Weekly Outlook: 2014, May 11 - 18

Forex Weekly Outlook May 12-16

US Federal Budget Balance, retail sales, inflation and employment data, Philly Fed Manufacturing Index and Prelim UoM Consumer Sentiment are the main events on Forex calendar. Here is an outlook on the highlights of this week.

Last week, Fed Chair Janet Yellen testified before the US Congress repeating her speech made earlier before the Joint Economic Committee. Yellen noted the economy is on track for solid growth and that accommodative policy will continue as long as required. The Fed will normalize interest rates when the economy improves. Yellen believes US balance sheet will return to normal in 5 to 8 years. However, despite the positive tone, there were some troubled spots such as the Russia-Ukraine conflict and the recent setback in the housing market imposing on the ongoing economic recovery. Will the positive note continue in the coming weeks?
Let’s start,

1. US Federal Budget Balance: Monday, 18:00. US budget debt narrowed more than expected in in March, reaching $36.9 billion, following $193.5 billion posted in February. Analysts expected a more modest decline to $76.5 billion. The overall trend is positive with a rise in receipts led by 11% fiscal year-to-date increase in corporate taxes and a 7 percent increase in individual taxes and the spending side is coming down including a 6% decline in defense spending. US Budget Balance is expected to reach a surplus of $112.6 billion.
2. German ZEW Economic Sentiment: Tuesday, 9:00. German investor confidence continued to slide in April reaching 43.2 after posting 46.6 in March. Despite the strong recovery in the first quarter, the six month outlook survey revealed growing concerns about the Russia-Ukraine crisis and its possible effects on manufacturers and exporters in Germany. German investor confidence is expected to continue its downward trend towards 41.3.
3. US retail sales: Tuesday, 12:30. U.S. retail sales surged to a 1-1/2 –year high of 1.1% in March indicating strong recovery in the US economy after a sluggish winter. The increase was evident in all sectors and followed a 0.7% gain in February. Meanwhile Core sales, excluding automobiles edged up 0.7%, the biggest rise in a year. These impressive figures raised new hopes for a boost in growth this year. U.S. retail sales are expected to climb 0.5%, while core sales are expected to increase 0.6%.
4. UK employment data: Wednesday, 8:30. The number people claiming jobless benefits in March declined by 30,400 reaching to 1.14 million after a 37,000 drop in the previous month, indicating an ongoing improvement in Britain’s labor market. The unemployment rate also improved to 6.9% from 7.2% in February. Average earnings in the three months to February increased by 1.7% compared with a year earlier. Chancellor of the Exchequer, George Osborne, hailed the “strong jobs numbers” as further evidence that the coalition government’s economic plan is working. The number of jobless aid seekers are expected to decline further by 31,200 pushing the unemployment rate down to 6.8%.
5. Mark Carney speaks: Wednesday, 9:30. Mark Carney, the Governor of the Bank of England will speak in a press conference, together with other MPC members, about the Inflation Report, in London. Carney stated in March that the Bank’s 2% inflation target became ‘dangerous distraction’ for the UK’s policymakers veiling the true progress made in the UK’s economy. Market volatility is expected.
6. US PPI: Wednesday, 12:30. U.S. producer prices edged up 0.5% in March, posting their largest increase in nine months, amid a rise in the cost of food and trade services. The increase was well above market consensus following a 0.1% fall in February. The unexpected rise may be explained by weather related factors, but the wholesale inflation is expected to settle down in April. U.S. producer prices are expected to climb 0.2% this time.
7. Haruhiko Kuroda speaks: Thursday, 4:25. BOJ Governor Haruhiko Kuroda will speak in Tokyo. Market volatility may occur.
8. US inflation data: Thursday, 12:30. U.S. consumer prices increased slightly more than expected in March, rising 0.2% after a 0.1% climb in the previous month, suggesting inflation is back. In the 12 months through March, consumer prices rose 1.5% after increasing 1.1% over the 12 months through February. Meanwhile, core CPI, excluding volatile energy and food components, also edged up 0.2% in March after rising 0.1% in the prior month. The central bank is expected to end the QE bond purchases later this year. Domestic demand and the labor markets are improving but a rate hike is not expected before the second half of 2015. U.S. consumer prices are expected to increase by 0.3%, while core CPI is predicted to climb 0.2%.
9. US Unemployment Claims: Thursday, 12:30. The number of new claims for unemployment aid filed last week fell 26,000 to 319,000, indicating the setback seen in the Easter holiday was temporary and the US job market is regaining its strength. Despite the drop in the number of applications. The four-week average increased by 4,500, to a seasonally adjusted 324,750 due to temporary layoffs around the Easter holiday but it is far better than the 343,000 average for 2013. Jobless claims is expected to rise to 321,000.
10. US Philly Fed Manufacturing Index: Thursday, 14:00. Factory activity in the U.S. mid-Atlantic region increased in April to 16.6 from 9.0 in March beating market forecast of a 9.6 reading. New orders edged up to 14.8, the highest level since October, from 5.7. The employment component improved to 6.9 from 1.7, but business conditions for the next six months fell to 26.6 from 35.4. Overall, the survey shows positive growth prospects for the US economy in the coming months. Factory activity in the Philadelphia area is anticipated to decline to13.9.
11. Janet Yellen speaks: Thursday, 23:00. Federal Reserve Chair Janet Yellen will speak in Washington DC at the National Small Business Week. Yellen may talk about her latest testimony at the US congress. Market volatility is expected.
12. US Building Permits: Friday, 12:30. US building permits fell by 2.4% in March reaching an annualized rate of 990,000.The reading suggests the pace of starts will increase further in the coming months. Single-family starts increased 0.2% compared to the previous year. Economists expect an acceleration in housing construction based on stronger household construction later this year and in 2015. US building permits are expected expand to an annualized rate of 1.01 million.
13. US Prelim UoM Consumer Sentiment: Friday, 13:55. Consumer confidence strengthened in April to the highest level since July, rising to 82.6 compared to 80 in March. Improvement in the US labor market contributed to this rise. The reading was better than the 81.2 projected by analysts. Increased employment opportunities and better wages will continue to lift consumer spending as well as consumer sentiment. Consumer confidence is expected to improve further to 84.7.

US Dollar Stands to Gain on Rate Forecast, Surge on Risk Trends

Fundamental Forecast for Dollar: Neutral

• A dense round of event risk in the week ahead reaches its pinnacle with CPI – the only indicator that can truly trigger a Fed hike
• Risk trends will remain a constant threat/opportunity, but change interest rate tables will be a more likely dollar driver

Having started out the period with a painful collapse, the US dollar ended this past week with a strong rally that brought it back to even. A substantial level of technical support for the greenback – both with the USDollar Index and individual pairs like EURUSD – was tested and held. Concerns of a deeper bearish current for the dollar have been curbed by a steadfast path in Fed rate expectations, a strong relative pace of growth and even the lingering fears of a capital market unwind. However, these elements have reinforced stability. To put the currency back on a bullish track, we need a motivating driver…or the collapse of its counterparts.

Heading into the new trading week, the most capable and promising driver for the benchmark currency is interest rate speculation. What has been a meaningful driver over the past months, has seen a surprising moderation of its influence just over the last two weeks. A FOMC meeting that reinforced an optimistic (hawkish) outlook despite the shockingly weak 1Q GDP reading and April’s exceptionally strong jobs report leveraged little strength from yields and the dollar.

The recent retreat in 2-year Treasury yields and slip from the 1Y2Y forward swap – good gauges for timing the first rate hike from the Fed – have contributed to the currency’s struggle. Yet, the pullback in yield has followed more a path of moderation than a general reversal in course. If the central bank remains optimistic on growth and plans to end the QE3 program by October (said outright by Dallas Fed President Fisher and insinuated in Chair Yellen’s ‘by fall’ remarks), the path to tightening is not likely to be much further behind. The consensus remains mid-2015 which would put the Fed ahead of the ECB, BoJ, BoC and perhaps even the RBA.

Maintaining optimism over the economic forecast will be key to strengthening the rate outlook, but a hike will only be possible when the specter of inflation arises. And, if the Dollar is to compete against the likes of the Pound or the Australian Dollar, that projection for the first hike and subsequent moves will require a timelier swell in price pressures than the market is currently accounting for. This week’s top US docket theme will be inflation as we take in April readings for import, producer and consumer price gauges. The CPI reading on Thursday will hold particular sway over rate speculation with a forecasted jump in the headline figure to a 2.0 percent annual pace – the Fed’s target.

Another aspect of the ‘relative’ monetary policy influence in the FX market is the bearings and influence of dollar’s counterparts. The EURUSD plunged in the second half of this past week after the ECB threatened a fresh round of accommodation (rate cut or new stimulus), and the greenback reveled in the Euro’s fading yield forecast. The weakness of the dollar’s counterparts could prove even more effective than its own advance. As such, we should keep an eye on the BoE’s Quarterly Inflation Report and the Eurozone 1Q GDP data due this week.

Finally, we should always keep in mind the theme that has struggled for traction but carries the greatest potential should it take: risk trends. Market participants in all asset classes and from bearish to bullish have show increased concern about the value of current market levels (see the weekend Strategy Video on Bubbles here). If fear started to spread, the underlying conditions of record leverage, over-subscription to risky assets and virtually no hedge would set a terrible blaze in financial markets. A quick escalation to deleveraging and panic leads to repatriation and demand for the traditional ‘all-out’ safe havens: dollar and Treasuries.

Japanese Yen Remains a Sell Until this Changes

Fundamental Forecast for Japanese Yen: Bearish

• Why is forex volatility so low, and why does it affect the Yen?
• Technical forecasts for the USDJPY point to sideways moves

The Japanese Yen trades at critical resistance versus the US Dollar (USDJPY trades at support). Given extremely low volatility expectations it seems unlikely we see a major USDJPY breakdown, but any major surprises out of upcoming Japanese data could force sharp currency swings.

FX traders sent 1-month volatility prices on USDJPY derivatives to their lowest levels on record, and it’s obvious that very few expect to see big things through the foreseeable future. Our forex technical forecasts as well as sentiment-based outlook subsequently favor a USDJPY bounce off of the lows. Yet expectations often beget disappointment; what could force a major Japanese Yen breakout?

Top economic event risk comes from Japan’s Q1 GDP Growth numbers due Wednesday night/Thursday morning, and any surprises could shake the currency from its tight trading range. Consensus forecasts call for a substantial 4.2 percent annualized rate of economic growth in the first quarter. Such lofty expectations arguably leave risks to the downside for the data itself and the Japanese currency. But why is the JPY stuck in such miniscule trading ranges across the board?

Put simply, forex volatility is near record-lows as risky asset classes continue to outperform. Yen volatility may trade to further lows if the US S&P 500 and Japanese Nikkei 225 continue to trade onto fresh peaks.

In that sense it will be important to watch how Japanese equities respond to key economic data; any Nikkei 225 losses might actually result in Yen strength (USDJPY weakness) regardless of the economic implications of the news results.

The absence of any major surprises in upcoming event risk would likely leave the status quo intact. It’s important to note that the Yen has historically fallen in times of low volatility, and indeed we would argue that a further compression in vols should keep the USDJPY above key support. The risk is that material disappointments in data could force equity market tumbles and, by extension, a USDJPY breakdown.

Gold Prices Vulnerable as USD Regains Footing- All Eyes on US CPI

Fundamental Forecast for Gold: Neutral

• Gold Churns on Near Term Fibonacci Retracement
• Gold Exposed To Easing Ukrainian Concerns, Crude Oil Cracks $100

Gold prices are softer for the second consecutive week with the precious metal off by nearly 1% to trade at $1287 ahead of the New York close on Friday. The losses come on the back of a broad-based USD rally that saw the Dow Jones FXCM USDOLLAR index reverse off fresh 6-month lows, paring the entire April decline by the end of the week. The index is now virtually unchanged since the monthly open and traders will be looking ahead to next week’s docket as the US data front picks back up.

The calendar was light for the US this week with gold prices giving up early gains after Fed Chair Janet Yellen noted in her testimony before congress that the central bank’s accommodative stance was warranted given the relative strength of the labor markets and subdued inflation metrics. The greenback regained its footing with a rather dovish ECB President Mario Draghi on Thursday further supporting the dollar rebound. The subsequent rally has continued to weigh on gold prices which look to close the week just off the low.

Looking ahead to next week, US data will be back in focus on the heels of this week’s Yellen testimony with Retail Sales, the Consumer Price Index (CPI) and Industrial Production on tap. Inflation figures on Thursday may prove pivotal for bullion with consensus estimates calling for a slight increase in the y/y and m/m prints with core CPI expected to fall to 0.1% from 0.2% m/m and hold at 1.7% y/y. Should the data show a faster-than-expected pace of price growth, look for gold prices to come under pressure as expectations for a 2015 Fed rate-hike take root.

From a technical standpoint, gold completed a 100% Fibonacci extension off the April lows with this week’s push into the $1310 barrier. The subsequent reversal has continued to be supported by the 100-day moving average, currently around $1287 and a break below this level puts back into focus key support at $1260/70 (bullish invalidation). That said, we cannot discount another assault on the highs as we continue to hold within the initial May opening range with a breach above $1310 suggesting that a more significant low may have been put in last month. Such a scenario looks back to a region defined by last month’s high and the 50% retracement of the March sell-off at $1327/34. With the current positioning and key US inflation data on tap next week, we will maintain a neutral stance into the open with the Sunday/Monday opening range likely to offer further clarity on a near-term directional bias.

Nikkei forecast for the week of May 12, 2014, get technical Analysis

The Nikkei as you can see fell during most of the week, but the ¥14,000 level offered enough support to turn things background inform a hammer. We believe that this area should offer quite a bit of support, so a break above the top of the hammer which is at the ¥14,500 level, that would in fact be a signal to start buying as we should head to ¥15,250 level. Above there, we would more than likely head to the recent highs again. Going forward, we fully expect this market to have buyers.

DAX forecast for the week of May 12, 2014, Technical Analysis

The DAX initially fell during the week, but found enough support at the €9400 level to turn things back around and form a nice-looking hammer. This hammer sits below the €9700 level, which is an area we need to see cleared in order to start going long again. We believe that a breakout above the €9800 level does all but completely guarantee a move to €10,000, and we do ultimately believe that this breakout will happen. Because of this, we have no interest in selling this market as we see a significant amount of support all the way down to the €9000 handle.

NASDAQ forecast for the week of May 12, 2014, Technical Analysis

NASDAQ as you can see had a back-and-forth week, but continues to respect the 4000 level as support. Because of this, we believe that ultimately this market will probably go higher, but recognize that there is a significant amount of resistance just above as well, with that being the theme of the last month. Because of this, we think that this market will continue to sideways, but ultimately will breakout to the upside in a move above the 4200 level should begin the next leg higher, which could be much higher.

MIB forecast for the week of May 12, 2014, Technical Analysis

The MIB fell during the bulk of the week, but found the 21,200 level to be supportive enough. That being the case, we feel that the market should continue to find buyers below, and therefore even if we don’t pick up right away, we believe that the market will bounce from this general vicinity. With that being the case, we are in “buy only” mode at the moment, but at the end of the day it is simply an uptrend that we have been following and the truth is we may go sideways in the meantime. However, we do believe that the 22,200 level will be broken above, and the uptrend will continue.

IBEX forecast for the week of May 12, 2014, get technical Analysis

The IBEX went back and forth during the course of the week, testing the €10,600 level above for resistance and finding it there. With that, the market looks like it’s still once to go higher though, but we may have to hang out in this general vicinity. If you notice, several months have gone by where we have basically been grinding higher, and that’s what this looks like to us, grinding. There is an upward bias though, so the only thing you can do in this market is by and at this point.

CAC forecast for the week of May 12, 2014, Technical Analysis

The Parisian index went back and forth during the course of the week, testing the €4400 level for support, while testing the €4500 level as resistance. With that, it appears that the market is trying to breakout above the top of the two shooting stars from the previous weeks. That being the case, and the fact that the market ended up forming a bit of a hammer, we believe that will see a massive breakout above the €4500 level, and as a result the market will then head to the €5000 level. Selling is not an option.