Weekly Outlook: 2014, July 20 - 27

Forex Weekly Outlook July 21-25

Glenn Stevens’ speech, US housing data, inflation and industrial data, NZ rate decision, British GDP data are the main events on FX calendar this week. Here is an outlook on the main market-movers ahead.

Last week the Philly Fed Index jumped to 23.9 points in July marking the highest reading since March 2011. Current activity rose to 23.9 from 17.8 in June, orders index jumped to 34.2 from 16.8. Economists expected the index to fall to 15.6. This release suggests manufacturing has accelerated across the board in the Philadelphia region heading towards a successful second half –year. More positive news came from the US employment market with a lower than expected release of 302,000 clams, down 3,000 from the prior week, beating expectations for a rise to 310,000. Will the US economy continue its upturn trend?

1. Glenn Stevens speaks: Tuesday, 3:00. Governor Glenn Stevens, head of the Reserve Bank of Australia will speak in Sydney. He may talk about the increasing value of the Australian dollar. In a former speech Stevens noted that the zero interest rate policies of major central banks are partly to blame for the inflation of the Australian dollar, and also warned market participants that this was no reason to remain complacent on the value of the currency. He continued to say that the RBA still has room to cut interest rates when required.
2. US inflation data: Tuesday, 12:30. U.S consumer prices edged up 0.4% in May, amid sharp rise in food prices. Economists expected a smaller increase of 0.2 %, getting close to the Fed’s target of 2.0%. Meanwhile, core prices also climbed more than expected, rising 0.3% from a 2.0% gain posted in April. In a yearly base, the core CPI increased 2.0 %, up from 1.8 % in April and the biggest gain since February of last year. The increase in prices, suggest the Fed may raise interest rates sooner than expected. U.S consumer prices are expected to gain 0.3% while core prices are predicted to increase by 0.2%.
3. US Existing Home Sales: Tuesday, 14:00. The number of pre-owned home sales edged up in May to a nearly three year high, reaching an annualized rate of 4.89 million from 4.66 million posted in the previous month. Analysts expected a lower rise to 4.74 million units. The housing recovery continues amid higher income and lower housing prices, which increase affordability. A further rise to 4.98 million is expected this time.
4. NZ rate decision: Wednesday, 21:00. New Zealand’s central bank announced a rate hike of 25 basis points in its June meeting, reaching 3.25%. This was the highest level since January 2009 and the third consecutive rise. The central bank said rates need to be higher as long as economic growth fuels inflation. Annual inflation slowed mildly to 1.5 % in the first quarter, while the RBNZ wants rates to be around 2 %, the mid-point of its 1-3 % target band. New Zealand’s central bank is expected to raise rates again to 3.50%.
5. US Unemployment Claims: Thursday, 12:30. The number of Americans filing initial claims for unemployment benefits declined 3,000 last week reaching 302,000, indicating the US labor market recovery is picking up. Analysts expected claims to reach 310,000 last week. The four-weak average fell 3,000 to 309,000, the lowest level since June 2007. Yellen warned that the Fed may kike rates sooner than planned in case the labor market continues to strengthen. The numer of claims is expected to rise to 310,000.
6. US New Home Sales: Thursday, 14:00. Sales of new U.S. single-family homes climbed to a six-year high in May, reaching a seasonally adjusted annual rate of 504,000 units, 18.6% more than in the previous month, beating predictions for 442,000 units. The high mortgage rates seen in the second half of 2013 are beginning to settle increasing affordability. The median price of a new home increased 6.9% from May since inventory remained unchanged, but prices are beginning to settle and should help to stimulate demand for houses. Sales of new homes is predicted to reach 485,000.
7. Eurozone German Ifo Business Climate: Friday, 8:00. German business climate index declined to 109.7 in June from 110.4 in May, posting its second consecutive monthly fall. Economists expected a minor drop to 110.3. German manufacturers fear the potential consequences of the crises in Ukraine and Iraq. More than 6,000 German companies are related to Russia and business and trade bodies have warned that further escalation in tensions over Ukraine may result in catastrophic losses for firms. Business sentiment is expected to edge down to109.6.
8. UK Prelim GDP: Friday, 8:30. In Q1 2014 the UK economy expanded by 0.8% in the first quarter and by 3.1% when compared with 2013 Q1. This was the fifth consecutive rise, the longest growth period since the economic downturn reaching 0.6% below its pre-downturn peak in Q1 2008. The main contributor to growth was the services industry, which grew by 0.9% on the quarter. The labor market also performs well. UK economy is predicted to expand 0.8% in the second quarter.
9. US Core Durable Goods Orders: Friday, 12:30. Orders for U.S. durable goods fell 1 % in May amid a sharp decline in demand for military equipment. The reading was worse than the 0.1% drop predicted by analysts and lower than the previous release of 0.6%. However, excluding defense-related goods, orders actually rose, and orders in a key category that signals business investment also increased. Meanwhile core orders excluding transportation, declined by 0.1%, while expected to rise 0.3%. Durable goods orders are expected to rise 0.4%, while core orders are predicted to gain 0.6%.

US Dollar Awaits Heavier Volatility, Rate Speculation Returns

Fundamental Forecast for Dollar: Bullish

- Consumer inflation (CPI) stats will look to take control of rate forecasts led astray by Treasury demand
- Volatility measures can’t fall much further, and that imbalance offers immediate benefit to the US Dollar

There was a considerable commotion in the financial markets this past week with sharp declines in global equities and sizable swells in volatility measures (the short-term equity-based measure increased nearly 60 percent on Thursday). Yet, a notable contrast to this chaos was the more moderate response from FX – and particularly the calm demeanor of the US Dollar. If the greenback is considered a safe haven, why did it not rally as other capital markets felt the effects of fear? What does this mean for the currency moving forward?

Last week’s volatility originated with two startling headlines: a downed plane in the disputed territory between Russia and Ukraine, and the start of a ground offensive in the Gaza Strip. Both carry serious geopolitical ramifications and thereby generate distinct concern amongst investors that have increasingly exposed themselves to risky assets and are dependent on stability. As grave as these concerns are, we have seen comparable bouts of fear in the past whereby the market has recognized and acclimated – ultimately returning to ‘status quo’. What separates the current situation from similar circumstances in the past is the financial backdrop. Activity levels, positioning and underlying fundamental themes are shifting.

Volatility measures have, in recent weeks, hit multi-year (equity, emerging markets, commodities) and record (FX and rates) lows. A natural low is inevitable where real returns (activity adjusted) have evaporated. The absence of premia in turn dissuades short-term traders – the primary active market participant through 2014 – looking to buy dips or “sell volatility”. Anemic volumes and open interest reflect the steady withdrawal of active market participants and liquidity that is crucial to stabilize market when fear arises. We can already see this eroding conditions: in the ‘stickiness’ of this most recent spell of volatility and a growing divergence in the performance of ‘risk’-sensitive assets.

The dollar represents a safe haven with a particular appeal. Fronting the world largest and most regulated market, it is prized for liquidity. That means that temporary jumps in volatility carry far less weight here than with an equity index or even a Yen cross. Then again, the current reach for yield in thinner markets represents a perfect opportunity for the currency as a conditions normalize.

Looking at the docket ahead, there are few events that look to carry the heft of a definitive change in sentiment. Furthermore, given the market’s immunity to so many other high-level event risks – FOMC decision, employment reports, external headlines – it is more likely that optimism will cave to the reality of positioning under its own power. On the other hand, the docket offers up a listing of key event risk for the other key driver for the dollar: interest rate expectations.

There is no true level in unemployment that the Fed is necessarily forced to hike rates at. The need to tighten monetary policy is developed through inflation pressure. That means the timing on the Fed’ s first hike and subsequent pace depends on readings like Tuesday’s CPI consumer inflation figures for June. The headline figure is expected to hold at 2.1 percent and core at 2.0 percent – both conspicuously at the central bank’s target. While the group’s favored measure is the PCE – which is materially softer than this reading – the more pressure seen in this market-favorite, the more pervasive the situation and more likely a bank response.

Another consideration for interest rate speculation behind the dollar is the knowledge that there is higher profile event risk due the following week. July NFPs, 2Q GDP and a FOMC rate decision are all on the docket another week out. It is commonplace for the market to weather near-term fundamental turmoil in deference to bigger event risk on the horizon. So, while there is plenty of favorable opportunity in both risk trends and rate forecast potential moving forward, we must bear in mind its timing as a catalyst.

GBP/USD Needs Hawkish BoE Minutes, Upbeat 2Q GDP for Fresh Highs

Fundamental Forecast for Pound: Bullish

• GBP/USD Hits Fresh Session Highs, Breaks 1.7100 Handle After UK CPI
• British Pound is an Attractive Buy on Dips

The Bank of England (BoE) Minutes and the U.K.’s 2Q Gross Domestic Product (GDP) report is likely spark increased volatility in the GBP/USD as market participants continue weigh the outlook for monetary policy.

The BoE policy statement may prop up the British Pound as a growing number of central bank officials show a greater willingness to normalize monetary policy sooner rather later, but we would need to see a greater dissent within the Monetary Policy Committee (MPC) to see fresh yearly highs in the GBP/USD as the pair retains the range-bound price action from earlier this month. With that said, a more hawkish statement along with a greater rift within the MPC may drive the British Pound higher ahead of the next quarterly inflation report due out on August 13, and the going shift in the policy outlook may continue to heighten the bullish sentiment surrounding the sterling as it boosts interest rate expectations.

However, the 2Q GDP print may undermine the bullish outlook for the British Pound as the economy is expected to retain a 0.8% rate of growth in the second-quarter, and we would need to see a more meaningful pickup in private sector activity to see a bullish reaction in the sterling as the BoE continues to mull the margin of spare capacity in the U.K.

With that said, we would need to see a series of positive fundamental developments to see a higher-low being carved ahead of the 1.7000 handle, but the GBP/USD may face a larger correction over the remainder of the month should the U.K. event risks drag on interest rate expectations.

AUD Braces For Jawboning From Stevens And Quarterly Inflation Data

Fundamental Forecast for Australian Dollar: Neutral

• AUD/USD finishes flat despite a bumpy week on RBA minutes, China data, and geopolitical shocks
• CPI figures and Stevens’ speech unlikely to shift expectations for a “period of stability” for rates
• If geopolitical tensions fail to intensify, traders could return to the Aussie for its yield appeal

The Australian Dollar’s consolidation continued over the most recent week with AUD/USD remaining within its narrow range between 0.9210 and 0.9440. A status-quo set of Minutes from the RBA and positive Chinese second quarter growth figures failed to inspire the Aussie bulls. While a sell-off on heightened geopolitical tensions proved to be short-lived, with the currency bouncing back during Friday’s trading. Over the week ahead, two key themes are likely to continue to offer the Aussie guidance; policy expectations and risk appetite.

On the risk-appetite front; geopolitical turmoil carries the potential to put pressure on the risk-sensitive currencies like the Aussie. There is considerable uncertainty over whether the flare-up between Israel and Hamas, as well as tensions in Eastern Europe could escalate, which could leave traders hesitant to move back to the Aussie. Investors’ reactions to the latest developments suggests that the market is highly sensitive to outside shocks at present. If either situation were to intensify, it could lead to an unwinding of AUD carry trade positions built up over recent months.

However, we have witnessed several of these geopolitical shocks this year, which have ultimately failed to leave a lasting impact on sentiment. When the dust settles from the latest flare-up traders could again be tempted to return to the Aussie for its yield appeal.

Next week’s domestic CPI data and speeches by RBA officials could feed the policy expectations theme. A surprise second quarter inflation reading may see a knee-jerk reaction from the currency, however given a shift in the rate outlook remains unlikely at this stage, follow-through could prove limited.

Similarly, another attempt at jawboning the Aussie lower from Stevens may fail to leave a lasting impact on the unit. In recent addresses the RBA Governor has simply been delivering the central bank’s view that the currency is overvalued, and at this stage remains unwilling to take action such as intervention to put pressure on the AUD.

Gold Posts 2% Weekly Loss- $1324 Key Resistance ahead of US CPI

Fundamental Forecast for Gold: Neutral

• Gold Trades into Resistance; Resistance at 1325 and 1335
• Gold, Crude Prep For Volatility As Unrest In Eastern Europe Escalates

Gold prices are considerably lower on the week with the precious metal down more than 2.3% to trade at $1307 ahead of the New York close on Friday. The losses come amid a tumultuous week for markets with geopolitical tensions continuing to build both in Ukraine and Israel. A downed civilian airliner in Ukraine and an Israeli ground invasion of Gaza fueled a substantial rally in gold on Thursday as broader equity markets turned over. The subsequent gold rally halted at a key resistance range and while the technical picture here is a little murky, our baseline scenario is for further weakness in gold while sub $1324.

Looking ahead to next week, investors will be closely eyeing the release of the US Consumer Price Index (CPI) with consensus estimates calling for the headline reading to hold at an annualized rate of 2.1%. In light of the recent commentary from Janet Yellen in this week’s Humphrey Hawkins testimony, the central bank chair continued to suggest that the inflation outlook remains “noisy” due to temporary factors. However, a strong inflation print may undermine the Fed’s dovish tone as a growing number of central bank officials show a greater willingness to normalize monetary policy sooner rather than later. As a result we would need to see a significant deviation from market expectations for the data to spur a material shift in the Fed’s policy outlook. Should the inflation data come in stronger than expected, look for gold to trade heavy as interest rate expectations fuel strength in the greenback.

From a technical standpoint the outlook for gold remains clouded with a mid-week rally taking prices back above the initial July opening range low. That said, it’s important to note that our topside bearish invalidation level remains at the zone between the 38.2% extension off the 2013 low and the 61.8% retracement from this month’s high at $1322/24.This week’s rally met strong resistance at this threshold and near-term focus will favor the short-side of the trade while below this threshold. Interim support rests at $1305 and is backed by the confluence of the monthly low, the 50% retracement of the June rally, the 50-day moving average and trendline support off the June low at $1292. A break below this level further validates our broader directional bias with such a scenario eyeing subsequent targets into more significant support at $1270. A topside breach/close above $1324 invalidates our near-term approach with subsequent resistance levels seen higher at $1335 the monthly high at $1345 and the 78.6% retracement of the decline off the March highs around $$1360. We will maintain a neutral bias heading into next week’s CPI data while noting a greater inclination to sell while below $1324.

DAX forecast for the week of July 21, 2014, Technical Analysis

The DAX as you can see initially tried to rally during the course of the week, but was be back at the €9900 region. The resulting candle is of course a shooting star but it sits on top of a significant amount of support in the area of €9600. With this, we feel that the market may continue to test support, but we feel that there is plenty below and therefore have no real interest in selling this market. With that, we are waiting on some type of supportive candle in order to go long again.

Nikkei forecast for the week of July 21, 2014, Technical Analysis

The Nikkei as you can see went back and forth during the course of the previous five sessions, forming a relatively neutral candle. At this into candle suggests that there is support at the ¥15,000 level, and that the market still is in an uptrend although we are starting to slow down again. Any pullback at this point in time will find support at the ¥15,000 level, as well as the ¥14,000 level. In other words, we feel that this is a “buy only market” at the moment as the trend has definitely been to the upside for the longer term.

Dow Jones 30 forecast for the week of July 21, 2014, Technical Analysis

The Dow Jones 30 as you can see rose during the course of the week, break out to a fresh, new high. We believe that ultimately that this market should continue to go higher, and that we should head to the 20,000 handle. We are long-term bullish of this market, and believe that pullbacks will invite buying opportunities as it is perceived value. Selling at this point in time is something that we have absolutely no interest in, and as a result we are “buy only” of the Dow Jones.

NASDAQ forecast for the week of July 21, 2014, Technical Analysis

The NASDAQ initially fell during the course of the week, but found enough support at the 4350 level to turn things back around and have a nice bounce. This bounce cents the market high enough to form a significant hammer, which happens to be on the aforementioned 4350 level. This level was one significant resistance back during the month of March, and now we have essentially “broken out, and retested the resistance for support.” This is basic technical analysis, and as a result we believe that the NASDAQ might be one of the most bullish markets we follow at the moment.

We need to get above the 4500 level in order to feel comfortable buying and holding, but we do think it’s about to happen. With that being said, a break to a fresh, new high has us buying this market and thinking that it will more than likely hit the 5000 level given enough time. We don’t really see much in the way of a selling opportunity at this point in time, because the trend has been so bullish, and so obvious. Only the fools are stepping into short this market now, and as a result we feel that it is essentially a “one-way bet.”

It isn’t that you can’t lose money buying this market, it’s just that the odds favor going long. This market looks like one that’s quite healthy, and as a result we feel that the move above 4500 should be essentially when the floodgates open, bring in the buyers in from everywhere. It will more than likely coincide with a break of the 2000 level in the S&P 500 as well, so that should just have risk assets in general going quite well. Remember, the NASDAQ is typically time to global growth as there’s a lot of technology involved in the index, and most of the technological companies on the NASDAQ tend to do a lot of business in places like Europe and Asia. With this, it is one of the better “risk on” financial assets that we track.level

S&P 500 forecast for the week of July 21, 2014, Technical Analysis

The S&P 500 pulled back initially during the week, but found significant support just below the 1960 level. That being the case, the market should continue to go higher, but we need to get above the 2000 level in order to feel comfortable going long of this market for a significant amount of time. Alternately, if we did pullback from here, we could find plenty of support down near the 1900 level, which would have us buying as well. We have no interest in selling this market now as it has been such a nice uptrend.