Weekly Outlook: 2014, May 25 - June 01

Forex Weekly Outlook May 26-30

The dollar and the pound enjoyed a positive week and the euro continued to grind lower. European Parliamentary Elections, US Durable Goods Orders, Consumer Confidence, GDP figures form the US and Canada as well as US employment data are the main market movers this week.

The FOMC meeting release failed to bring surprises. The main focus was on normalizing monetary policy after the Fed finishes its asset purchase tapering. The Fed expects growth will continue to accelerate in 2014 despite the unexpected softness in the first quarter attributed to bad weather conditions. The euro was pressured lower once again, through a combination of unimpressive data and more talk from the ECB regarding an imminent rate hike. In the UK, mostly positive data kept the pound bid, and cable still has a shot on 1.70. The Aussie showed weakness despite a positive surprise from China. Where will currencies go in the last week of this turbulent month?

1. European Parliamentary Elections: The European Parliament elections takes place every five years. This time 751 MEPs will be elected and the voters will have more of a say in the appointment of the next Commission president. According to recent surveys, only 37 percent of Europeans believe their voice counts in Brussels. Policymakers in Brussels are trying to democratize the election process, and for the first time, the election results will be linked to the selection of the European Commission president. The major risk is that Euro-skeptic parties from the right will gain ground, thus undermining the decision making processes in the union.
2. US Durable Goods Orders: Tuesday, 12:30. Orders for long lasting U.S. manufactured goods increased more than expected in March, jumping 2.6%, higher than the 2.1% rise estimated, while Core orders edged up 2.0%, beating forecasts of a 0.6% increase. Capital spending plans increased significantly indicating a pickup in growth in the second quarter. This report correlates with other manufacturing data indicating expansion. Durable goods orders are expected to decline by 0.5%, while core orders are expected to rise 0.2% this time.
3. US CB Consumer Confidence: Tuesday, 14:00. US consumer confidence came below market consensus in April reaching 82.3 from 83.9 in the previous month. Analysts expected a slightly stronger reading of 82.9. Consumers assessed current business and employment conditions less favorably than in March, however the short-term outlook remained strong. Consumer confidence is expected to rise to 83.2.
4. Haruhiko Kuroda speaks: Wednesday, 0:00. BOE Governor Haruhiko Kuroda will speak in Tokyo. Kuroda stated last month that consumer inflation may exceed the central bank’s projection in the fiscal year that ended in March. BOE Governor is confident that Japan’s economy is progressing in line with the banks forecasts. Kuroda may explain the BOJ’s decision of maintaining monetary policy. Market volatility is expected.
5. US GDP (second release): Thursday, 12:30. The preliminary estimate of GDP growth for the first quarter of 2014 showed a weak growth rate of 0.1% dragged down by lower demand and unusually harsh weather conditions. Nevertheless, consumer spending increased 3.0% in the first three quarters. With weather conditions back to normal, housing and corporate investment should rebound sharply. GDP growth estimate for the first quarter is expected to show a 0.6% contraction and this could weigh on the dollar.
6. US Unemployment Claims: Thursday, 12:30. The number of Americans filing initial claims for unemployment benefits edged up by 28,000 last week to 329,000, but still remaining at low levels suggesting a steady pace of hiring. The four-week average declined 1,000 to 322,500 indicating an increase in job openings. The pickup in hiring may help boost economic growth for the rest of 2014. Jobless claims are expected to reach 321,000 this time.
7. US Pending Home Sales: Thursday, 14:00. Contracts to buy existing U.S. homes edged up in March by 3.4% following a 0.8% contraction in the prior month. The reading was well above expectations for a 1.0% rise. This was the first good sign in nine months that the housing market is recuperating. The strong reading suggest that the housing market will continue to support growth in the US economy. Pending home sales are expected to rise further by 1.1%.
8. Canadian GDP: Friday, 12:30. The Canadian economy expanded by 0.2% in February after a 0.5% growth in January. The reading came in line with market forecast, indicating a modest recovery from the 0.4% contraction in December. However estimate for the first quarter growth stand at 1.7%-to 1.9%. February’s growth is credited to the mining and oil and gas industries. The agriculture and forestry sector contracted 1.5%. Manufacturing rose 0.6% after increasing 1.6% in January, and goods production climbed 0.5%. GDP for March is expected to reach 0.1%.

US Dollar On the Verge of Serious Reversal – But Can it Make the Turn?

Fundamental Forecast for Dollar: Neutral

• EURUSD has already has already started to turn the tide; and GBPUSD, AUDUSD, USDCHF and NZDUSD seem close behind
• Risk trends and rate forecasts are critical for momentum, but data is light this week; and NFPs and FOMC come soon after

It was a week of contrasts. Through Friday’s close, the S&P 500 surged to a record high. Yet, at the same time as this ‘risk’ benchmark made its move higher, the traditional safe haven US Dollar strong-armed a bullish reversal. Furthermore, while both benchmark currency and index pushed highs, conviction in participation collapsed. This disparity between performance and positioning draws serious doubt – even amongst the bulls. These are the kinds of circumstances that impose a nauseating calm under heavy tension – where the buildup is slow and eventual reversal seismic. The question for traders is how long can we play musical chairs.

While skepticism casts a long shadow over the markets, the options are to wait for price to reconcile to value or to trade what is in front of us now. Through this past week, the Dow Jones FXCM Dollar Index (ticker = USDollar) and ICE Dollar Index (DXY) broke to six-week highs – though the reversal does not yet have a lot of momentum. Much of the progress seems to be derived from the fading of the greenback’s counterparts rather the strength of its own backdrop.

Amongst the majors, EURUSD is perhaps the most influential of the pairings. The most liquid dollar cross has dropped over 350 pips and is now pressuring its 200-day moving average (a floor for a multi-month bull trend) largely on the change in tack for the ECB. The central bank seems on track for an expansion of its stimulus regime which is a distinct contrast to the Fed’s steady Taper and countdown to a (still distant) rate hike. Meanwhile, moderation of monetary policy expectations on different positions of the monetary policy curve have helped bolster the dollar’s appeal to different degrees versus the British Pound, Australian Dollar, New Zealand Dollar and Japanese Yen.

Valuation in the FX market is relative. So, theoretically, the dollar could still gain with a static fundamental backdrop so long as its major counterparts continued to tumble. The problem is that the stymied conditions will dampen these indirect winds as much as the dollar’s own drivers. That means that further dollar gains will be impeded whether bullish or bearish unless something stirs a dominant theme.

To cater to the dollar’s safe haven sensibilities, a risk aversion move would be an exceptionally effective catalyst. On the docket over the coming week, there is little that stands out as a capable spark. Having weathered an incredibly tepid 1Q GDP, hold to FOMC Taper and various geopolitical flare-ups, the bar is set high. That said, the march to record highs was founded on the lowest equity volume on record and near-record low volatility. That means there is little risk premium for the short-term traders that have been carrying the market over the past three months to exploit. A correction – while not a genuine trend jump off pump – is a strong probability.

Far more active a subject for the dollar is rate speculation. On this front though, the market is stubborn in its suspicions for that first rate hike. Though the Fed has maintained the ‘mid-2015’ banner call for the first increase to the benchmark rate and data has reinforced it, Fed Funds futures still project an opening mover later than that general time frame. If the market were to fully price in a June or July 25 bp hike, the dollar would climb markedly. However, the milestones to solidify that view this week are light. Fed speeches, a PMI activity reading and consumer confidence report are noteworthy, but they lack for the clout that the following week’s May NFPs and labor data will carry. Yet, like the risk current, a rebound in Treasury yields could nevertheless given the dollar some buoyancy.

USD/JPY Bearish Setup to Take Shape on Japan CPI, Dismal U.S. 1Q GDP

Fundamental Forecast for Japanese Yen: Bullish

• Weekly Price & Time: USD/JPY Rebounds From Bottom of Multi-Month Range
• USD/JPY Drops Below 101.00 As BOJ Refrains From Further Stimulus

The USD/JPY pared the decline following the Bank of Japan (BoJ) interest rate decision, with the pair working its way back towards former support (101.80-102.00), but the economic developments due out next week may instill a more bearish outlook for the dollar-yen should the data prints spark a greater deviation in the policy outlook.

The BoJ Minutes may continue to heighten the appeal of the Japanese Yen as the central bank turns increasingly upbeat on the economy, and we may see a growing number of central bank officials scale back their dovish tone for monetary policy as Governor Haruhiko Kuroda remains confident in achieving the 2% target for inflation. With that said, it seems as though the sales-tax hike may have a limited impact on the economic recovery while raising the outlook for inflation as Japan’s Consumer Price Index (CPI) is expected to increase an annualized 3.3% in April, and a marked uptick in the headline reading for price growth may continue to generate lower highs & lower lows in the USD/JPY as it dampens bets of seeing the BoJ further expand its asset-purchase program.

At the same time, the advance U.S. 1Q GDP report may also put increased downside pressure on the dollar-yen as the world’s largest economy is expected to contract 0.5% during the first three-months of 2014, and a marked downward revision in the growth rate may drag on interest rate expectations as Fed Chair Janet Yellen remains in no rush to normalize monetary policy.

Given the string of lower highs & lower lows, the downward trending channel may continue to take shape going into the end of May, and the USD/JPY may make a more meaningful run at the 100.50 region should the fundamental developments spur an increased deviation in the policy outlook.

Gold Breakout Imminent- Will US GDP Be the Trigger?

Fundamental Forecast for Gold: Neutral

• Gold B Wave Triangle Could Lead to Thrust Lower
• EUR/JPY Rebound to Target Former Support- Gold Capped by 50-Day SMA

Gold prices are virtually unchanged on the week with prices off by a mere 0.1% to trade at $1291 ahead of the New York close on Friday. Prices have continued trade within a tight range despite ongoing strength in the US dollar and broader equity markets. Nevertheless, gold remains at a critical juncture and the technical picture continues to suggest that a break of a multi-week consolidation pattern is imminent as we head into the close of May trade.

In light of the recent strong demand for US Treasuries, it’s disconcerting that although gold has largely moved in tandem Treasuries since the start of the year, it has been unable to participate in the bond rally since April. This condition suggests that the gold market remains vulnerable in the near-term and with the long bond coming off key near-term resistance at the 61.8% retracement from the decline off the 2012 record highs, further weakness in Treasuries could put added downside pressure on gold prices.

Looking ahead, the preliminary 1Q GDP print highlights the biggest event risk for the week ahead with consensus estimates calling for a downward revision to reflect an annual contraction of 0.5% q/q. With that said, a dismal growth read may dampen the appeal of the US Dollar and spur increased demand for gold as interest expectations get pushed out. Watch for developments in the bond market and the greenback for guidance with the recent price action in gold warning of a decisive move heading into the monthly close.

From a technical standpoint, our outlook remains unchanged from last week. “Gold has continued to trade into the apex of a multi-week consolidation pattern off the April highs and a break-out ahead of the May close is in focus. A break below 1260/70 is needed to put the broader bearish trend back into play targeting $1216/24 and the 2013 lows at $1178. Interim resistance and our near-term bearish invalidation level stands at $1307/10 with a move surpassing $1327/34 shifting our broader focus back to the long-side of gold. Bottom line: look for a decisive break of this pattern next week with a move surpassing the May opening range to offer further clarity on our medium-term directional bias. The broader outlook remains weighted to the downside sub $1334.

Australian Dollar Vulnerable to Deeper Losses on Fed Policy Bets

Fundamental Forecast for Australian Dollar: Bearish

• Australian Dollar Drops Most in Four Months on Dovish RBA Minutes
• Firm US Data to Cement Fed QE Cutback Outlook, Punish the Aussie

The Australian Dollar fell by the most in four months against its US counterpart last week after a dovish tone in minutes from May’s RBA meeting weighed dented interest rate hike bets. A lull in homegrown event risk in the week ahead puts the onus on external catalysts, with the spotlight on investors’ evolving Federal Reserve policy outlook.

A central theme driving markets since the beginning of the year had been the disparity between soft US economic data and the Fed’s commitment to continue “tapering” its QE stimulus program. That encouraged markets to speculate that lackluster economic performance will push the central bank to scale down or abandon reducing the size of its asset purchases. For its part, the Fed has steadily reduced its cash injections by $10 billion/month since the cutback process was initiated in December. Fed Chair Janet Yellen and her colleagues on the policy-setting FOMC committee argued that the downturn in the first quarter was transitory and didn’t warrant a change of course. The markets were duly skeptical of this position absent hard evidence to support it.

This may now be changing. The tone of US economic news-flow appears to have marked an important turn in early April, with data from Citigroup showing that outcomes have been consistently improving relative to expectations since. That hits that analysts are underestimating the resilience of US recovery, opening the door for upside surprises. The week ahead will see a diverse range of US economic indicators cross the wires. Durable Goods Orders, Consumer Confidence, Pending Home Sales, Personal Income and Spending as well as revised first-quarter GDP figures are all on tap. On the commentary front, a speech from incoming Cleveland Fed President Loretta Mester is a standout. Mester will take the place of Sandra Pianalto on the FOMC starting June 1 and markets will keen to evaluate where she stands.

Unencumbered speculation about the end of QE and the beginning of interest rate hikes thereafter sparked liquidation across the spectrum of risky assets last year, when then-Chairman Ben Bernanke first hinted at stimulus reduction. Increasingly upbeat US economic data against a backdrop of pro-taper Fed rhetoric threatens to re-ignite this dynamic. As one of the higher yielders in the G10 FX space, the Australian Dollar is highly sensitive to broad-based risk aversion, meaning another mass exodus from sentiment-geared assets stands to hurt the currency.

US Dollar Index forecast for the week of May 26, 2014, Technical Analysis

The US Dollar Index rose during the course of the week, closing at the 80.38 level. That being the case, we continue to grind higher, and we think of this market will head to the 81.25 handle first, and then possibly higher than that. Most certainly, the 79 level has been very supportive over the last several months, and as a result we feel that any dip in this area will more than likely be a longer-term buy signal. With that, we are bullish of the US Dollar Index but recognize that there will be pullbacks from time to time.

Silver forecast for the week of May 26, 2014, Technical Analysis

The silver markets tried to rally during the course of the week, but as you can see basically ended up unchanged. The market is sitting just above the $19 handle, and we do think that it is somewhat of a “floor” in this market. However, it doesn’t look like it’s ready to continue going higher from here, so until we get a weekly close above the $20 level, we really are doing anything at this point in time. A move below the recent lows could have us selling, aiming for the $15 level.

Crude Oil forecast for the week of May 26, 2014, Technical Analysis

The light sweet crude markets rose during the course of the week, closing and at the very highs as we closed on Friday above the $104 level. That being the case, we feel that this market should certainly continue going higher, and as a result $105 level will be the next resistance area that we will have to struggle with. A move above there sends the market going much higher, and as a result we do ultimately believe that the $110 level will be tested.

The market could very well pullback in the near-term though, and we simply look at that as value. The market most certainly has a taut of support below current levels, and as a result we feel that pullbacks will bring in more and more buyers, not to mention short covering as it will give some relief to those traders that are on the other side of this move.

The Brent market as you can see went back and forth during the course of the week, proving the $109 level to be supportive enough to pop the market higher. We when as high as $111 at one point in time, and recognize that we are somewhat range bound. However, we feel that the market will ultimately breakout above the $111 level, and head towards the $115 level. Oil markets in general are very bullish right now, and with everything that’s going on in the Crimea, it’s hard to believe that there is suddenly going to be a headline that’s going to push oil prices back down.

Any pullback at this point time should bring in value seekers, and we are counting on that to happen. There is a ton of support all the way down to the hundred $5 level, and quite frankly probably even lower than that. The market is most certainly bullish, and as a result we will continue to buy on dips, with absolutely no interest in selling what looks to be a very strong uptrend at this point.

Natural Gas forecast for the week of May 26, 2014, Technical Analysis

The natural gas markets tried to rally during the course of the week, but found the $4.60 level to be far too resistive to continue going higher. With that, the market formed a shooting star, which of course is very negative. The $4.20 level below offers a significant amount of support, and as a result feel that this market should offer buying opportunities below and as a result we aren’t comfortable shorting into we get well below the $4.20 level, which at that point time could open the door way to the $3.60 level given enough time.

Gold forecast for the week of May 26, 2014, Technical Analysis

Gold markets did very little during the course of the week as we continue to meander just below the $1300 level. That being the case, the market looks as if it is ready to go absolutely nowhere. We have been consolidating over the longer term between $1200 and $1400, so we are essentially a “fair value.” With that being the case, we really don’t have much in the way of an opinion at the moment, but if we go higher from here, we have to admit that this could be a basing pattern, and as a result could be a “higher low.”

Ultimately, we feel that a move above the $1400 level since this market much higher, and extends the move to the $1600 level without too many issues we believe. With that being the case, we feel that the market is probably one that we should be watching, waiting for some impulsive candle to show the true direction of the market. With that being the case, we are being patient and on the sidelines, but recognize that ultimately the market should offer buying opportunities sooner or later. My frankly, we feel that there is potential for a longer-term move to the upside, but recognize that you’re probably going to be better off in a very low leverage position, or even possibly physical gold if nothing else.

With that being the case, we feel that selling is almost impossible unless of course we get below the $1200 level. If we get below the $1200 level, we feel that this market could unwind long positions down to the $1000 handle. That being the case, we feel that there is a significant move coming, but there is also the possibility that the markets make an extraordinarily quite over the summer as we are starting to suggest in several other markets, so at the end of the day we are going to have to be patient with this lack of volatility. Ultimately though, no market sits still forever, and as a result we will get our trade.