Weekly Outlook: 2014, June 29 - July 06

Forex Weekly Outlook Jun 30-Jul 4

The US dollar was on the back foot in a week that saw quite a few breakouts. As the new quarter begins, top tier events are due in the busy calendar. The peak is the early Non-Farm Payrolls release, which happens at the same time that Draghi begins talking. Here is an outlook on the highlights of this week.

The divergence between past and present data became extreme: Q1 contraction was revised to a terrible 2.9% and it certainly hurt the dollar. How will the US reach 2.2% growth in 2014 this way? Well, Q2 continues to look good, with excellent home sales and rising consumer confidence. In the euro-zone, data remains weak, while in the UK, the BOE watered down its comments and sent GBPUSD down. NZD/USD stood out with a challenge of the yearly highs and the loonie continued recovering.

1. Canadian GDP: Monday, 12:30. The Canadian economy continued to expand in March rising 0.1%, after a 0.2% increase in the previous month while growing at a yearly rate of 2.1% following 2.5% in February. The reading was in line with market forecast. The Bank of Canada maintained its interest rate in its last meeting in June but is under pressure to deliver some policy tightening in the face of an asset bubble that is forming in the housing market. The Canadian economy is expected to grow by 0.2% in April.
2. US Pending Home Sales: Monday, 14:00. The index of pending U.S. home sales increased modestly in April up by 0.4% to 97.8, indicating the housing market is stabilizing after the harsh winter. The increase was below market forecast of 1.1% and followed a 3.4% jump in the previous month. The index has risen for two consecutive months. However, they fell 9.2% in the 12 months through April. U.S. pending home sales is expected to rise 1.4% this time.
3. Australian rate decision: Tuesday, 4:30. The Reserve Bank of Australia (RBA) kept the cash rate unchanged at 2.50% in its June meeting. The reading was in line with market expectations posting the eight consecutive meeting of unchanged rates. The Bank’s statement was also the same as in the previous month. Financial conditions are accommodative and price volatility is low. Domestic economy is adjusting to the sharp decline in the resource sector investments and unemployment reaches record highs. No change is expected now.
4. US ISM Manufacturing PMI: Tuesday, 14:00. The U.S. manufacturing sector continued to expand, in May reaching a revised 55.4 from an initial reading of 53.2. The figure was better than the 54.9 release posted in April, slightly below the 55.7 expected by analysts. This improvement indicated that the manufacturing sector had advanced more rapidly in May compared to April. The U.S. manufacturing sector is predicted to rise further to 55.6 .
5. US ADP Non-Farm Employment Change: Wednesday, 12:15. US employers hired fewer workers than expected in May adding 179,000 positions from 215,000 in the previous month, but a growth trend was visible in the services sector suggesting the pick-up in economic growth continues after a sluggish start early this year. Nevertheless the ADP release did not forecast the strong job addition of 217,000 posted later that week in the Non-farm Payrolls. US employment market is expected to grow by 206,000 this time.
6. Janet Yellen speaks: Wednesday, 15:00. Federal Reserve Chair Janet Yellen will speak in Washington D.C. at the International Monetary Fund. Fed Chair Yellen delivered mixed messages after the FOMC meeting leaving investors puzzled about a possible rate hike. Market volatility is expected.
7. Eurozone rate decision: Thursday, 11:45. The European Central Bank decided to act in its last meeting in June agreed to impose a negative interest rate of -0.10% on its overnight depositors, to encourage banks to lend rather than hoard cash with their central banks and prevent the euro zone from falling into deflation. The ECB was the first central bank to set negative interest rates on banks. The Central bank also cut rates to 0.15% from 0.25%. Economists expected the ECB to cut its rate to 0.10% and reduce deposit rate to -0.10% from zero. The ECB is not expected to make further changes at this point but we Draghi always rocks the markets, as he did last time by closing the door to more cuts.
8. US Non-Farm Employment Change and Unemployment Rate: Thursday, 12:30. The U.S. economy created 217,000 jobs in May, backing claims that the five-year-long recovery accelerated this spring. The reading cane above forecast for a 214,000 addition, following a huge increase of 282,000 posted in the prior month. The jobless rate remained unchanged at 6.3% beating forecasts for a rise to 6.4%. An addition of 211,000 positions is expected, while the unemployment rate is expected to remain unchanged at 6.3%
9. US Trade Balance: Thursday, 12:30. US trade deficit edged up 6.9% in April to a two-year high of $47.2 billion, amid a sharp increase in imported goods such as cars, cellphones, computers and networking gear, indicating consumer spending is picking up. However, slower than expected growth in the second quarter increases deficit. The 4-week moving average edged up 2,000 reaching 314,250. US trade deficit is expected to reach 45.1 million this time.
10. US ISM Non-Manufacturing PMI: Thursday, 14:00. The U.S. service sector continued to expand in May, rising to 56.3 from 55.2 in April, exceeding market forecasts by 0.7 points. The majority of respondents were positive about current and future conditions. The employment index edged up to 52.4, from 51.3 in April, new orders rose to 60.5, from the previous reading of 58.2 and the business activity climbed to 62.1, from 60.9. The U.S. service sector is expected to reach 56.2.

US Dollar: NFPs Versus Fading Volatility

Fundamental Forecast for Dollar: Neutral

• Nonfarm Payrolls are one of the most market-moving US releases, but what does that mean for a market not moving?

Hope is high amongst traders that the low volatility environment that has forced many to change to a short-term approach or stay sidelined for near-perfect setups will end soon. Volatility is a critical ingredient to the dollar’s performance moving forward. Not only does the greenback represent a preferred safe haven – in demand when fear clouds the appeal of most other assts – but complacency has further dampened speculation surrounding the Fed’s policy plans. To jump start market swings or speculation of a more timely FOMC rate hike, we need volatility. Yet, given the confluence of a holiday liquidity drain with historically low levels of activity, it will be exceptionally difficult to jump start meaningful trends even with the help of June NFPs.

In analyzing the market: there are three different types of general forces that shape the environment. Technicals have offered up tantalizing setups for weeks. Though, for the most part, those opportunities have fizzled out shortly after triggering. Fundamentals can provide the drive that feeds trend and momentum as more investors recognize the change in expectations. Yet, a move on a trendline break and even the rise or fall of a major systemic theme is rendered powerless if there is no market to support the move. Volatility is both a reflection of participation and motivations – both of which are exceptionally deflated.

Recently, we have seen activity levels in the capital markets slide to seven year lows and those in the FX market slump to a record. This has resulted in large part from a collapse in interest rates, a swell in cheap funding and a dive in participation (volume). In the week ahead, this situation risks growing even more extreme. We are entering the ‘Summer Doldrums’ and the liquidity drain that occurs around the US Independence Day holiday we only further stress the situation.

The backdrop for activity will pose an ironic contrast to the scale of event risk on deck. At the center of a US calendar that includes sentiment surveys, manufacturing measures and Fed speeches is the June NFPs. This is one of the rare occasions that the labor data will be released on a Thursday due to the market holiday falling on Friday. Under more normal conditions, this data can generate substantial waves for risk trends. That is unlikely this go around – barring an extreme surprise – given traders will be shutting down early in the NY session to leave for the extended weekend.

Despite the curb on speculative interests due to this event, there is another facet to the jobs data that can carry forward and impact the dollar later: interest rate speculation. At the June 17 FOMC meeting, the central bank extended its Taper and laid out its forecasts. Notably, the interest rate forecasts suggested by the policy body are materially more aggressive than what is being priced in by the market. For example, the Committee’s average forecast of thebenchmark rate through the end of 2015 is 1.15 percent. The market is pricing in a 0.69 percent rate. There is plenty of room for speculation to adjust in this dynamic, and a capitulation by the market would mean a substantial dollar rally.

So, while there may be near-term hurdles for the dollar, the outlook presents a material skew in the bulls favor a little further out. Where the dollar is kept in check by the persistent but tepid equity market run, it is more likely to be proactive should risk aversion kick in. Meanwhile, interest rates – dictated by longer-term trends – are heading higher, and the market is undervaluing the return potential. The future looks favorable for the dollar…just not the immediate future.

Japanese Yen Shows Signs of Life, but May be Good Time to Sell

Fundamental Forecast for Japanese Yen: Neutral

• Japanese Yen tests critical resistance level versus US Dollar
• Key issue remains: is inflation low enough for the Bank of Japan to act?

The Japanese Yen showed signs of life as it posted its largest weekly gain versus the US Dollar in two months. But will the coming week produce the long-awaited breakout?

Key economic event risk out of Japan and the United States point to stronger USDJPY volatility in the days ahead. For Japan, traders look to Industrial Production growth figures and Tankan Manufacturing survey data to guide economic outlook. Yet sharper moves may need to wait for Thursday’s US Nonfarm Payrolls report as the Japanese currency has shown relatively little sensitivity to domestic economic data.

We may need to see especially large surprises out of upcoming economic releases to force a Dollar or Yen breakout. Interest rates for both currencies are at or near record-lows, and steady outlook for both Bank of Japan and US Federal Reserve monetary policy gives little reason to expect changes through the foreseeable future.

And therein lays the biggest reason the Dollar/Yen remains in a tight trading range: markets are waiting for something big to happen. What that could be is anyone’s guess, but as it stands USDJPY volatility prices/expectations are trading near record lows.

It’s important to note that volatility has historically returned to its long-term average; extremely slow market moves can’t last forever. We’ll watch the USDJPY near critical year-to-date lows near ¥100.80. Absent a major shift in market conditions, however, the pair is likely to stick to its broader trading range.

GBP/USD Poised for Higher Highs & Lows in July Amid Policy Disparity

Fundamental Forecast for Pound: Bullish

• EUR/GBP, GBP/CHF Flags Ready for Liftoff as Carney Signals Policy Shift
• GBP/USD Diagonal Line Still in Focus above 1.7100

The GBP/USD held within the previous week’s range as the Bank of England (BoE) laid out new measures to stem the risk for an asset-bubble, but the bullish sentiment surrounding the British Pound may gather pace throughout the second-half of the year as the central bank shows a greater willingness to start normalizing monetary policy sooner rather than later.

Increased efforts to cool the housing market may continue to limit the near-term rally in the British Pound as U.K. Mortgage Applications are expected to narrow to an annualized 61.8K in May, and a dismal print may generate a larger correction in the GBP/USD as it dampens the prospects for a stronger recovery in the second-half of 2014.

Nevertheless, the policy outlook should play a larger role in dictating the long-term outlook for the sterling as BoE Governor Mark Carney sees greater scope to raise the benchmark interest rate towards the end of this year, and it seems as though the Monetary Policy Committee (MPC) will sound increasingly hawkish going forward as the pickup in economic activity raises the risk for inflation. With that said, it seems as though the BoE will allow the British Pound to appreciate further as it helps the central bank to achieve price stability in the U.K., and we will retain a bullish forecast for the GBP/USD as the Federal Reserve remains in no rush to move away from its easing cycle.

In light of the growing deviation in the policy outlook, we will continue to look for opportunities to ‘buys dips’ in the GBP/USD, and the pair may continue to carve a series of higher-highs & higher-lows in July as price and the Relative Strength Index (RSI) retain the bullish momentum from earlier this year.

Australian Dollar May Correct Lower on Eroding Yield Advantage

Fundamental Forecast for Australian Dollar: Bearish

• Status-Quo RBA Policy Announcement May Weigh on Aussie Dollar
• Upbeat US Data May Amplify Decline in the Aussie’s Yield Advantage

Domestic policy returns to focus for the Australian Dollar in the week ahead as all eyes turn to the RBA interest rate decision. Economists’ expectations suggest Governor Glenn Stevens and company will leave the baseline lending rate unchanged yet again. The markets seem to agree, with a Credit Suisse gauge tracking the priced-in policy outlook putting the probability of an adjustment at a mere 1 percent. That puts the spotlight on the statement accompanying the announcement, with traders combing through the document’s verbiage to tease out the central bank’s thinking on where it intends to go in the months ahead.

For the past two months, the combination of the post-meeting RBA statement and the subsequent release of minutes from the sit-down have left investors with a dovish lean in their forward outlook. The statements themselves have struck a fairly neutral tone, steadfastly arguing for a period of stability in benchmark borrowing costs. The minutes have added some dovish color, reflecting a central bank uneasy about a return to tightening. That is not surprising: Australian economic news-flow has dramatically deteriorated relative to consensus forecasts since mid-April, warning against taking any steps that might make matters worse.

July’s meeting seems likely to offer more of the same. While the economy continues to look fragile, it does not seem to have become substantially more so since policymakers convened in June. That opens the door for the status quo to remain in place. Interestingly, the absence of a change in the RBA’s posture may still carry important directional implications for the Aussie. Having previously moved tracked closely with Australia’s 2-year bond yield, the currency has increasingly diverged in recent weeks. While the Australia-US front-end yield spread has moved sharply lower, AUD/USD has continued to oscillate in a range loosely defined between the 0.92 and 0.95 figures.

On balance, this seems to leave the door open for a correction. Moving past the RBA announcement without material changes to the landscape may put a spotlight on the increasingly disconnect between the exchange rate and relative policy bets, forcing the Aussie to correct downward. The move may be amplified by a set of high-profile US data releases. Manufacturing- and service-sector ISM figures as well as the closely-monitored Nonfarm Payrolls reading are in the spotlight. Expectations call for only nominal changes on both fronts, keeping the present setting of investors’ Fed policy bets broadly intact. Cumulatively, the emerging narrative tells of a US central bank that is cautiously reducing stimulus and an Australian one that isn’t, prodding investors to take heed of the shifting landscape and respond accordingly.

Nikkei forecast for the week of June 30, 2014, Technical Analysis

The Nikkei fell during the course of the week, but found the ¥15,000 level to be supportive. It appears that the market is trying to grind its way higher, but there is a significant amount resistance just above, so this could be a market that has to fight a little bit to get to where wants to go. We believe ultimately that we will go to the ¥16,250 level yet, so we are long of this market already. We would look to short-term candles such as a daily or even four-hour chart in order to fine-tune an entry to the upside. Selling is something we are not interested in.

DAX forecast for the week of June 30, 2014, Technical Analysis

The DAX as you can see fell during the course of the week, testing the €9800 level. However, we found enough support towards the end of the week in order to stop falling, and we are certainly approaching a significantly supportive area. The €9700 level is very supportive as far as we can tell, so we would expect a lot of buying pressure to enter the market at that point in time to make this uptrend continue going higher. We have no interest in selling, at least not until we break down below the €9000 level, something that we do not expect to see anytime soon.

NASDAQ forecast for the week of June 30, 2014, Technical Analysis

The NASDAQ broke higher during the course of the week after initially testing the 4350 level, thereby forming not only a hammer, the closing just below the 4400 level. This area looks rather good to go, as we have broken to a fresh, new high. This fresh, new high should send this market much higher, and we believe that the NASDAQ is now free to climb all the way to the 4500 level initially, and then ultimately the 5000 level. Pullbacks should continue to be buying opportunities as the NASDAQ is most certainly bullish.

S&P 500 forecast for the week of June 30, 2014, Technical Analysis

The S&P 500 initially fell during the course of the week, but found enough support at the 1945 level to turn things back around and form a nice-looking hammer. This hammer of course suggests that the market is going to go higher, on a break above the top of the range. With that, we are very bullish of this market as it is without a doubt very positive anyway. We ultimately believe that this market goes to the 2000 level, thereby a making it a “buy only” type of marketplace at the moment.

Dow Jones 30 forecast for the week of June 30, 2014, Technical Analysis

The Dow Jones 30 fell during most of the week, but found enough support at the 16,800 level to turn things back around and form a hammer of sorts. The 17,000 level just above is massive resistance, so we can get above there we believe that this market could continue to go much higher. We certainly cannot sell now, there as far too much bullish pressure underneath. Ultimately, we believe that this market goes to the 20,000 level, although it will obviously take a significant amount of time and effort.