Weekly Outlook: 2014, May 04 - 11

Forex Weekly Outlook May 5-9

A very busy week ended with a drama around the Non-Farm Payrolls and left some uncertainty about the next market moves. The list of events for the coming week includes: US ISM Non-Manufacturing PMI, Trade Balance, Janet Yellen’s testimony, and rate decisions in Australia, the UK and the Eurozone, with the latter promising a lot of action. Here is an outlook on the main market-movers awaiting usr this week.

European inflation numbers came out worse than expected, but is it enough for action from the ECB? Draghi’s headache is probably worsening. In the US, we can see a distinction between the weak GDP in Q1, and the promising data from Q2. Is the bounce strong enough? The Fed acknowledged the gap and in any case, continued tapering for the fourth time. The Non Farm Payrolls provided a great show: the US gained 288K jobs and this certainly boosted the US dollar. However, within an hour, the tables turned and the greenback lost its shine. Is volatility making a comeback?

1. US ISM Non-Manufacturing PMI: Monday, 14:00. The US service sector rebounded mildly in March reading 53.1 after a sharp drop to 51.6 in February. Economists expected a slightly higher reading of 53.5% in March. The employment index registered the biggest climb rising 6.1 points to 53.6, from 47.5 in February. Furthermore, other components such as new orders and export orders increased, indicating the US economy continues to expand. US service sector is expected to advance further to 54.3.
2. Australian rate decision: Tuesday, 4:30. The Reserve bank of Australia decided to maintain its cash rate at 2.5% in light of stronger than expected job figures as well as a climb in domestic demand and improvement in household finance. Furthermore, the ABS reported a surge in retail sales, rising 1.2% in January, beating market consensus. No change in rates is expected this time.
3. US Trade Balance: Tuesday, 12:30 The U.S. trade deficit increased in February to $42.3 billion, reaching its highest level in five months due to lower demand for American exports. U.S. exports plunged 1.1% to $190.4 billion as sales of commercial aircraft, computers and farm goods fell. Imports climbed 0.4% to $232.7 billion, mainly autos and clothing. The increase in deficit caused some economists to reduce their estimate for overall economic growth for the January-March quarter. However analysts believe deficit will shrink this year with the help of exports. The U.S. trade deficit is expected to narrow to $40.1 billion.
4. NZ employment data: Tuesday, 22:45. The jobless rate in New Zealand edged down to 6.0% in the fourth quarter of 2013 from 6.2% in the third quarter, in line with market forecast. New Zealand’s job market expanded by 1.1% in the final quarter of 2013, exceeding forecasts for a 0.6% increase. On a yearly basis, employment picked up 3.0%, far better than the 2.4% estimated. The employment rate reached 64.7 % with 2,297,000 people in the work force. The participation rate reached 68.9%, beating expectations for 68.6 %. New Zealand’s job market is expected to advance by 0.7% in the first quarter, while the unemployment rate is predicted to decline to 5.8%.
5. Janet Yellen speaks: Wednesday, 14:00. Federal Reserve Chair Janet Yellen will speak in Washington D.C. before the Joint Economic Committee of Congress. The question and answer session may provide info about important monetary policy issues. Market volatility is expected. It will be interesting to hear her view on more tapering in light of the fourth such move and the recent jobs report.
6. Australian employment data: Thursday, 1:30. The Australian unemployment rate edged down to a four-month low of 5.8% in March, following 6.1% in February. An addition of 18,100 jobs in March and 48,200 in February, helped lower the rate, suggesting a growth trend in the Australian economy. Full-time positions fell 22,100 in the month and part-time employment was up 40,200. However, the federal employment minister, Eric Abetz, cautioned against reading too much into one month’s numbers because of a decline in the labor force participation rate. Australian job market is expected to add 9,600 jobs while the unemployment rate is expected to reach 5.9%.
7. UK rate decision: Thursday, 11:00. The Bank of England kept its key interest rate unchanged at a record low of 0.50%, amid a continuous growth trend in Britain’s economy. The bank also maintained the stimulus program of 375 billion pounds, in government bonds that it has purchased over the past five years. The BOE is not expected to change rates until next year according to analysts. GDP increased 0.8% in the first quarter of 2014. Growth in the first quarter is expected to reach 0.9% with lower unemployment and increased economic activity. The Bank of England is expected to maintain rates and monetary policy.
8. Eurozone rate decision: Thursday, 11:45, press conference at 12:30. The ECB could cut the main lending rate by 0.10% and leave the deposit rate at 0% in an attempt to lower the value of the euro without using the heavier tools. Draghi’s dilemma is becoming a big headache. He would prefer to have a lower value of the euro against both the dollar and the Chinese yuan without having to take action. It worked amazingly well with the OMT. However, even his stronger and more explicit verbal interventions to lower the exchange rate are having a diminishing effect. The excellent US NFP was not enough to do the job for Draghi. More words without action could damage his credibility. Inflation is low and well below the 2% target, but not below 0.5% – a level that would probably force the ECB to act. With core inflation standing at 1%, it will be hard for Draghi to convince his German colleagues to use the “nuclear option” of setting a negative deposit rate. Regarding QE, it is quite complicated in the euro-zone and probably left as the last option. Cutting only the main lending rate has a very marginal effect on the EZ economies, but still shows that the ECB can act and not only talk. With such a move, Draghi can hope for a lower exchange rate and leave the other, bigger tools as big bazookas and nothing else.
9. US Unemployment Claims: Thursday, 12:30. The number of Americans filing initial claims for unemployment benefits increased last week to 344,000 from 330,000 in the previous week. The reading was higher than the 317,000 anticipated by analysts. However this rise may be attributed to seasonal adjustment issues caused by the Easter holiday. Analysts believe that the real measure of claims is much lower. Another good sign is the ADP non-farm employment change report released a day before showing a rise of 220,000 jobs in April following 209,000 in the previous month. US Jobless claims is expected to rise by 328,000 this time.
10. Canadian employment data: Friday, 12:30. Canada’s labor market expanded by 42,900 in March driven by jobs for Canadian youths aged 15 to 24. This rise helped push down the unemployment rate by 0.1% to 6.9%, beating forecast of 7.0%. The majority of job addition is part-time. Employment in health care and social assistance edged up, while the agriculture sector continued to shrink. Canada’s labor market is expected to expand by 21,400 jobs, while the unemployment rate is expected to remain at 6.9%.
11. US JOLTS Job Openings: Friday, 14:00. The JOLT Job Openings jumped to a 6 year high in February, reaching 4.17 million. This rise indicates a growth trend in the US economy as employers hire more people due to meet rising consumer demand. However, the quit rate remained unchanged at 1.7% a higher quit rate means employees are confident that they can find a new jobs. Chair Yellen, cited these indicators as important indicators for the Job market strength. The JOLT Job Openings is expected to reach 4.21 million.

Gold Posts Key Outside Reversal Post NFPs- $1307 Key Resistance

Fundamental Forecast for Gold: Neutral

• Gold and Silver Face Make-Or-Break Moment Ahead Of US NFPs
• Gold Big Levels Loom as Support; Above 1306 is Bullish

Gold prices are softer on the week with the precious metal off by 0.42% to trade at $1300 ahead of the New York close on Friday. The week was marked by continued weakness in gold prices as equities rallied into fresh record highs. The shift came on Friday however, with gold prices reversing course just ahead of key support on the back of a stellar US labor report. Note despite the volatility, gold prices saw little change in April with a gain of just $7 on the entire month. While our longer-term market view remains weighted to the downside for gold, recent price action suggests we should be looking higher heading into the start of May trade.

The April non-farm payroll report highlighted the economic docket this week with employment gauge showing a gain of 288K jobs last month, pushing the headline unemployment rate to 6.3%, its lowest levels since September of 2008. Despite the better than expected headline print, it’s important to take note that the civilian labor force contracted by some 800K workers, bringing the participation rate down to its lowest level since December at 62.8% (a 35-year low). Gold initially spiked lower before quickly rallying back towards the weekly highs on the heels of the release. Although the report topped estimates, a dismal 1Q GDP print earlier in the week and lackluster housing data is unlikely to prompt any change in the Federal Reserve’s outlook and as such, gold could remain supported in the near-term as Yellen maintains a dovish stance on monetary policy.

The economic docket will be rather light next week with only ISM non-manufacturing and trade balance data on tap for the US. Look for comments from central bank Chair Janet Yellen to possibly impact market sentiment as she testifying before the joint economic congressional committee on Wednesday and the senate budget committee on Thursday. That said, we’ll look for broader market sentiment to steer prices with the technical picture offering further clarity.

From a technical standpoint, gold now looks poised for a near-term recovery higher after posting a key outside day reversal ahead of a critical support at $1260/70. 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 the 61.8% retracement of the advance of the December low. The rally also took prices through trendline resistance dating back to the 2014 high set on March 17th (interesting to note- that was also a key outside day reversal). As such, or immediate focus is on interim resistance at the 61.8% retracement of the decline off the April highs at $1307.

We will use this level as our near-term bearish invalidation point with a breach above targeting more critical topside resistance targets at $1327/34. A breach surpassing this threshold would suggest that a more significant low was put in last month with such a scenario targeting levels back towards the $1400 threshold. Note that a break and close below $1260 is required to put the broader down-trend back into focus targeting the 2013 lows at $1178.

Dollar Fails to Rally on Great Payrolls Data, Remains a Sell

Fundamental Forecast for Dollar: Bearish

• US Dollar jumps following sharply better-than-expected Nonfarm Payrolls data, fails to hold gains
• Our technical forecasts leave us mostly in favor of USD weakness

A sharply better-than-expected US Nonfarm Payrolls report wasn’t enough to keep the Dollar from falling versus major FX counterparts, and the Greenback looks at risk of further declines as key fundamental factors favor weakness.

The fact that the Dollar was unable to capitalize on the strong April NFPs data tells us most of what we need to know: a market that doesn’t rally on bullish data probably isn’t bullish. Traders initially sent the Greenback and US Treasury Yields sharply higher as the data showed the national unemployment rate tumbled as the economy added far more jobs than expected. Yet both the currency and interest rates gave back all of those gains, and indeed the downtrend for the US Dollar remained intact.

A quiet week of economic data ahead suggests that the US Dollar’s slow grind lower may continue. The fact that forex market volatility prices trade near record-lows hurts the safe-haven US currency. If traders don’t fear big currency moves, there’s little reason to hold dollars as interest rates remain near record-lows.

The one potentially significant event on the US economic calendar comes on Wednesday as Fed Chair Janet Yellen speaks to Congress on the state of the US economy. It will be important to listen for any shifts in tone following the impressive April labor market data. Of course the recent disappointment in Q1 GDP Growth figures suggests that a more substantive change in policy is relatively unlikely.

Beyond the US calendar, FX traders will keep an eye on upcoming interest rate decisions from the Reserve Bank of Australia, Bank of England, and European Central Bank. Markets predict that none of these central banks will move interest rates in the coming week or even in the coming 12 months. That in itself gives us little reason to expect major currency swings, and much like those central bankers we remain in “wait and see” mode across major pairs.

Until we see a sharp jump in volatility and/or a material shift in interest rate expectations, we see relatively little scope for a Dollar bounce. Our technical and sentiment-based forecasts likewise call for further Greenback weakness. It will likely take a surprising catalyst to break the Greenback out of its slow grind lower.

AUD/USD Threatens 92.00 Support- Need Dovish RBA for Larger Decline

Fundamental Forecast for Australian Dollar: Neutral

• AUD/USD Holds 0.9200 Support- Dovish RBA to Trigger Key Reversal
• Australian Dollar Downtrend Intact, We Like Selling

The long-term outlook for the AUD/USD remains bearish as the pair carves a lower high in April, and the Australian dollar remains at risk of facing a larger decline in the week ahead should the Reserve Bank of Australia (RBA) adopt a more dovish tone for monetary policy.

Even though the RBA is widely expected to keep the benchmark interest rate at 2.50%, the persistent strength in the local currency may undermine the central bank’s upbeat assessment for the $1T economy, and Governor Glenn Stevens may continue to highlight the ongoing slack in private sector activity as the soft 1Q Consumer Price report limits the scope to normalize monetary policy ahead of schedule. With that said, the RBA may take a more aggressive approach in talking down the local currency, but central bank’s verbal intervention may continue to have a limited impact on the exchange rate as the ongoing pickup in market sentiment heightens the appeal of the higher-yielding currency.

As a result, a further pickup in Australia Retail Sales paired with a 9.5K rise in employment may continue fuel expectations of seeing a RBA rate hike sooner rather than later, and a slew of positive developments may keep the AUD/USD afloat should the central bank show a greater willingness to move away from its easing cycle.
In turn, the 0.9200 handle may continue to provide support in the days ahead, and we would need to see a break and a close below this region to favor a bearish outlook for the AUD/USD as the Relative Strength Index preserves the bullish momentum from earlier this year.

GBP/USD Climb to New 5 Year Highs Will be Fraught With Danger

Fundamental Forecast for Pound: Neutral

• Cable closed at a five-year high this past week on the back of a robust UK GDP reading – quite the contrast to the US
• A BoE rate decision this week is likely to hold less influence that a range of economic data releases that can weigh rate forecasts

The pound has finished out an impressive month and week. Through April, the currency has advanced against all of its major counterparts. In the past week alone, progress was more restrained; but the perception was just as robust. The clear standout for the pound is GBPUSD (often called ‘Cable’) with a move through 1.6850 that has pushed it to a near five-year high. Having cleared yet another technical boundary on a 10-month climb backed by enviably growth rates and burgeoning rate expectations, is this currency bound to overtake 1.7000 to open up a much bigger bull run?

A medium-term outlook for the sterling must rely more on fundamentals and less on mere technical momentum. Speculative appetite certainly plays a dominant role in both bearing and conviction (momentum), but underlying financial market conditions have sapped the drive from all assets and pairs – including Cable. In seeking out the primary sparks for the British currency, this is one of the few majors that doesn’t simply await its cue from general risk trends. With a historically low benchmark rate that is in the middle of the pack between the US and Australian dollars, there is neither carry nor funding labels attached to the pound. However, as speculation for a rate hike regime from the Bank of England gains further traction; this may prove the fastest horse in a slow race.

Amongst the majors, the BoE is perceived as the most hawkish policy authority behind the RBNZ (which has already hiked rates twice). This hawkishness derives from the impressive reversal in the UK’s economic health last summer and the group’s simultaneous shift away from threatening further stimulus program upgrades. As everything in the FX market is relative – this has presented a particularly stark contrast to the likes of the Fed, ECB and BoJ who maintain an expansionary policy.

Yet, it is important to recognize that the foundation of the pound’s strength is built on expectations rather than current conditions. Gilt yields and swaps show expectations for an opening rate hike from the BoE well ahead of its US counterpart. Having priced in that forecast, though, the burden is now on maintaining that optimism. Projecting a move ahead of the central bank’s own timetable requires a consistent stream of favorable data to persuade the MPC (Monetary Policy Committee) to capitulate. Given the current bearings on rate expectations, it is far more difficult to advance the timetable (a bullish factor) and far easier to postpone it through data.

This focus leverages the potential impact UK data can have on rate forecast and therefore the pound. The most obvious release this week is the BoE rate decision. However, this is likely to prove uneventful. When the central bank does not change its policy, they do not release a statement detailing their reasoning. That said, there are plenty of key indicators that will hit the areas of the economy.

For general economic forecast, Tuesday’s Composite PMI and Friday’s NIESR GDP Estimate for April offer the broadest scope. Yet, particular industry updates may prove more convincing. Manufacturing production for business activity, the RICS home sector reading and construction output for housing, and the trade figure for the external support. During each release, we should keep a leery eye on GBPUSD and the 10-year UK bond yield.

DAX forecast for the week of May 5, 2014, Technical Analysis

The DAX as you can see rose during the majority of the week, but did find enough resistance in the form of the €9600 level to push the market back down a little bit. We believe that this congestion should send the market higher eventually though, and that pullbacks will be buying opportunities as the DAX has been wildly bullish over the last couple of years. With that being the case, we are buyers above €9700, and most certainly above €9800 as it would open the doors to the €10,000 level.

NASDAQ forecast for the week of May 5, 2014, Technical Analysis

The NASDAQ fell during the bulk of the week, but found enough support near the 4000 level in order to form a hammer, which of course shows that the market does in fact have plenty of buyers below. With that, a break above the top of the shooting star from the previous week, or the 4200 level if you will, is a nice buying opportunity. We believe that there is a “floor” in this market at the 4000 level, and as a result we are bullish still. On a move above the 4200 level, we think of this market originally will try to get to the 4350 level, and then ultimately the 4500 level.

MIB forecast for the week of May 5, 2014, Technical Analysis

The MIB rose during the bulk of the week, but found the 22,000 level to be a bit too resistive to continue. This is the second week in a row that we have found resistance in this general vicinity, so we think that we may be heading into a bit of a consolidation move now, but we certainly think that this market remains bullish overall. That being said, we get above the 22,200 level, we are buyers as it would show continued strength. However, we fully anticipate sideways action in the short term.

IBEX forecast for the week of May 5, 2014, Technical Analysis

The IBEX initially fell during the week, but found enough support near the €10,250 level to turn things back around and head towards the €10,500 level. The fact that the market touch the top of the shooting star suggests that the market is going to try to breakout to the upside, and we believe that the IBEX should continue to be one of the better performers in Europe as the Spanish index always gets a lot of “hot money” flowing into it. With that, we are bullish and look at buying on dips, and a break above the top of the range for the week.

CAC forecast for the week of May 5, 2014, Technical Analysis

The Parisian index rose during the week, but for the second week in a row found enough resistance near the €4500 level to form a shooting star. The fact that we have dual shooting stars at the €4500 level suggests that this market is in fact going to struggle to get above that area. However, the CAC has been a strong performer over the longer term, and with that we feel that the market will eventually breakout to the upside. On top of that, we feel that there will be enough momentum and inertia build job that once we finally get that break above 4500, this market should become wildly bullish again and perhaps head to the €5000 level.

Keep in mind that the market won’t make that move in one quick swipe, but ultimately we think that it will happen. On top of that, any pullback in this general vicinity should find plenty of buying areas, such as the €4400 level, the €4300 level, and most certainly the €4000 level. With that, we cannot sell this market as the Parisian index continues to be one of the more bullish out there. If you look at the recent action, you can see that we are in a little bit of an uptrend the channel, and that a pullback all the way to the 4300 level would be within the realm of possibility without breaking any type of momentum.

We believe in the European stock exchanges anyways, and with this market in particular, we have had one of the nicest uptrends over the last couple of years. Because of this, we believe that buying on the dips will continue to be the way to go going forward, and this move may offer just that type of setup. Of course, if we break above €4500 on a daily close, we think that’s strong enough as well as the market would continue to go much higher, ultimately touching the €5000 level as mentioned above. We have no scenario in which to sell this market right now.