Weekly Outlook: 2014, April 27 - May 04

Forex Weekly Outlook Apr 28 – May 2

Currencies drifted sideways in the post Easter week, and now we have a very busy week with top tier events. The all important inflation release from the euro-zone, GDP in the US and the UK, the FOMC meeting, the buildup to to Friday’s Non-Farm Payrolls and other events all promise lots of action Here is an outlook on the market-movers for this week.

The week after Easter provided some interesting developments. This time, US data was quite mixed: durable goods orders climbed nicely, but jobless claims disappointed and new home sales plunged. Will the skies clear in the upcoming week? In the euro-zone, Draghi tried to play down the euro once again, with diminishing success. He might be forced to act soon. One extreme action would be buying gold with printed euros. A central bank that is acting, but in the other way, is the RBNZ: a second rate hike in New Zealand certainly supported the kiwi. Its neighbor, the Aussie, was falling after weak inflation data. The pound remains near 4 year highs.

1. US Pending Home Sales: Monday, 14:00. Signed contracts to purchase existing homes fell 0.8% in February, declining for the eighth straight month, indicating the housing sector goes through a rough patch. Pending home sales fell 0.2% in January. Analysts expected the index to rise 0.1% this time. The cold winter probably played a role in discouraging prospective buyers. Pending home sales are expected to rise by 1.0% this time.
2. UK GDP: Tuesday, 8:30. Britain’s economic recovery weakened slightly in the final quarter of 2013, with a 0.7% growth rate, following 0.8% in the third quarter. The service sector was the main locomotive of GDP growth. Manufacturing grew 0.9%, though construction suffered a 0.3% fall in output. However, wage growth increased less than price inflation, indicating smaller income. However, GDP growth in 2013 was the highest since 2007 with a 1.9% expansion rate. Britain’s estimated GDP for the first quarter of 2014 is expected to be 0.9%.
3. US CB Consumer Confidence: Tuesday, 14:00. U.S. consumer confidence edged up in March to its highest in more than six years posting 82.3 points following an upwardly revised 78.3 in February. Economists expected a mild improvement to 78.7. Consumers expect the economy to continue improving with a pick-up in growth in the coming months. However labor market assessment was more pessimistic in March. Consumers also anticipated larger price increases, with expectations for inflation in the coming 12 months. Consumer confidence is expected to edge up further to 82.9.
4. Japan rate decision: Wednesday. The Bank of Japan left its monetary policy unchanged in April in line with market forecast, Governor Haruhiko Kuroda said on at the press conference following the rate statement that the BOJ may decide on additional monetary easing to boost the economy, although Prime Minister Shinzo Abe, did not ask for any additional measures by the BOJ to achieve the goal of an annual 2 % rise in consumer prices by fiscal 2015. Kuroda noted that the economy is in a growth trend but is still needs to attain the inflation goal and beat deflation risks. No change in rates is expected despite the weaker than expected inflation numbers from Tokyo for April.
5. Euro-zone CPI Flash Estimate: Wednesday, 9:00. Annual consumer inflation in the Euro area member states was 0.5%, lower than the 0.7% posted in February and the lowest since 2009. Economists predicted a 0.6% inflation rate. This was the sixth month of low inflation defined by the ECB as the “danger zone” of below 1%. Mario Draghi suggested that the bank will take bold action should the outlook deteriorate. Inflation is expected to gain momentum with a 0.8% reading, in part due to the shift in date of Easter, from March in 2013 to April this year. Inflation below 0.5% could force the ECB to act.
6. US ADP Non-Farm Payrolls: Wednesday, 12:15. The ADP report of job creation in March edged up to 191,000 from 178,000 posted in February, suggesting that the downside trend in the last few months has ended. Goods-producing sector employment increased by 28,000 jobs in March, but the main gains came from the construction industry which added 20,000 jobs over the month; compared to an average of 16,000 during the prior three months. Manufacturers added 5,000 jobs in March, the same as February. Service-providing employment rose by 164,000 jobs in March, up from the upwardly revised 153,000 in February. ADP early jobs gain report is expected to reach 212,000.
7. Canadian GDP: Wednesday, 12:30. The Canadian economy rebounded in January with a growth rate of 0.5% from a weather-related contraction of 0.5% in December. Production rose by 1.0%, led by a boost in manufacturing, mining, construction, and oil and gas extraction. Services climbed 0.3% with gains in most sectors. According to forecasts, the yearly growth rate should go beyond 2%. The Canadian economy is expected to show a 0.2% expansion rate in February.
8. US Advance GDP: Wednesday, 12:30. The US economy expanded at an annual rate of 2.6% in the last quarter of 2013, despite the government shutdown and the debt ceiling ordeal. The pace of growth weakened from 4.1% in the third quarter but still indicated US gross domestic product increased quite strongly in the last half of 2013, a pace unseen since 2003. A weak first half of the year impeded growth to 1.9% for all of 2013, down from 2.8% in 2012. The fourth-quarter enjoyed healthy gains in consumer spending, personal consumption rose by an annual rate of 3.3%, the strongest pace in three years. The GDP news were good for investors. US stock markets rose after several days of losses. Early estimates of GDP growth forecast a 1.1% rise in the first quarter of 2014 due to the effects of the cold winter.
9. US FOMC Statement: Wednesday, 18:00. In the last FOMC statement released in March Federal Reserve Chair Janet Yellen raised the possibility of an earlier- than-anticipated increase in interest rates. The Fed is likely to taper bond buys for the fourth time to $45 billion / month, continuing the current policy. After Yellen dropped the forward guidance in her first decision, no other policy changes are likely. The focus could be on how the Fed sees the economy. If it expresses worries about the winter slowdown, the dollar could slide, and if it is upbeat on a spring bounce, the dollar could rise. The data is mixed, so the Fed might adopt a cautious approach. The bigger fireworks will probably wait for June, when the data will be clearer and a press conference accompanies the decision. For the upcoming decision, the GDP release made earlier on the same day could “steal the show”..
10. Janet Yellen speaks: Thursday, 12:30. Federal Reserve Chair Janet Yellen will speak in Washington DC at the Independent Community Bankers of America’s Annual Policy Summit. She may talk about the growth trend in the US economy and may refer to her statement regarding the rate hike expected in 2015. Market volatility is expected.
11. US Unemployment Claims: Thursday, 12:30.The number of Americans filing initial applications for unemployment benefits jumped by 24,000 last week to 329.000 due to temporary layoffs in the week before Easter. Economists expected a milder rise to 309,000. However the US economy is on a growth trend and the average of applications is declining. A year ago, claims stood at 343,000 indicating this year, employers hold back layoffs and increase hiring. The number of unemployment claims is expected to decline to 317,000.
12. US ISM Manufacturing PMI: Thursday, 14:00. The U.S. manufacturing sector registered a mild pick-up in March compared to February, reaching 53.7. However the climb in production indicates that the U.S. economy is strengthening after the cold winter. Economists expected PMI to increase to 54.2. Overall, surveyed purchasing managers were optimistic regarding current economic conditions reporting a rise in demand. U.S. manufacturing sector is expected to continue its recovery with a reading of 54.3.
13. US Non-Farm Employment Change and Unemployment rate: Friday, 12:30. The US job market continued to progress in March gaining 192,000 jobs after a 197,000 addition in the previous month. Private employment exceeded the pre-recession peak for the first time, indicating a growth trend in the US economy and supporting the Fed’s decision to continue tapering. Economists expected a higher reading of 199,000. Meanwhile, Unemployment rate remains unchanged at 6.7% however, a half-million Americans started looking for work last month, and most of them found jobs. The rise indicates that hiring increased. The US labor market is expected to expand by 211,000 jobs while the unemployment rate is predicted to decline to 6.6%.

Dollar’s Indecision Likely to End with FOMC, NFPs, 1Q GDP

Fundamental Forecast for Dollar: Bullish

• The specter of a downturn in risk trends grows increasingly corporeal – and the dollar stands ready to take off if it does
• Meanwhile, rate forecasts will be revived this week between economic health updates (1Q GDP and NFPs) and the FOMC

FX and capital market traders are anxious for activity. Stability is one thing, but the quiet that currently hangs over the markets carries the hallmarks of extraordinary complacency and an inevitable reversal to the opposite extreme. Given the markets lean and positioning over the years, the more charged scenario would be one where risk aversion and deleveraging unfold. That would be a boon for the greenback as its safe haven status is revived under the stress. But even if we are kept to wait for the return to risk engagement, there will be plenty of the US economic docket to keep the dollar occupied – including a FOMC decision, 1Q GDP release and April NFPs.

Always starting with the fundamental theme with the greatest overall potential over the market, risk trends are the first consideration for trading starting the next week. Already tepid, activity levels this past week fully collapsed with the holiday liquidity drain and never recovered. Now, among mature capital market trends and extremely low volatility and participation levels, we are finding measures so excessive that complacency is no longer an option. Perhaps the starkest measure is that of FX-based volatility. While the equity-based VIX is steady since the start of the month, its currency-sourced counterpart dropped another 20 percent (to 5.73 percent) to a seven year low – and only marginally off a record. Realized – also termed ‘actual’ – volatility is itself at a multi-decade low.

The wait for a rebound in risk trends has been a frustrating one. Bullish or bearish, sentiment can engage the market and offer meaningful trend – rather than the stunted chop we have dealt with. Looking back, there have been a few notable attempts to revive the optimism run, but circumstances of participation, leverage and exposure have consistently seen the move die. This tells us that to engage a lasting market-wide, sentiment-based move; it may have to be a deleveraging of risky exposure.

In the annals of history, the greatest extremes are typically the first to reverse. If that is the case with risk trends, the circumstances for FX activity measures may prove the spark for a more systemic change in attitude. A currency market-based increase in activity would likely favor the dollar – as volatility is associated to concerns of safety – but the most reliable driver for the benchmark would be a risk aversion move that spanned asset classes and investor type. The US docket this week is particularly well suited to get the ball moving.

Under normal circumstances, the expectation of a major release or event that can materially change investment conditions often encourages the trading ranks to sit on their hands. The schedule this week is spread out, but the market is unlikely to hesitate should Wednesday’s releases hit the right key. After earlier releases of US housing data and sentiment survey, the top listings come Wednesday with the release of the release of the first quarter growth (1Q GDP) report at 12:30 GMT and FOMC rate decision at 18:00 GMT.

For fundamental impact, these two indicators offer a clear view of the economic health of the world’s largest economy and the monetary policy assistance it is receiving. Even if they fall short on stirring the broader ‘risk on risk off’ mentality, they will still prove weighty measures for interest rate expectations – the other dominant theme for the dollar. This past week, medium-term Treasury yields have regained lost ground as rate expectations stabilized (though there is also a consideration that Treasuries will rise – and yields fall – as safety demand induces a bid). As we move closer and closer to the first rate hike, its time frame – whether further or nearer – should become clearer. As we see the timing take shape, traders will be more willing to better place the greenback in the ranks of rate forecasts with its major counterparts.

Japanese Yen Might Finally See Breakout on BoJ, FOMC, and NFPs

Fundamental Forecast for Japanese Yen: Bullish

• US Dollar at key risk of break versus JPY ahead of critical event risk
• Two key price levels to watch on the USDJPY exchange rate

The Japanese Yen finished higher as a noteworthy pullback in the Nikkei 225 pushed the USD/JPY exchange rate to weekly lows. Yet the true fireworks may come on upcoming Bank of Japan and US Federal Reserve rate decisions, while US labor market data may likewise spark big moves in the USDJPY.
Both the BoJ and the US Federal Open Market Committee (FOMC) are likely to keep monetary policy unchanged through their upcoming decisions. Yet all eyes will turn towards the Bank of Japan’s statements to gauge the likelihood of future policy changes, and investors will similarly scrutinize FOMC rhetoric for any clues on the timing of future interest rate increases.
Japan’s central bank governor Haruhiko Kuroda made it clear that officials do not anticipate the need for further monetary policy easing at the BoJ’s last policy-setting meeting. And indeed it seems unlikely that recent economic data will have shifted the bank’s bias. As such we’ll watch for any reference towards changing economic forecasts—particularly in light of the consumption tax hike put into effect at the beginning of the month.
On the US side of the equation, the Federal Reserve is almost certain to keep its current level of “Taper” intact; it will announce a fresh $10bn reduction in its Quantitative Easing purchases through its April 30 meeting. Investors will focus on whether the policy-setting board clarifies the future of interest rate hikes. Fairly hawkish FOMC projections initially sent US yields sharply higher on its March 19 decision, but interest rates gave back much of their gains on fairly moderate Fed commentary. It will be important to monitor how the Dollar and global equity markets respond to FOMC commentary—particularly ahead of highly-anticipated US Nonfarm Payrolls data.

Volatility prices on USD/JPY options have bounced noticeably ahead of the BoJ, FOMC, and NFPs and for good reason—any one of these has the potential to force big Dollar and Yen moves. Our Senior Strategist highlights two critical levels to watch for the USDJPY, and certainly the pickup in economic event risk increases the likelihood of sharp short-term currency moves.

GBP/USD to Eye Fresh Highs as U.K. GDP Highlights Stronger Recovery

Fundamental Forecast for Pound: Bullish

• British Pound Looks for a Lifeline Following Bank of England Minutes
• GBP/USD Stalls Below Key Gann Resistance

The GBP/USD may continue to mark fresh highs ahead of the next Bank of England (BoE) meeting on May 8 as the stronger recovery in the U.K. puts increased pressure on the central bank to normalize monetary policy sooner rather than later.

The fundamental developments coming out of the U.K. may continue to heighten the appeal of the British Pound as the region’s 1Q GDP report is expected to show a pickup in economic activity, and BoE Governor Mark Carney may adopt a more hawkish tone for monetary policy as the outlook for growth and inflation improves.

Despite concerns surrounding the current account deficit, it seems as though the Monetary Policy Committee (MPC) will do little to halt the appreciation in the sterling as positive real wage growth paired with rising home prices renews the threat for inflation, and the central bank may continue to look for a higher exchange rate as it helps to achieve price stability. At the same time, the BoE may have little choice but to take further steps to cool the housing market as the underlying momentum in U.K. home prices raises the risk for an asset-bubble, and a further shift in the policy outlook should continue to paint a bullish outlook for the GBP/USD as the Federal Reserve remains reluctant to move away from its zero-interest rate policy (ZIRP).
As a result, the GBP/USD should continue to carve a series of higher highs & higher lows in 2014, and we will retain our approach in looking for opportunities to ‘buy dips’ in the pair as interest rate expectations improve. In turn, it seems as though it will only be a matter of time before the GBP/USD clears the 1.6850-60 region, the 78.6% Fibonacci expansion from the February advance, and we may see the 1.7000 handle come on our radar as the pound-dollar carves a higher low in April.

Gold Rally At Risk Ahead of Key US Event Risk- Bearish Sub $1327

Fundamental Forecast for Gold: Neutral

• Gold Price at Risk Near-Term on a Return of USDollar Strength?
• Rising US Yields Push Gold Price towards April Low, $1277 Tipping Point

Gold prices are firmer on the week with the precious metal advancing 0.52% to trade at $1300 ahead of the New York close on Friday. The advance comes on the back of a sell-off in broader risk assets this week with all three major US stock indices closing markedly lower on the session. Ongoing geopolitical tensions between Ukraine and Russia and continued weakness in the greenback have continued to offer support for the battered commodity which came off lows not seen since early February this week.

Looking ahead to next week, all eyes will be fixated on the US economic docket with the FOMC policy decision, advanced 1Q GDP and Non-Farm Payrolls on tap. The central bank is widely expected to taper QE operations by another $10Billion bringing the pace of asset purchases to $45Billion a month ($25Billion in Treasury purchases / $20Billion in MBS purchases). While no change is expected to forward guidance, traders will be looking to the accompanying policy statement for clues as to the Fed’s outlook on interest rates. 1Q GDP is released on Wednesday with consensus estimates calling for an annualized print of 1.2% q/q, down from 2.6% in 4Q as extreme weather in the Northeast in the early part of the year weighed on medium-term growth prospects. The April employment report rounds out the week with estimates calling for a print of 215K jobs, bringing the headline unemployment rate to 6.6% from 6.7%.

From a technical standpoint, the broader outlook remains weighted to the downside while below key resistance at $1327/34. 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. Interim resistance stands at $1300/07 where the 200-day moving average, the 50% & 61.8% retracements and trendline resistance dating back to the March highs come into focus. Critical support rests at $1260/70 were barrage of Fibonacci extensions, retracements and pivots are clustered and a break/close below this thresholds risks substantial losses for the yellow metal targeting last year’s lows at $1178/80

Bottom line: Key interim resistance remains at $1327/34 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.

Nikkei forecast for the week of April 28, 2014, Technical Analysis

The Nikkei did very little over the course of the week, as we continue to hang about the ¥14,500 level. The market should be relatively well supported from the previous week’s gains though, so are looking for move above the ¥15,000 level in order to start buying. At that point time we would be convinced of the validity of the continued uptrend, inserting four ¥16,400 or so. Selling is not an option at this point, as we feel that there are far too many supportive areas between here and ¥13,000 to be bothered doing so.

DAX forecast for the week of April 28, 2014, Technical Analysis

The DAX attempted to rally during the week, but found too much in the way of resistance at the 9700 level to continue. With this, we pulled back enough to form a shooting star, which of course is a bearish sign. This sign isn’t one we are willing to take as a selling opportunity, but rather a chance to buy at lower levels in the meantime. We are looking for supportive candles below, and then will be willing to get long at that point as this market has been trending higher for some time now.

NASDAQ forecast for the week of April 28, 2014, Technical Analysis

The NASDAQ as you can see tried to rally during the course of the week, but found far too much in the way of resistance just below the 4200 level to continue. With that, the market pullback to form a shooting star now we find ourselves with a very sign just above a significant bottom in the market. With this, we feel that the next couple of weeks could be vital to the NASDAQ, and show where the next moves heading towards.

If the NASDAQ does in fact break down from here and below the hammer from the previous week, we feel this market could come undone at that point. Granted, it has been a nice there step type of action higher, but we have to recognize that we have broken down below a trend line that is positive, and have retested it from the bottom. We failed, and as a result the NASDAQ suddenly looks like it could be a bit vulnerable.

On that move, we believe that the market will probably look for 3600 at first, but possibly 3300 as well. With that, we feel that the move could be fairly sudden though, and it really comes down to whether or not we get the right headline to push the market over the cliff so to speak. On the other hand, if we break the top of the shooting star which is roughly 4200, that would be an extraordinarily bullish sign, and have the market going much higher. A break above the 4350 level of course would be a fresh, new high, and the markets would of course take off to the upside at that point in time.

We don’t necessarily think the markets ready to break down quite yet, but we have to bring that to your attention as it is a potentially market moving event. The next candle or two would be very important, and as a result we will be paying quite a bit of attention to this market. On another note, if the NASDAQ moves drastically, it will be a sign of risk appetite. That could send all stock markets in the same direction.

MIB forecast for the week of April 28, 2014, Technical Analysis

The MIB as you can see initially tried to rally during the week, but found the 22,000 level to be far too resistive. Because of this, the market pullback to form a shooting star, and it appears that we will be looking to find support below. With that, the market is still in a very strong uptrend though, so we are not interested in selling this market under any circumstances. We are simply going to wait on the sidelines for a supportive candle so that we can start buying again.

CAC forecast for the week of April 28, 2014, Technical Analysis

The Parisian index tried to rally during the week, but as you can see found enough resistance of €4500 level to turn things back around. Unfortunately, we ended up forming a shooting star, instead of breaking through like we would have preferred. Nonetheless, the market of course still look bullish overall but the fact that we formed a shooting star does suggest to us that possibly we may be getting ready to pull back a bit. At the end of the day, we believe that this pullback may be one of those times where the bullish longer-term traders may be a lot of pick out a bit more in the way of a position size as it certainly should concede value down in this general area.

Currently, we have been in an uptrend the channel and there is nothing on this chart to suggest that the channel is done. With that, we believe that a pullback all the way down to the 4350 level is possible, and as a result we think that there will certainly be some value in that area. On top of the idea of the channel is the fact that the area has offered support and resistance over the last several months, so quite frankly appears that there is quite a bit of interest in general.

The market looks as if it’s ready to continue going higher after a little bit of a pullback in if you look at the channel itself, it just seems that we been shopping around with the general upward bias. Because of this, we believe that the CAC is a longer-term buy-and-hold type of situation, not something you should be looking for quick returns in. That’s okay, because quite frankly that is a much healthier sign then suddenly gains. The shows that people were methodically stepping back into the marketplace, and that they believe in the long-term validity of the uptrend that we are presently in. With all that, there is absolutely no reason that we can see on this chart to consider selling this market.