Weekly Outlook: 2014, April 20 - 27

Forex Weekly Outlook Apr. 21-25

The pound and the dollar emerged as winners in a week that saw the euro and the yen retreat. US housing data, the rate decision in New Zealand, German business sentiment, US Durable Goods Orders and Unemployment Claims are the main highlights on Forex calendar. Here is an outlook on the market-movers for this week.

The US economy emerged from the cold winter registering gains in retail sales and manufacturing activity as well as continuous improvement in the labor market. . The Philly Fed Index exceeded expectations in April, providing more evidence of a spring bounce. Overall, the US economy is steadily advancing. In the euro’zone, Mario Draghi managed to send the euro down in a Sunday gap, and the common currency never recovered. GBP enjoyed a sharp drop in the UK unemployment rate to reach new multi year highs. The kiwi stayed behind after weak inflation figures and the loonie took the other direction on positive ones

1. US Existing Home Sales: Tuesday, 14:00. U.S. existing home sales declined slightly in February to a 19 month-low reaching an annual rate of 4.60 million units, following 4.62 million in January. A combination of cold weather and dwindling inventory of homes for sake, discouraged potential buyers. Economists expected a higher figure of 4.65 million. However, as the cold winter is over, analysts believe the pace of sales will accelerate this time. U.S. home sales are expected to rise to 4.57 million.
2. Chinese HSBC Flash Manufacturing PMI: Wednesday, 1:45. The independent purchasing managers’ index is considered one of the most reliable gauges for the Chinese economy, the world’s no. 2 economy. After a disappointing drop to 48 points, a small rise to 48.4 is expected. Note that this is below the 50 point mark separating growth and contraction.
3. US New Home Sales: Wednesday, 14:00. The number of transactions for buying new U.S. homes in February declined to 440,000 (annualized) due to the unusually cold winter. Sales of new homes declined 3.3% from a revised rate of 455,000 in January. Nevertheless, economists forecast a pick-up in sales this spring. A further improvement in the US job market and a better consumer confidence will help boost numbers in March. New home sales are expected to reach 455,000.
4. NZ rate decision: Wednesday, 21:00. The Reserve Bank of New Zealand raised its official cash rate by 25 basis points to 2.75%, in line with market forecast. RBNZ Governor Graeme Wheeler said in a statement that inflation pressures have increased and expected to continue doing so over the next two years. Raising rates was important to keep inflation under control. Wheeler left the door open for further rate hikes within the next two years. The Reserve Bank of New Zealand is expected to raise its benchmark rate to 3%. Recent weak inflation data suggests that the RBNZ may become somewhat more dovish.
5. German Ifo Business Climate: Thursday, 8:00. German business sentiment declined for the first time in five months in March reaching 110.7 from 111.3 in February, amid the Russian- Ukraine conflict. Businesses are worried that this ongoing crisis might affect Germany’s economic recovery since Germany receives more than a third of its gas and oil from Russia. In case of conflict escalation, many German firms are at danger. German business sentiment is expected to edge down to110.5.
6. Mario Draghi speaks: Thursday, 9:00. ECB President Mario Draghi will speak at a conference in Amsterdam. He may comment on the low inflation in the Eurozone. Market volatility is expected. We have seen his heavy hand on the euro and we might see this happen again.
7. US Core Durable Goods Orders: Thursday, 12:30. Orders for long-lasting U.S. manufactured goods regained strength in February with a 2.2% increase following a 1.3% decline in the previous month. Meantime, Core durable goods orders increased by 0.2% after posting a 0.9% rise in January, falling below expectations of a 0.3% rise. Economic growth in the first quarter is expected to be weaker than the fourth quarter’s annualized 2.4% rise, due to the cold weather. Orders for transportation equipment increased 6.9% while transportation orders had declined 6.2% in January. Durable goods orders are expected to climb 2.1%, while Core durable goods orders are expected to edge up 0.6%.
8. US Unemployment Claims: Thursday, 12:30. The number of new jobless claims registered last week remained low at 304,000, near their pre-recession levels, following 302,000 posted in the previous week. Manufacturing activity has accelerated in April, indicating growth momentum after the cold winter. Economists forecasted jobless claims to reach 315,000. The four-week moving average for new claims, dropped to its lowest level since October 2007 with a 312,000 claims. Jobless claims are expected to increase by 5,000 to 309,000.

British Pound at Clear Risk as Positions Stretched and Gains Slowing

Fundamental Forecast for Pound:Neutral

• British Pound soars as UK Unemployment rate drops below Bank of England threshold
• Sterling gains are slowing but not likely over as crowds continue selling

The British Pound was the only major currency to strengthen against the US Dollar in a holiday-shortened week of trading, but can it continue higher? The high-flying Sterling will need support from the Bank of England to hold near multi-year peaks in the week ahead.

A strong wave of domestic economic data drove the lion’s share of British Pound gains, and indeed Sterling strength coincided with a big improvement in UK bond yields. The spread between the UK and US 2-year government bond yields stands at its largest in three years.

It’s with that in mind that we look for any surprises out of upcoming Bank of England Minutes as a potential catalyst for big GBP moves. The BoE released no details in the policy announcement following its April 10 meeting, and we can only speculate as to whether it remained a unanimous decision to keep rates and Quantitative Easing levels unchanged. And though officials would not have final UK unemployment figures released six days later, it will be interesting to hear whether labor market improvements could force the bank to tighten policy ahead of expectations.

The risks to the British Pound are clear: it has thus far set a fairly ominous daily reversal at multi-year highs. CFTC Commitment of Traders data likewise shows speculators are their most long GBP in over three years when it set a significant top near $1.65. And though important price and positioning extremes are only clear in hindsight, the fact that leveraged trades are stretched warns that gains may at least slow.

Traders have thus far seemed willing to push the British Pound to fresh highs, but it may take something special to keep the high-flying currency near these significant peaks.

Gold Carves Lower High in April- Bearish Below $1327

Fundamental Forecast for Gold:Neutral

• Gold Still Trading Heavy
• Gold Prices Likely to Trade Lower as Recovery Falls Flat

Gold is off sharply this week with the precious metal shedding 1.7% to trade at $1298 heading into the weekend. The sell-off comes on the back of the strong performance in US equity markets with all three major stock indices closing higher by 1-1.7% on the week. We will take a more neutral tone heading into next week on the heels of this decline while noting a broader bearish bias below key resistance which was tested this week.
Looking ahead, traders will be closely eying the US economic docket and the ongoing geopolitical tensions in between Ukraine and Russia.

Existing/new home sales, durable goods orders and the final April read of the University of Michigan confidence survey will be on tap next week. With the recent Fed rhetoric suggesting that the markets continue to overstate the timing of Fed normalization, look for weaker than expected data to support gold at the expense of the greenback. The gold vs USD correlation continues to press deeper into inverse territory, posting its lowest levels since march 24th and we’ll look for a reaction off key support at 10,400 in the Dow Jones FXCM USDOLLAR Index (Ticker: USDOLLAR) for further conviction on our directional bias.

From a technical standpoint, gold reversed off a key inflection point we highlighted in last week’s outlook at $1327. This level is defined by the March opening range low, the 23.6% Fibonacci extension taken from the advance off the December 31st low and a longer-dated trendline resistance dating back to the 2012 high. The resulting move saw the daily RSI signature turnover ahead of the 60-theshold, keeping our broader focus on the short-side of gold. Look for support at the monthly open at $1283 with a break below shifting our focus to a massive support range at 1260/70. This region has triggered substantial inflections in gold prices dating back to June of last year with multiple longer-term and medium-term fib ratios once again highlighting the technical significance of this range.

Bottom line: Key interim resistance remains at $1327 and we continue to favor selling rallies with only a breach/close above this threshold invalidating the broader downside bias. The biggest risk to our outlook remains a broader risk sell-off which could trigger haven flows into the perceived safety of bullion. Look for a break above 1891 in the S&P to signal the end of the correction off the April high.

Bullish USD/JPY Outlook at Risk as Japanese Inflation Picks Up

Fundamental Forecast for Japanese Yen: Neutral

• Price & Time: Downside Break on the Horizon in USD/JPY?
• Japanese Yen: Little Mistaking the Drop in Support for More QE

A further pickup in market sentiment should continue to fuel the near-term rally in the USD/JPY, but the fundamental developments coming out next week may keep the dollar-yen contained within the wedge/triangle formation as the Bank of Japan (BoJ) remains upbeat on the economy.

The recent rise in risk appetite may gather pace as the U.S. earnings season boosts trader confidence, and the ongoing themes in the financial markets may continue to heavily influence the USD/JPY as it remains highly correlated to equity prices.

Nevertheless, it seems as though the BoJ is in no rush to further expand its asset-purchase program as Governor Haruhiko Kuroda remains confident in achieving the 2% target for inflation and another uptick in the region’s Consumer Price Index (CPI) may continue to alter the policy outlook as market participants scale back bets of seeing a larger quantitative-easing (QE) program. With that said, we may see a growing number of BoJ official show a greater willingness to carry the current policy into the second-half of 2014, and the USDJPY may continue to congest ahead of the next central bank meeting on April 30 as Fed Chair Janet Yellen remains reluctant to move away from the zero-interest rate policy (ZIRP).

As a result, the USDJPY may continue to face narrowing ranges as it consolidates within the wedge/triangle formation from earlier this year, and it appears as though we’re going to need a key fundamental catalyst for a major move in the pair as market participants mull the outlook for monetary policy.

Dollar Pushed to the Edge with Risk and Yields Raising the Stakes

Fundamental Forecast for Dollar:Bullish

• The USDollar’s correlation to FX-based volatility remains a link to ‘risk’, but there are limitations to further complacency
• US yields have recovered as market participants attempt to set a time frame for Fed hikes

Though its progress was restrained by the same liquidity drain that reined in risk trends, the dollar managed a broad recovery this past week. Yet, the conviction behind this move comes with a heavy dose of doubt. Like the questionable rebound for the S&P 500, the currency’s performance may have been more a reversal of the previous period’s momentum rather than a committed change in trend. With the market still working out its convictions for general risk trends and where the Fed stands in the slow shift to a global monetary policy tightening cycle, the return of liquidity will immediately engage the dollar.

Looking ahead to the new week of trading, the first thing to appreciate is the impact that the holiday trading conditions have imposed on the capital markets and the dollar. The Easter holiday took the US, European and Australian amongst other regions offline Friday; and some of those same regions will be off Monday as well. When a significant portion of the global financial system is absent – as it is now – it is exceptionally difficult to generate a market-wide trend. The gaps in the transmission of gluttonous yield chase or panicked selling quickly temper momentum. Expectations of that listlessness can also lead markets to adjust before it hits. That is likely what led equities to recovery the ground lost through the previous weeks and the dollar to do the same.

If there is a low probability of significant trend development – particularly counter-trend – traders see ideal conditions to exploit the same trading approach they have used over the past 16 months: buy short-term dips and sell jumps in volatility. However, this trading approach and the liquidity lull end quickly. That means that when markets are back up to full power, we revert back to earnest trend development. If risk measures start to slip Tuesday and further into the week, it would be a strong indication that a systemic turn is underway. For the sentiment theme to once again guide the dollar, we would need to see a serious engagement and trend.

Outside of the unrealized potential for risk-on-risk-off, dollar traders have a more effective rudder in interest rate expectations. The rebound in Treasury yields (2, 5, 10-year) may have rebound under the same liquidity pretenses as equities this past week, but the buoyancy is more likely to stick. The recent tumble in yields was suspect and likely a short-lived speculative run considering data and Fed commentary we’ve as of late firmly supports the steady Taper of QE and the forecast for a mid-2015 first hike. In fact, a strong TIPS (inflation-protected Treasury) auction this past week and rise in two-year breakeven rates (used to gauge inflation expectations) suggest those expectations are being reinforced.

For tangible catalysts to build – or undermine – US rate forecasts, the docket is pretty light. The Chicago Fed’s national activity index and Markit’s Composite PMI figure are broad measures for economic health. Housing data and durable goods will be viewed as more distant monetary policy fodder. However, this being a relative valuation scheme, we should also keep in mind the general bearing of the dollar’s market counterparts. The ECB has threatened easing to curb EURUSD’s appreciation, BoE expectations are extended, and both China and Japan may be forced to adopt new stimulus if their economic conditions worsen. So, while the Fed’s ‘mid-2015’ time frame may not change; pushing out the tightening schedule for its international peers would make it look significantly more bullish.

Australian Dollar Facing Conflicting Domestic, External Catalysts

Fundamental Forecast for Australian Dollar: Neutral

• Australian Dollar Looking to Upbeat CPI Data to Rekindle Up Move
• Firming US News-Flow May Hurt AUD/USD on Narrowing Policy Gap

The Australian Dollar’s month-long winning streak ran into resistance last week as the build-up in RBA policy expectations stumbled. A Credit Suisse measure of investors’ priced-in policy bets over the coming 12 months declined for the first time in three weeks. A potentially conflicting set of fundamental event risk in the week ahead promises to keep driving policy outlook speculation and keep volatility elevated.

On the domestic news-flow front, the spotlight will be on first-quarter CPIdata. Expectations suggest the headline year-on-year inflation rate will rise to 3.2 percent from 2.7 percent recorded in the three months through December 2013, marking the highest level in over two years. Data from Citigroup shows Australian economic news-flow has increasingly outperformed relative to consensus forecasts since mid-February, suggesting economists are underestimating Australia’s place in the business cycle.

That opens the door for an upside surprise. Such a result may go a long way toward rebuilding support on from the RBA policy outlook and driving the Aussie higher.

Externally, a busy docket of US activity data will help inform bets on the continuity of the Fed’s effort to “taper” QE asset purchases. Home Sales, Durable Goods Orders and Consumer Confidence figures are in the spotlight. Economic data outcomes from the world’s largest economy showed a notable improvement relative to expectations over the past two weeks. If that trend continues, ebbing doubt about the continued withdrawal of Fed stimulus. That may highlight the immediacy of the Fed’s move to narrow the policy gap compared with the RBA’s apparent preference for inaction in the near term, weighing on AUD/USD.

New Zealand Dollar: Lots of Room to Disappoint in RBNZ

Fundamental Forecast for the New Zealand Dollar: Neutral

• The RBNZ rate decision will be a key event for the New Zealand dollar this week
• With the market pricing in a near 100 probability of a follow up hike, can the central bank still impress?

The market seems pretty certain that the New Zealand central bank will usher in the strongest wave of monetary policy – and thereby carry increase – of the majors. Yet, if the outlook is so certain and hawkish; why is the performance for the New Zealand dollar not more bullish? The Kiwi reminds us that markets move to price in fundamental considerations as soon as they are deemed probable enough to be acted on; and fundamental impact – as with currency performance – is relative.

On Wednesday at 21:00 GMT, the Reserve Bank of New Zealand (RBNZ) is set to deliberate on the country’s monetary policy. According to the 15 economists polled by Bloomberg, the meeting will end with a 25 basis point (bp) hike to 3.00 percent. The market is equally as convinced that the policy authority will raise rates at back-to-back meetings. Overnight swaps are pricing in a 97 percent probability of another quarter-percent hike.

That certainty inadvertently diminishes the potential for bullish market response to this event while simultaneously leverages the potential and impact of a ‘disappointment’. If the market is certain of an impending hike, carry traders and speculative frontrunners should theoretically already positioned for such an outcome. As such, realizing the move would generated limited reaction for a stronger bullish swell as there would be few that haven’t already accounted for it. Consider, since the March 12 rate hike – the first – the New Zealand dollar has maxed out its bullish move with a 2 percent climb versus the euro. Its performance versus others is materially weaker – and even negative versus the Australian dollar.

And, what happens if the RBNZ decides not to move forward so aggressively with its policy course? If the bulk of the market is positioned for a hike, its absence could lead to a material unwinding of long exposure to account for a more moderate course of tightening. In other words, the market is already pricing perfection; and now RBNZ Governor Wheeler needs to keep pace.

In probability terms, a rate hike is the more likely outcome; but there will still be speculation surrounding subsequent moves. According to Wheeler’s own forecasts, he expected another 200 bps of tightening through the first quarter of 2016. That would mean that there are inevitably gaps between hikes. If that first wait-and-see moment is for the next meeting in June, the kiwi could fall back. The market will look to assess this in the central banker’s usually blunt commentary.

Another factor to keep in mind with this high profile event is that risk appetite dictates the influence that monetary policy changes have. In other words, if there is a market-wide ‘risk aversion’ drive; a 25bp increase in New Zealand’s still-historically low yield will likely do to quell the capital flight. And given the market’s pricing in perfection for the kiwi and New Zealand monetary policy, the risk is again amplified should risk aversion touch off.

Nikkei forecast for the week of April 21, 2014, Technical Analysis

The Nikkei had a good week, climbing from the ¥14,000 level to close at ¥14,500 roughly. With that, we feel that the market continues to go higher, and that the selloff recently has merely offered another buying opportunity and suggests that we are probably going to head to roughly ¥16,000 given enough time. We are bullish of the Nikkei, and do think that eventually the uptrend continues itself as there are far to be reasons the think that the Bank of Japan will continue to support the stock market in Tokyo.

DAX forecast for the week of April 21, 2014, Technical Analysis

The DAX initially fell during the week, but found enough support below the €9200 level to turn things back around. If that’s the case, it appears that the market has found enough bullish orders to push back above the €9400 level. Now that we’ve cleared the €9400 level, we feel that the market heads to the €9700 level. That level is fairly resistive, but once we get above there we feel that this market eventually heads to the €10,000 level, which is our longer-term target for this market place.

NASDAQ forecast for the week of April 21, 2014, Technical Analysis

The NASDAQ as you can see fell during the beginning of the week, but found the 4000 level to be supportive enough to bounce back and form a nice-looking hammer candle for the week. The shape the candle is just about perfect, and the fact that we are sitting at the 4000 level of course has caught our attention as well as it is a major, round, psychologically significant number. We feel that this market should continue to go higher on a break in the top of the hammer, and most certainly the trend is in our favor, as the buyers have taken control for several months now.

That being the case, we feel that the market should continue, and therefore we have absolutely no interest in selling. We actually see a decent cluster underneath this hammer as well, so quite frankly were not even think about selling going forward. A break of the top this candle should send the market looking for at least the 4350 level, which of course was the most recent high.

This market is heavily tech influenced, as one would expect. However, the most important thing that you need to pay attention to is the fact that the NASDAQ as an extremely interesting market when risk appetite is high. Because of this, we feel that the NASDAQ might be one of the better performers going forward, assuming that everybody is going higher. One of the things you can do is pay attention to other stock markets, and then by this one as a proxy for many of the other indices around the world that we follow here. After all, most stock markets will follow each other over time. If the Nikkei, DAX, and CAC are all going higher, typically the NASDAQ will as well. Because of that you need to look at the entirety of the world marketplace, and recognize that the interconnectivity of the stock markets offer plenty of trading opportunities. Without a doubt, looking at this trend it is roughly perfect, and therefore it is one of the favorite markets in a buying situation.