Weekly Outlook: 2014, June 22 - 29

Forex Weekly Outlook June 23-27

Haruhiko Kuroda’s speech US housing data, German Ifo Business Climate, US CB Consumer Confidence, US Durable Goods Orders, Mark Carney’s speech are the main highlights on FX calendar. Here is an outlook on the main market-movers for this coming week.
Last week, the Fed continued its $10 billion bond tapering, reaching $35 billion, but delivered mixed messages at the press conference on Wednesday evening. The Federal Reserve reduced economic growth forecast to 2.3%, but also a lowered unemployment projection to 6-6.1%, while nearly maintaining its inflation forecast to 2.1-2.3% describing the recent inflation data as “noisy” saying, the FOMC will take its time about interpreting CPI data. Yellen also stressed that the Fed is taking a “balanced approach” to monetary policy and is being very watchful to unfolding economic events. Will the growth trend continue?

1. aruhiko Kuroda: Monday, 6:00. BOE Governor, Haruhiko Kuroda will speak in Tokyo. Kuroda is confident that the BOJ’s massive monetary stimulus pulled Japan out of deflation, but money printing alone will not do the job. Kuroda urges Prime Minister Shinzo Abe to act on his side and carry out badly needed reforms to revive Japan’s economy.
2. US Existing Home Sales: Monday, 14:00. Previously owned U.S. home sales advanced in April by 1.3% reaching an annualized rate of 4.65 million units from 4.59 in March. The widening supply of properties raised prospects for a stronger spring buying season with a slower price appreciation. Analysts expected yet another increase to 4.71 million units. Strong employment gains will boost the housing market increasing affordability. Existing home sales are expected to advance further to 4.74 million units.
3. German Ifo Business Climate: Tuesday, 8:00. German business sentiment declined more than expected in May, falling to 110.4 from 111.2 in the previous month. Economists predicted a minor decline to 111. German economic growth is mainly dependent on domestic demand while the Bundesbank estimated slower growth in the coming months. However, despite the lack of growth German economy is expected to maintain its leading position in the Eurozone. German business climate is expected to decline further to 110.3.
4. US CB Consumer Confidence: Tuesday, 14:00. U.S. consumer sentiment edged up in May to the second-highest level since 2008, reaching 83 from 81.7 in April due to increased optimism about the economy and the employment market. The survey revealed that stronger employment contributed to consumer spending which accounts for almost 70% of the economy. Analysts expected an even stronger reading of 83.2 in May. However, economic expectations declined to a seven-month low in May, indicating a limited rebound from the slow growth witnessed in the last few months. Consumer sentiment is expected to rise further towards 83.6.
5. US New Home Sales: Tuesday, 14:00. Sales of new single-family homes edged up in April to a 3-1/2 year high of 433,000 units. The rise ended two months of declines, beating market forecast of 426,000 units. However analysts believe the market has not clearly gained steam. Meanwhile, sales of previously owned homes increased in April to the highest level in nearly two years giving hope for a real recovery. Sales of new family homes are predicted to rise again to 442,000.
6. US Core Durable Goods Orders: Wednesday, 12:30. Orders for durable U.S. manufactured goods unexpectedly increased in April by 0.8% while predicted to slide 0.5%. However a drop in business investments could fail expectations for a sharp rebound in economic growth this quarter. Meanwhile Core durable orders excluding transportation items inched 0.1% while expected to rise 0.2%, following a 2.4% rise in March. Durable goods orders are expected to decline 0.1% while, Core orders are predicted to rise 0.3%.
7. Mark Carney speaks: Thursday, 9:30. BOE Governor Mark Carney will make two speeches in London. The last BOE meeting confused financial markets about the future course of interest rates. Carney talked about keeping borrowing costs on hold despite strong economic data. Valuable information may be obtained about the BOE’s plans. Market volatility is expected.
8. US Unemployment Claims: Thursday, 12:30. The number new claims for unemployment benefits dropped by 6,000 last week, to a seasonally adjusted 312,000, remaining near pre- recession lows. The reading was broadly in line with market forecast. The number of workers continuing to draw unemployment benefits reached 2.56 million on a seasonally adjusted basis, down 54,000 from last week. The ongoing decline in the number of jobless claims together with higher hiring rate indicates the US labor market is continuing to improve. The number of claims is expected to reach 314,000.

US Dollar Will Settle for Euro As Recovery Driver in Absence of Volatility

Fundamental Forecast for Dollar: Neutral

• Four Fed speeches on the economy and monetary policy compliment a round of top tier economic event risk to drive the USD this week

The most effective means for leveraging a significant rally from the US Dollar is for a shock to resonate through the global financial system. In other words, have a significant event trigger a deleveraging of the ‘yield chase’ effort that has been building over the past years and see the flight to quality as well as repatriation of funds lift the greenback. Yet, hoping for volatility is just that – hope. We need something more tangible than an ideal scenario to work with if we are looking for timely trades. Interest rate expectations are still an active theme to work with, and the dollar’s relative position to the Euro may prove one of the more rewarding drivers in the immediate future.

Interest rate speculation amongst the majors (US, Eurozone, UK, Japan) is a key fundamental theme - the dominant one so long as markets are neutral on the tides of 'risk' trends. Looking out over the field, we have the Bank of England (BoE) seemingly on pace for the first rate hike of the majors; the Bank of Japan (BoJ) seems intent on feeding its open-ended QQE program; the People's Bank of China (PBoC) is expanding and trimming its efforts at irregular intervals; and the European Central Bank (ECB) has taken recent steps to escalate its own effort. In this field, the Federal Reserve is winding down its QE3 program - on pace for an October halt - and sees a mid-2015 first hike. That is considerable advantage.

FX markets are forward looking, so the timing for a Fed hike that is second only to the BoE is a substantial advantage. And, that edge is certainly not priced in. Given the open range of possible times for the first hike, there is still room for the dollar to gain or loss ground as data and policy rhetoric shape the consensus. On that front, the docket has a few noteworthy points to watch for. On the speaking schedule, we have four Fed members scheduled to speak. We know that Lacker will speak on the economic outlook, Bullard on monetary policy and Plosser will remark on both. For data, we have updates on manufacturing, housing and consumer sentiment. My focus though will be on the central bank's preferred inflation figures: the PCE. Last week, a journalist asked Fed Chairwoman Janet Yellen whether the group's focus on the PCE versus the CPI could lead them to be behind the ball. We may very well see if that is indeed the case in this update.

Rather than just look at the individual currency in isolation, we should further consider the dollar's position versus more active counterparts. The world's second most liquid currency - the Euro - is still in the early phases of bleeding the built up premium of its unintended balance sheet contraction. The introduction of new accommodation measures and speculation of an outright purchasing program moving forward mean the two-year EURUSD build up can continue to retrace - providing a distinct benefit to the greenback.

And, while we look to the more probable and proactive considerations, it is important to always keep those 'fat tail' events in mind. Should we see volatility catalyze and appetite for anemic returns meltdown, the dollar will move quickly to absorb panicked funds. Yet, distinguishing between a false alarm and a systemic shift in investor sentiment is critical here. The requirement for confirmation should be materially higher here than just a technical break or a VIX jump.

GBP/USD to Eye Fresh Highs on Hawkish BoE Testimony; 1.7100+ on Tap?

Fundamental Forecast for Pound: Bullish

• British Pound Shows Restraint after BoE Minutes Escalate Probability of 2014 Hike
• GBPCAD Scalps Target Weekly Range- Bullish Bias at Risk Sub 1.8480

The British Pound extended the advance from earlier this month, with the GBP/USD climbing to a fresh yearly high of 1,7062, and the bullish sentiment surrounding the sterling may gather pace in the week ahead should we see a growing number of Bank of England (BoE) officials show a greater willingness to normalize monetary policy sooner rather than later.

Even though the BoE Minutes showed a unanimous vote to retain the current policy at the June 5 meeting, the official statement sounded more hawkish this time around as the central bank talked up the risk for a rate hike in 2014. Indeed, there appears to be a growing dissent within the Monetary Policy Committee (MPC) as voting-member Ian McCafferty argues that the central bank should start to normalize monetary policy before the output gap is ‘fully’ closed, and we may see a larger rift at the July 10 meeting as the board anticipates a faster recovery in the second-half of this year.

With the BoE scheduled to testify on its May inflation report next week, the fresh batch of central bank rhetoric may further boost the appeal of the British Pound, and the GBP/USD may continue to carve higher-highs & higher-lows during the summer months should Governor Mark Carney lay out a more detailed exit strategy. With that said, the growing deviation in the policy outlook will be another theme to watch as the Federal Reserve remains in no rush to move away from its zero-interest rate policy (ZIRP), and we may see the British Pound appreciate throughout the second-half of the year as interest rate expectations for the U.K. pick up.

As a result, the next topside object for the GBP/USD comes in around 1.7110-20 (78.6% Fibonacci expansion), and we will retain a bullish outlook for the pair as price & the Relative Strength Index (RSI) retain the upward trend from earlier this year.

Japanese Yen Looks Primed to Move. When, Where, and How?

Fundamental Forecast for Japanese Yen: Neutral

• When and where might the Japanese Yen move?
• Euro may continue onto further highs versus the Yen

The Japanese Yen finished the week almost exactly where it began, but continued consolidation within a tight range suggests a breakout is inevitable. When, where, and how might the JPY move?

Record-low volatility for the Japanese currency leaves us looking for clues on when the Yen might finally break its recent range. Yet if there’s going to be a fundamental catalyst it could very well come on upcoming Japanese Consumer Price Index inflation figures. A key question remains whether the Bank of Japan will look to boost its aggressive Quantitative Easing measures.
BoJ Governor Kuroda emphasized the central bank is only halfway to achieving its inflation target and talk of pulling back monetary policy stimulus is premature. And indeed it might take a significant surprise in CPI inflation results to force a large reaction in the Yen. It is then little surprise to note that 1-week volatility prices on US Dollar/Japanese Yen finished Friday at record lows. Or in other words: traders have never bet on/hedged against slower JPY moves.

One crucial thing to understand about volatility is that it doesn’t stay high or low forever; it eventually returns to its long-term average. It’s with that in mind that we view a USDJPY breakout or breakdown as inevitable, and indeed our Senior Strategist highlights key price levels to watch through near-term trading.

It’s ultimately a fool’s errand to try and pick major market turning points, and traditional fundamentals give few clues on the Yen’s next moves. We’ll watch market reactions to economic data with interest, but it will likely require a broader shift in market conditions to force a large Japanese Yen move. Last week we argued that a Japanese Yen breakout might indeed spark a larger shift in forex market conditions.

Gold Rallies Through Key Resistance Post FOMC- Bullish Above $1286

Fundamental Forecast for Gold: Bullish

• Gold Pullback May Prove Short-lived, Copper Looks To China Data
• What To Make of Gold’s Bullish Move

Gold price are sharply higher on the week with the precious metal up nearly 3% to trade at $1315 ahead of the New York close on Friday. Thursday saw bullion post its largest daily range in nine months as prices surged through key technical levels before teetering out just above the May high. The move comes amid escalating geopolitical tensions in the Middle East and a more dovish tone from the FOMC this week as equities continued to march higher. But does this really change things for the broader gold outlook? The answer is simply- Yes.

As expected the central bank tapered QE purchases by another $10billion this week bringing the monthly pace of asset purchases down to $35billion. The accompanying quarterly projections however showed a slight shift in the committee’s outlook on interest rates with both the timing and the longer-run rate expectations suggesting a greater leniency towards a more accommodative stance on monetary policy. During her presser, central bank chair also talked down the threat of inflation suggesting that the data remains “noisy” and that underlying metrics remain in line with the Fed’s broader expectations.

Thursday’s rally broke through a confluence of key technical metrics including trendline resistance dating back to April, a longer-dating trendline resistance dating back to the 2012 high, the 61.8% retracement of the decline off the May high, the 200 & 50-day moving averages AND the weekly opening range high. Bottom line: the medium-term focus on gold shifts to the topside while above $1286 with a breach above key resistance at 1316/21targeting the 61.8% retracement of the decline off the 2014 high at $1334. A move back sub-1260/70 would be needed to shift the outlook back to the short-side of the trade.

Looking ahead into next week investors will be closely eyeing the final read on 1Q GDP with consensus estimates calling for another downward revision from an annualized -1.0% q/q to -1.8% q/q. Durable goods orders and housing data are also on the docket with existing home sales, new home sales and the Case Shiller home price index on tap. The USD remains in a vulnerable state heading into the releases and should the data disappoint, look for gold to remain well supported with a pullback early next likely to offer more favorable long-entries.

Australian Dollar at Risk as Markets Rethink Post-FOMC Reaction

Fundamental Forecast for Australian Dollar: Bearish

• RBA Minutes Spark Renewed Deterioration in RBA Policy Expectations
• Aussie Dollar Weakness Likely as Post-FOMC Price Action is Unwound

The Australian Dollar stumbled after three consecutive weeks of gains, failing to mount a sustained push above 0.94 figure against its US counterpart yet again. As we expected, minutes from June’s RBA meeting proved to be a major hurdle as policymakers added color to a seemingly status-quo policy announcement with decidedly dovish rhetoric. This led the Aussie sharply lower as rate hike bets unwound, with a Credit Suisse gauge tracking investors’ priced-in 12-month policy outlook dropping to the lowest level in nearly three weeks.

Downside follow-through proved limited however, with the Aussie mounting a swift recovery in the aftermath of the FOMC policy announcement. Investors looked beyond a generally upbeat statement from the rate-setting committee and an even-handed performance from Chair Yellen at her quarterly press conference to focus on a sharp downgrade in officials’ 2014 GDP growth outlook. The Fed’s central projection now sees the upper bound on growth this year at 2.3 percent, an dramatically lower number than the 3 percent estimate given in March. Traders seemed to interpret this to mean that interest rate hikes are becoming an increasingly distant prospect following the end of QE3 asset purchases expected in the fourth quarter.

Such sentiments may be short-lived. A cutback in 2014 growth bets reflecting the widely-known slump in the first quarter should not to be surprising for market participants at this point. Investors also ought to find it telling that the Federal Reserve has conspicuously opted not to alter the policy normalization process after the downturn, arguing the soft patch was a transitory aberration rather than a real threat to recovery. Put simply, this means the 2014 GDP growth downgrade reflects old news rather than a new piece of the puzzle that is likely to alter the course of policy going forward. On the contrary, a particularly chipper tone in the policy statement and a hawkish shift in baseline rate hike expectations are far more noteworthy.

The week ahead will bring plenty of opportunities for the markets to reconsider their initial FOMC reaction. A slew of economic indicators including home sales, consumer confidence, durable goods orders, and PMI figures are on tap. The trend in US economic news-flow marked an important upturn relative ton consensus forecasts in early April and has broadly (if unevenly) continued to improve since. More of the same from upcoming releases may show investors they ought to be looking ahead to shape their Fed outlook, not dwelling on backward-looking reflections of weakness that policymakers have already dismissed.

Scheduled commentary from regional Fed Presidents Plosser, Williams, Lacker and Bullard may help this cause. This means post-FOMC moves across the asset class spectrum may be swiftly unwound, sending the Aussie lower in the process.

Nikkei forecast for the week of June 23, 2014, Technical Analysis

The Nikkei initially fell during the course of the week, but found the ¥15,000 level to be supportive enough to push the market higher. We broke above the ¥15,200 level, an area that we had pointed out as resistance previously. Because of this, we feel that the Nikkei is going to continue to go higher given enough time, and the fact that the Bank of Japan is flooding the market with liquidity doesn’t exactly hurt that argument either. After all, there will be no real yields coming out of the Japanese Government Bonds, so it forces money into the Nikkei itself. On top of that, as long as the US numbers are starting to improve, that is good for the export market out of Japan.

One of the biggest problems is the value of the Yen though, and as long as it remains elevated it is somewhat of a lid on this marketplace. Nonetheless, we feel that the Bank of Japan will get its way, inflating the Nikkei for the time being. The Nikkei should continue to offer value, as we have been grinding sideways for some time now. Pullbacks will continue to be buying opportunities as far as we can tell, and it’s not really until we get below the ¥14,000 level that we become worried about selling pressure.

We believe that this market will ultimately go to the ¥16,000 level in the short term, followed by much higher levels in the longer term. 20,000 isn’t exactly a stretch of imagination, although it would take a bit of time to get there obviously. Selling is not something that we are comfortable with at the moment, therefore we are looking to buy and buy only. Because of this, we can even look for shorter-term charts as signals, such as the daily chart. We believe also that a move higher will provide plenty of pullbacks for short-term traders to continue to profit off of this market as well, giving us a steady bullish presence in the Nikkei going forward as we continue the positive momentum.

DAX forecast for the week of June 23, 2014, Technical Analysis

The DAX bounced off of the €9900 region in order to have a fairly positive looking week. However, it is obvious that the 10,000 level is still going to offer a bit of resistance, and as a result we need to see a weekly close above that level, as it would finally give us the confirmation that the market is going to take the next leg higher. There is massive support down at €9800, and we are most certainly in an uptrend. Because of this, we are “long only” of this particular market.

NASDAQ forecast for the week of June 23, 2014, Technical Analysis

The NASDAQ rose during the course of the week, using the 4300 level as work. We closed at the very top of the range, and although you could make an argument for a “double top”, we feel that the market has enough momentum underneath to continue going higher. Is because of this that if we break the top of the range for the previous week, we are more than willing to start buying as we think this market really only can go in one direction at this point in time. 4000 will be the “floor.”

S&P 500 forecast for the week of June 23, 2014, Technical Analysis

The S&P 500 rose during the course of the week, breaking out to a fresh new high. Because of this, we are very bullish of the S&P 500 and believe that we will eventually hit our longer-term target of 2000. This is a market that has been in a very nice uptrend for some time now, and until something major changes, we don’t see any argument for shorting this market. We also believe that the 1900 level will continue to be the “floor” in this market, thereby making this a “buy only” type of situation.