at 1260 putting longer-term targets at 1224/26 in view.

USD/JPY Capped By Former Support- Upbeat BoJ Risks Larger Decline

Fundamental Forecast for Japanese Yen: Neutral

• Japanese Yen Pairs Rally Over-Extended Ahead of BoJ
• USD/JPY at Top of Near Term Channel; Caution Warranted

The USDJPY pulled back from a fresh monthly high of 104.11 as the weaker-than-expected U.S. Non-Farm Payrolls report dragged on the dollar, and the pair may face a larger decline in the week ahead should the Bank of Japan (BoJ) continue to scale back its willingness to further expand its asset-purchase program.

Indeed, the BoJ is widely expected to preserve its current policy at the April 8 meeting as Governor Haruhiko Kuroda retains an upbeat tone for the Japanese economy, and the board may continue to endorse a neutral policy stance for the foreseeable future as a growing number of central bank officials see scope to achieve the 2% target for inflation as early as the end of FY 2014. With that said, we may see Governor Kuroda merely reiterate the policy statement from the March 10 interest rate decision, and the Yen may benefit from a less-dovish BoJ as market participants scale back bets for additional monetary support.

At the same time, it seems as though the value-added tax (VAT) will have a limited impact on the BoJ’s policy stance as Governor Kuroda continues to see a moderate recovery in Japan, and the central bank head may even sounds more hawkish this time around as the VAT raises the outlook for price growth. In turn, a more material shift in the policy outlook may highlight an improved outlook for the Japanese Yen, while a further decline in trader sentiment may also generate greater demand for the low-yielding currency as it benefits from risk aversion.

As a result, the USD/JPY may continue to give back the rebound from the end of March as former support (104.00 pivot to 104.15 38.2% Fibonacci expansion) now acts as resistance, and the pair may ultimately make another run at the 101.00 handle in April should the BoJ see scope to halt its easing cycle sooner rather than later.

British Pound Will Look for Rate Hopes to Keep 1.6500 Intact

Fundamental Forecast for Pound:Neutral

• Interest rates have been key to the sterling’s performance, which is seen in its strength vs JPY and weakness vs NZD
• With the yield forecast so high, each piece of data can undermine bullish hopes

The British pound offered up an unflattering performance this past week. While the currency was unable to mount a meaningful advance, neither would it loose substantial ground against most counterparts. Stability in exchange rates is sought by central bankers but not currency traders. Looking out over the coming week, the question is whether there is enough of a tide to drive the sterling to a revive the bullish trend that flourished from this past summer until February or the spark that sends the currency tumbling.

Before plotting the sterling’s course, it is important to appreciate its current bearings. Since the UK economy started to show evidence of turning around and current BoE Governor Carney stepped in with a more hawkish message, the currency has appreciated against all of its counterparts with the exception of the New Zealand dollar (whose central bank has actually hiked rates). With a modest loss against a high-yield and aggressive carry counterparts like the kiwi to substantial gains against the dovish Canadian dollar (GBPCAD is up 12.3 percent) or stimulus heavy yen (GBPJPY 11.4 percent), it is clear what matters most for the pound: yield forecasts.

In the risk spectrum, the pound carries enough of a safe haven appeal to compete with major liquid counterparts; but its market rates are material enough to keep it out of the ‘liquidity of funding currency only’ category. According to short-term rates markets, the market seems to pin the first Bank of England rate hike around March of 2015. That is well ahead of the Fed, RBA, ECB and Bank of Canada.

Maintaining that hawkish/bullish outlook until that first move is realized is the difficult part. At current levels, the market’s assumptions for rates are high. To maintain current levels – much less gain further ground – we would need to see an improvement in economic activity and material return of inflation pressure. We will find updates on both fronts with this week’s data – likely offering the market more to work with than the Bank of England decision scheduled for Thursday…

For economic updates, we have data that will cover employment, factory activity, trade, housing and a general growth assessment. Of the reports, the NIESR GDP Estimate for March is most comprehensive. While this data is afforded relatively little attention (or at least short-term volatility), it maintains a particularly good and leading relationship to the official GPD statistics. Furthermore, given an increased scrutiny over data that shapes rate decisions, this report could be afforded more respect.

Economic strength is key to ushering in a return to rate hikes, but what truly necessitates such a move is inflation. While we don’t have the CPI figures until the following week, we do have the RICS house price measure and the BRC’s Shop Price Index – which is a very good proxy for the official ONS consumer reading.

Assessing rate expectations through sterling activity alone or through sheer will of analysis is difficult. Sterling traders should be particularly attuned to the government bond (Gilt) yield curve. Should the market grow increasingly certain of a hike in the near future and further price additional tightening to follow in a regime, we will see it in rising yields in 2-year, 5-year and even 10-year bond yields.

Forex Weekly Outlook April 7-11

The US dollar gained against most currencies and the euro was on the back foot in a busy week. And now, rate decisions in Japan and the UK, Australian employment data and the FOMC meeting minutes of Yellen’s first decision are the highlights of this week. Here is an outlook on the main market-movers ahead.

The all-important US Non-Farm Payrolls, slightly disappointed with a 192,000 jobs gain in March. The expectations were high since the winter storms were over and a strong rebound was anticipated. Nevertheless, the release still indicates recovery and consists of encouraging details. The taper train remains on track. Mario Draghi sent the euro lower on more dovish rhetoric and despite a lack of action. Is the ECB serious about QE? In the UK, PMIs weighed on the pound, and the loonie finally staged a recovery after a great Canadian jobs report. More volatility ahead? Let’s start:

1. Japan rate decision: Tuesday. The Bank of Japan maintained its accommodative monetary policy for the sixth consecutive month, to help the ongoing growth trend in Japan’s economy. Deflation fears have subsided while the BOJ strives to achieve a 2% inflation rate. The bank also upgraded its assessment on capital investment amid a pick-up in business activity. This is the first decision of the BOJ after the sales tax hike and it comes in the one year anniversary of Kuroda’s monetary blitz.
2. US JOLTS Job Openings: Tuesday, 14:00. The US economy increased its Job openings to 3.974 million in January from December’s revised print of 3.914 million. However the reading was below market forecast of 4.015 million. The hiring rate and separation rate remained nearly unchanged at 3.3% and 3.2%, respectively. The Federal Reserve’s new chair Janet Yellen highly regards JOLTS Report as a good indicator for hiring in the US economy. Jobs openings in February are expected to reach 3.99 million.
3. FOMC Meeting Minutes: Wednesday, 18:00. These are the meeting minutes of Yellen’s first decision, in which a third taper of QE to $55 billion was announced and forward guidance was dropped. More importantly, markets will look for hints about the timing of a rate hike, something that was conveyed by Yellen in the press conference with the 6 months comment and ignited a dollar rally.
4. Australian employment data: Thursday, 1:30. The Australian economy increased its labor force by 47,300 jobs in February, following 18,000 climb in January. The reading topped market forecast of 15,300 job addition. However the unemployment rate remained unchanged at a decade high of 6%. Full-time employment edged up by a staggering 80,500 but was offset by a drop in part-time workers. Despite a positive reading, both the RBA and the Treasury believe the unemployment rate will rise in the coming months as the economy struggles to transition from a fading mining investment boom to broader based growth. Australian economy is expected to add 14,300 jobs while the unemployment rate is predicted to remain 6%.
5. UK rate decision: Thursday, 11:00. The BoE maintained its rate at a five –year low of 0.5%, in March. The Monetary Policy Committee decided to reinvest 8.1 billion pounds of proceeds from government bonds the Bank bought through its quantitative easing program and which are due to mature in March. The pick-up in recovery witnessed in recent months forced the central bank to reinvent its forward guidance policy. BoE last month broadened the focus of the guidance towards a wider assessment of spare capacity, or slack in the economy, to refrain from raising rates or tightening monetary conditions and also indicated that the first rate hike could come in the second quarter of 2015. No change in rates is expected.
6. US Unemployment Claims: Thursday, 12:30. The number of Americans filing initial claims for unemployment benefits edged up more than expected last week, reaching 326,000, however the general trend indicates the Us labor market is continuing to improve. The 16,000 addition compared to the previous week increased the four-week moving average to 319,500. Despite this relapse, the number of claims has been generally stable in March suggesting acceleration in the US job market. Claims are expected to decline to 314,000.
7. G20 Meetings: Thu-Fri. G20 meetings taking place in Washington DC are attended by finance ministers and central bankers from 20 industrialized nations including the G7 nations – Canada, Italy, France, Germany, Japan, the UK, and the US. The discussions are closed to the press but officials usually give statements to reporters after the meetings have been concluded.
8. US Federal Budget Balance: Thursday, 18:00. The federal expenses generally increased in February, but this year the increase was 32% lower than last year. February’s budget deficit reached $193.5 billion compared to the $203.5 billion posted in February 2013. In the five months of the government’s fiscal year, the total is up to $377.5 billion, 24% smaller than last year. The good news is that the deficit has improved to where it’s running at about 3% of GDP, the normal 40-year average. US Federal budget deficit is expected to improve to -$127.5 billion.
9. US PPI : Friday, 12:30. Prices of finished goods fell slightly in February, down by 0.1%, following a 0.2% rise in the previous month. Analysts expected a 0.2% increase. On a yearly base, producer prices rose 0.9%, the smallest 12-month increase since last May. The recent drop suggests, inflation remains low. However, Fed officials have expressed concern about the persistence of low inflation. If it remains below target, the Fed may stop scaling back its stimulus measures. A rise of 0.1% is expected this time.
10. US UoM Consumer Sentiment: Friday, 13:55. U.S. consumer sentiment declined in March to 79.9 from 81.6 in the prior month, the lowest level since November 2013. Economists expected the index to rise to 81.9. Meanwhile, Conference Board consumer confidence report edged up to 82.3, the highest since 2008 but relied mostly on consumers’ expectations. Consumer sentiment is expected to rise to 81.2.

Nikkei forecast for the week of April 7, 2014, Technical Analysis

The Nikkei as you can see gapped higher during the week, and then just went higher from there. We believe that this market will continue to go bullish, and now that we are above the ¥15,000 level, we believe that the market will target the recent highs which were above the ¥16,000 level. With that being the case, we are buyers, although we anticipate a bit of volatility between here and there. There is no interest in selling, as the market should be supported by not only a weakening Japanese yen, but also a Bank of Japan which continues to flood the markets with liquidity.

DAX forecast for the week of April 7, 2014, Technical Analysis

The German index fell during the week, but found enough support below the €9600 level in order to pop back up and form a hammer. This hammer of course suggests that the market is going to find buyers here, and because of this we believe that the market will ultimately break out to the upside. The €9800 level courses the resistance area that we are looking at, but above there we think the market is free to go to the €10,000 level. Any pullback from here will more than likely be some type of buying opportunity as there seems to be plenty of support below.

NASDAQ forecast for the week of April 7, 2014, Technical Analysis

The NASDAQ initially try to rally during the week, but as you can see found the 4300 level to be a bit too resistive. Because of this, we ended up forming a massive shooting star, but we are sitting right on top of a massive hammer from two months ago. With that, we feel there is far too much support all the way to the 4000 level to start selling, and quite frankly would feel much more comfortable buying a supportive candle if and when it prints. At this moment, we are on the sidelines.