Weekly Outlook: 2014, June 08 - 15

Forex Weekly Outlook June 9-13

Rate decision in New Zealand and Japan, employment data in the UK, Australia and the US and US retail sales are the highlights of this week. Here is an outlook on the main market-movers coming our way.

Last week, US Non-Farm Payrolls showed a 217K gain in jobs in May reinforcing estimates that the five-year-long recovery has accelerated this spring. April’s jobs addition was the best in more than two years. Meanwhile the unemployment rate remained unchanged at 6.3% in May, matching the lowest level since September 2008. Analysts expected a lower job addition of 214,000 and a higher unemployment rate of 6.4%. May’s advance tops the average monthly gain of about 200,000 during the past year. Will this positive trend continue?

1. UK employment data: Wednesday, 8:30. U.K. jobless claims declined less-than-expected in April, down 25,100 from 30,600 in the previous month while economists expected a contraction of 30,700 claims. However the rate of unemployment declined to 6.8% in the three months to March from 6.9% in the three months to February, in line with market forecast. The average earnings increased by a seasonally adjusted 1.7% in the three months to March, the same as in the prior three months, lower than the 2.1% rise expected. The number of unemployed is expected to decline further by 25,000 and the unemployment rate is expected to decline to 6.7%.
2. US Federal Budget Balance: Wednesday, 18:00. The US government posted a large $106.9 billion surplus in April, lowering deficit to $305.8 billion for a dramatic 37% improvement from this time last year. Receipts were on the rise led by a11% fiscal year-to-date increase in corporate taxes and a 7% increase in individual taxes. The rate of improvement indicates a positive trend of deficit contraction. Us Federal budget is predicted to show a 142.8billion deficit this time.
3. NZ rate decision: Wednesday, 21:00. Governor of the Reserve Bank of New Zealand, Graeme Wheeler decided to raise rates by 25 basis points to 3.0% in April in light of positive growth in New Zealand’s economic activity. The rate hike was in line with market forecast. Prices for New Zealand’s export commodities remain very high, despite a 20% drop in auction prices for dairy products in recent months. Domestically, the long period of low interest rates and the strong expansion in the construction sector led to strong recovery. The RBNZ is expected to increase rates once more by 0.25% to 3.25%.
4. Australian employment data: Thursday, 1:30. Australia’s unemployment rate remained steady at 5.8% in April, amid positive signs of recovery in the labor market. The number of people employed increased by 14,200 to 11.57 million in April. Full-time employment edged up 14,200 to 8.05 million during the period. Part-time employment remained unchanged at 3.53 million. If the rate of improvement continues, the RBA may have to consider raising rates. Australian job addition is expected to reach 10,300, while the unemployment rate is expected to grow to 5.9%.
5. US retail sales: Thursday, 12:30. U.S. retail sales were slow in April after strong gains posted in the previous two months, but the overall growth trend for the second quarter remains robust. Retail sales edged up 0.1% affected by declines in receipts at furniture, electronics and appliance stores, restaurants and bars and online retailers. Retail sales edged up 1.5% in March after a 1.1% advance in February following stagnation during the cold winter season. April’s low reading may reflect growing caution amid consumers waiting to confirm economic recovery. Meanwhile, Core sales, excluding automobiles, remained unchanged in April after advancing 1.0% in March, much lower than the 0.6% rise anticipated by analysts. U.S. retail sales are expected to grow by 0.5% , while core sales are predicted to gain 0.4%.
6. US unemployment claims: Thursday, 12:30. The number of US jobless claims rose last week to 312,000 from 304,000 in the prior week, but the general trend continues to point to a strong labor market. Analysts expected a smaller increase to 309,000. The four-week average fell 2,250 to 310,250, the lowest level since June 2007. Even if job growth slows in May as expected, economists say it should not be viewed as a loss of momentum in the labor market and the economy as payrolls would still be above the average for the preceding six months. US jobless claims are expected to reach 306,000 this week.
7. Stephen Poloz speaks: Thursday, 15:15.BOC Governor Stephen Poloz will speak in Ottawa. Market volatility is expected.
8. Mark Carney speaks: Thursday, 22:00.BOE Governor Mark Carneywill speak in London. Carney may talk about the BOE’s latest rate decision and the reasons for maintaining monetary policy in June. Volatility is expected.
9. Japan rate decision: Friday. The Bank of Japan maintained rates in May, renewing their commitment to boost monetary base by 60-70 trillion yen per year. The bank statement said Japan’s economy is progressing according to forecasts and capital spending is expected to advance in the coming weeks. Exports are stable and will remain unchanged according to the forecast. No change in rates is exected.
10. US PPI: Friday, 12:30. The prices that U.S. finished goods increased 0.6% in April, following a 0.5% rise in March indicating a rising inflation trend. The reading was above market forecast of a 0.2% increase. The increase was led by higher food prices and greater retailer and wholesaler profit margins. On a yearly base, producer prices increased 2.1%, the biggest rise in more than two years. US producer prices are expected to gain 0.1% this time.
11. US Prelim UoM Consumer Sentiment: Friday, 13:55. US consumer sentiment declined to 81.8 and in May from 84.1 in April mainly due to lower rating in the current conditions index, down to 95.1 from 98.7 in April. Analysts expected the index to rise to 84.7. The outlook component also slipped to 73.2 from 74.7. However, overall data indicates consumer sentiment continues to its positive trend despite recent financial market volatility. US consumer moral is expected to rise to 83.2.

Dollar Bulls Simply Waiting for the Right Cue

Fundamental Forecast for Dollar: Bullish

• Stability from the dollar while FX volatility collapses to record low is a bullish sign for the currency
• Stable rate expectations may find inadvertently push the greenback to the top of the majors’ rate tables

When a currency or asset doesn’t fall in the face of ‘bad’ event risk, it’s bullish. For the greenback, fundamental circumstances and positioning have stacked up against the benchmark currency; and yet it has held steady. Risk trends are soaring, though the safe haven dollar has maintained its buoyancy over both the long and medium-term. Meanwhile, interest rate forecasts have kept a steady course even as yields have retreated. Don’t mistake small corrections as a more expansive bear trend. The dollar looks more like a dormant major simply biding its time for more fertile conditions.
The most prominent fundamental threat to the financial system moving forward is a souring of the extreme run in sentiment. And, that just happens to represent a deep well of untapped potential for the dollar. This past week, the S&P 500 surged to a record high after the ECB upped its stimulus effort and NFPs printed its strongest run of payroll additions in over a decade. In turn, volatility – considered a ‘fear’ measure and the barometer for ‘risk aversion’ – collapsed to a 7-year low in the equity market and a record in FX.

There are few pure optimists remaining in the markets that believe conditions now are ripe for investment for over the medium-to-long term. Most active traders now are looking for quick returns by buying dips and short-term breakouts, selling volatility premium, and employing leverage in riskier assets. Against a backdrop of cooler growth, still-low rates of return and anemic participation; we have already passed the threshold of for deescalating this situation peacefully. The question is not ‘if’ but ‘when will excessive risk by flushed?’
As a safe haven prized when liquidity evaporates and markets grope for safety, the dollar is particularly well positioned for the inevitable. But that theme must be engaged. This is a potential that has long festered, but only nudged modestly a few times over the past years. Yet, our time frame may look a lot more immediate than most suspect. The room for further complacency and leverage is almost at an end with volatility premium near record lows and gearing at record highs. Short-term opportunists are running out of run and time.
Awaiting a spark for risk trends is proving stomach churning for both risk bulls and bears. On the coming week’s docket, there isn’t a particular event that threatens to send market participants into panic – though the tipping point may not need to be so dramatic. Keeping track of the major milestones, the FOMC rate decision on June 18 (with quarterly forecast updates and press conference) is a big ticket item. In the meantime, a careful watch should be kept on the S&P 500 and VIX as barometers for increasingly levered sentiment.

In the meantime, interest rate expectations can prove the more proactive driver. Treasury yields recovered this past week, but they may not be tendering the best assessment for that first FOMC hike. Data and Fed commentary have kept steadfast support of the mid-2015 first hike. This is neither hawkish nor dovish, bearish nor bullish until we put it into perspective. And therein lies the dollar’s strength. While the RBNZ is already hiking and expectations for the BoE have been moved up on the time table (both will be tested this week), the US policy lean is notably more aggressive than its European, Japanese, Chinese and even Australian counterparts. That means more attractive returns over time.

Japanese Yen to Eyes Range Support on Less-Dovish BoJ

Fundamental Forecast for Japanese Yen: Neutral

• Price & Time: Don’t Forget About the Yen
• June Forex Seasonality Sees US Dollar Outperformed by Aussie, Euro

The USD/JPY may continue to consolidate in the week ahead as it retains the wedge/triangle formation from earlier this year, but the Bank of Japan (BoJ) interest rate decision may heighten the appeal of the Yen as the central bank is widely expected to retain a positive outlook for the region.

Indeed, BoJ board member Takehiro Sato argued that there is ‘no need’ to adjust policy at the current juncture as the central bank continues to anticipate a ‘moderate’ recovery, and it seems as though we will get more of the same at the June 13 meeting as Governor Haruhiko Kuroda remains confident in achieving the 2% target for inflation over the policy horizon. However, we may see a growing number of BoJ officials scale back their dovish tone for monetary policy as the sales-tax hike underpins the fastest pace of price growth since 1991, and a further shift in the policy outlook may continue to dampen the bearish sentiment surrounding the Japanese Yen as the central bank remains in no rush to further expand its asset purchase program.

With that said, it seems as though the Fed will also stick to its current course for monetary policy as Chair Janet Yellen remains reluctant to move away from the zero-interest rate policy (ZIRP), and the USD/JPY may continue to face a narrowing range over the near-term as the Federal Open Market Committee (FOMC) looks to carry its highly accommodative policy stance into the second-half of the year.

As a result, the USD/JPY may continue to face a narrowing range as it struggles to push above the May high (103.01), but the dollar-yen remains at risk of facing increased volatility during the summer months as it approaches the apex of the wedge/triangle formation from earlier this year. In turn, a less-dovish BoJ interest rate decision may generate a more meaningful decline in the USD/JPY, and the pair may come up against the 101.40-50 region to test for near-term support amid the ongoing series of lower-highs in the exchange rate.

British Pound at Important Risk of Reversal Ahead of Key Data

Fundamental Forecast for Pound: Neutral

• We see material risk of a GBPUSD turn lower
• The Bank of England gives no clues on its next interest rate moves, keeping GBP unchanged

The British Pound finished the week almost exactly where it began, but key UK employment data releases on the calendar promise bigger moves in the week ahead.

Lack of action from the Bank of England kept the Sterling in a tight range versus the US Dollar, while extensive action from the European Central Bank actually forced the Euro/GBP exchange rate to its lowest since 2012. Key technical indicators suggest that the British Pound may nonetheless be at risk of declines versus the Euro and US Currency. A news-driven catalyst could come on upcoming UK Jobless Claims and Unemployment Rate data.

Analysts expect that the UK jobless rate fell to fresh five-year lows in April, and continued outperformance in the labor market will put further pressure on the Bank of England to raise rates through the foreseeable future.
Indeed it was an important reversal in UK interest rate expectations that pushed the Sterling to fresh multi-year highs. Thus any significant disappointments in top-tier economic data could force GBP pullbacks. The bullish forecasts for the key figures leave risks to the downside for the British currency.

Those waiting for substantial GBP volatility may nonetheless need to wait for a change in broader market conditions; 1-week volatility prices on GBPUSD options have fallen near record lows. We may look to sell any important rallies as we see clear risk of a larger GBP turn lower.

Gold Bounces Off Range Low Post ECB/NFP- Bearish Sub $1270

Fundamental Forecast for Gold: Neutral

• Gold Attempts Recovery, US Dollar Outlook Still Favors the Upside
• Gold Selling Subsides before Key Support

Gold prices firmer on the week with the precious metal up 0.21% to trade at $1252 ahead of the New York close on Friday. The advance comes on heels of shift in the European Central Bank policy outlook and continued strength in the US labor markets. Despite this week’s advance however, bullion remains at risk for further losses heading into June trade with the technical outlook looking for a June low to buy into.

The ECB interest rate decision spurred a 1% rally in gold as the Governing Cancel took unprecedented steps to shore up the monetary union. In one swift move the central bank decided to cut interest rates, offered another 4-year Long-Term Refinancing Operation (LTRO) and unveiled plans to conduct unsterilized Securities Market Program (SMP) purchases moving forward. Gold rallied through a tight weekly opening range on the news before stalling just ahead of key resistance at $1260/70.

The release of the US May non-farm payrolls on Friday offered little clarity on the gold trade with prices nearly unchanged on the day despite broadly positive employment print. The US economy created 217K jobs last month keeping the headline unemployment print anchored at 6.3%. Consensus estimates were calling for a 215K print with and expected uptick in the unemployment rate.
Heading into next week, traders will be eyeing data out of the US with retail sales and the preliminary June University of Michigan confidence surveys on tap. Moreover, broader market sentiment may continue to play a greater role in driving gold price action amid the material shift in the global monetary policy outlook.
From a technical standpoint, gold remains vulnerable for further declines while below the $1260/70 key resistance range. Our base case scenario is to look for a new low to buy into heading deeper into June trade with immediate support targets eyed at $1236 and $1216/22. Bottom line: our focus will remain weighted to the downside sub $1260 with a break below the monthly opening range low at $1240 targeting subsequent support targets into mid/late June.

Australian Dollar at Risk as US Data Bolsters Fed Policy Outlook

Fundamental Forecast for Australian Dollar: Bearish

• Australian, Chinese Economic Data to Reinforce RBA Policy Standstill
• Firming Bets on Fed Stimulus Withdrawal Likely to Hurt Aussie Dollar

Domestically, the spotlight will be on May’s Employment data and a round of Chinese economic indicators. The former is expected to show hiring slowed, with the economy adding 10,000 jobs compared with the 14,000 increase in April. The jobless rate is expected to tick higher to 5.9 percent. Australian economic data has increasingly underperformed relative to expectations since mid-April, hinting economists are overestimating the economy’s performance and opening the door for downside surprises.
Meanwhile, Chinese news-flow has markedly improved over recent weeks, suggesting expected improvements in May’s trade, industrial production, retail sales and inflation figures may prove larger than what is implied by consensus forecasts. Taken together, this may reinforce the monetary policy standstill telegraphed in last week’s RBA rate decision, putting the onus on external factors to drive price action. On the macro front, Federal Reserve policy speculation remains in focus. As we’ve discussed previously, the fate of the FOMC’s effort to “taper” QE asset purchases with an eye to end the program this year – paving the way for interest rate hikes – has been a formative catalyst for the markets this year. Last week’s supportive ISM data set, upbeat Fed Beige Book survey and marginally better-than-expected expected US jobs report sets the stage for continued reduction of monthly asset purchases and increasingly unencumbered speculation about outright tightening to follow. The week ahead brings further evidence by way of May’s Retail Sales and PPI figures as well as June’s preliminary University of Michigan Consumer Confidence print. Improvements are expected on all fronts. Furthermore, US economic data has looked increasingly rosier relative to forecasts over the past two months, meaning surprise risks are tilted to the upside. That stands to narrow the Aussie’s perceived future yield advantage in the minds of investors. Firming bets on US stimulus withdrawal may likewise drive broader risk aversion. Needless to say, all of this bodes ill for the currency.

AUD/USD Forex Technical Analysis – June 9, 2014 Forecast

The AUD/USD recovered last week after an early setback to post a strong gain for the week. The market was underpinned by a series of technical chart points and the decision by the Reserve Bank of Australia to leave its benchmark interest rate unchanged at 2.5 percent. The surge in the market occurred after the European Central Bank announced its plan to provide more liquidity. This drove up demand for the higher yielding Aussie Dollar.

Technically, the main trend is up on the daily chart. The new main bottom is .9229. This price is slightly above a key 50% level at .9227 and a series of bottoms .9210, .9208 and .9201. Although the main trend is up, the market posted a potentially bearish closing price reversal top on Friday. This chart pattern may not lead to a change in trend, but could trigger a two to three day break into the retracement zone formed by the .9229 to .9358 range at .9293 to .9278.

A trade through .9318 will confirm the closing price reversal top. It will also put the market on the weak side of a downtrending angle from the .9408 at .9318. Taking out this area will make .9318 new resistance.

Besides the retracement zone at .9293 to .9278, an uptrending angle from the .9229 bottom is also a potential downside target. This angle is at .9309. Another uptrending angle comes in at .9269.

Taking out .9358 will negate the closing price reversal top, setting up a potential move into the next downtrending angle at .9363. A sustained move over this price targets .9386 to .9389.

The tone of the market on Monday will be determined by how investors react to .9318. A trade through this price will confirm the closing price reversal top and should trigger a two to three day break into at least .9293.

US Dollar Index forecast for the week of June 9, 2014, Technical Analysis

The US Dollar Index rose during the course of the week, but as you can see the 81 level offered quite a bit of resistance. The resulting resistance push the market back down to form a massive shooting star. Because of this, we feel that the market will more than likely fall from here, back into the consolidation area that we had been in previously. Because of this, we feel that the market is still going to be difficult for long-term traders to be involved in, and as a result we are on the sidelines when it comes to longer-term trades.

Silver forecast for the week of June 9, 2014, Technical Analysis

The silver markets rose slightly during the course of the week, but are closing right at the $19 level. The real question then becomes whether or not we can continue to go higher, or are we starting to fall? Quite frankly, we will not feel comfortable with a long-term buy until we get clear of the $20 level, so we would be a bit cautious at this point. However, if we break to a fresh, new low, we could see selling down to the $15 level, and then ultimately the $13 level.

Gold forecast for the week of June 9, 2014, Technical Analysis

The gold markets went back and forth during the course of the week, as we continue to meander around the $1250 level. With that, it appears that the market simply has no real direction at the moment, and as a result we are on the sidelines. Nonetheless, we believe that the market will ultimately bounce from somewhere near here or just below, so we are looking for supportive candles in order to start buying. The US Dollar Index looks a little on the weak side at the moment, and as a result we could see gold rise if the US dollar depreciates a bit.