Weekly Outlook: 2014, August 03 - August 10

Forex Weekly Outlook August 4-8

The US dollar was the star during most of the week, although it lost some of its shine towards the end. Rate decisions in Australia, the UK, Japan and the Eurozone, Employment data, in Australia, Canada and US trade data are some of the highlight events on Forex calendar. Here is an outlook on the main market movers for this week.
The US dollar was on a roll in the past week: the excellent GDP report that showed 4% Q2 growth (annualized) and speculation about an upcoming rate hike (despite a not-too hawkish Fed) boosted the greenback. The below expectations Non-Farm Payrolls report took out some of the shine of the greenback, but the US economy continues doing well. In the euro-zone, inflation fell deeper, to 0.4%, and cast a dark cloud on not-too-shabby employment and consumption data. The pound continued falling on more weak data in what looks like a u-turn rather than a correction. Weak data in Japan helped USD/JPY move higher and weak Australian data finally sent the Aussie below 0.93. The kiwi and the loonie were not spared, but also managed to stage a recovery in an exciting week.

1. Australian rate decision: Tuesday, 4:30. The Reserve Bank of Australia maintained rates at 2.5% on its last meeting in July, despite rumors of a possible rate cut. RBA Governor Glenn Stevens declared the currency was “overvalued” but kept monetary policy unchanged. Stevens noted the growth signs and the pickup in demand saying accommodative policy would continue to boost economic activity. It is unlikely that the RBA would step in again with further stimulus measures. No change in rates is expected this time.
2. US ISM Non-Manufacturing PMI: Tuesday, 14:00. Service sector activity expanded slower than expected in June, reaching 56 after posting 56.3 in May, amid bleak economic outlook. Economists expected a smaller drop to 56.2. New Orders Index increased by 0.7 points to 61.2. Employment Index increased 2.0 points to 54.4. Overall, the non-Manufacturing sector reported growth in June. A rise to 56.6 is expected now.
3. New Zealand employment data: Tuesday, 22:45. Unemployment in New Zealand remained unchanged at 6% in the first quarter, with an increase in labor force and the highest participation rate in New Zealand’s history. Economists expected the unemployment rate to fall to 5.8%. However, the participation rate edged up 0.4% to 69.3%, reaching a record high for New Zealand. Wages increased an annualized 1.6% (including overtime) in the March quarter, unchanged from the previous quarter. New Zealand job market is expected to rise by 0.7%, while the unemployment rate is predicted to tick down to 5.8%.
4. US Trade Balance: Wednesday, 12:30. The U.S. trade deficit narrowed to $44.4 billion in May as U.S. exports expanded to an all-time high of $195.5 billion, while, imports declined slightly. The trade deficit narrowed 5.6% in May after hitting a two-year high of $47 billion in the prior month. The low trade deficit ensures better growth rate. The U.S. trade deficit is expected to shrink further to 44.2B this time.
5. Australian employment data: Thursday, 1:30. Australia’s jobless rate increased to 6.0% in June following 5.9 registered in the previous month. However the labor force increased by 15,900, beating forecast for a 13,200 job addition. The number of full-time jobs declined by 3,800, and part-time employment edged up by 19,700. Australia’s participation rate climbed to 64.7% in June from 64.6% in May. Australia is expected to add 13,500 jobs, while the unemployment rate is expected to remain at 6%.
6. UK rate decision: Thursday, 11:00. The Bank of England maintained its benchmark interest rates at a record low of 0.5% in July. However economic activity has greatly improved, bouncing back from a long period of stagnation, raising calls for a rate hike at the end of this year or in early 2015. BoE’s Quarterly Inflation Report will be released this month and may act as a catalyst for the more hawkish members of the committee to contemplate voting for a tightening. The BOE is not expected to change its monetary policy this time.
7. Eurozone rate decision: Thursday, 11:45. The ECB kept rates on hold in July’s meeting after cutting them to boost economic growth. Mr. Draghi said interest rates will remain put for an “extended period of time in view of the current outlook for inflation“. Inflation remained at the “danger zone” below 1% in June, reaching 0.5%. However Markit’s survey shows a pickup in new orders suggesting economic activity will grow in the second half of the year. No change in rates is forecasted.
8. US Unemployment Claims: Thursday, 12:20. The number of people seeking U.S. unemployment benefits edged up by 23,000 last week reaching 302,000. The reading was broadly in line with market forecast while remaining at pre-recession levels. The four-week average, a less volatile measure, fell 3,500 to 297,250, posing the lowest average since April 2006. Fewer layoffs and strong confidence in the US economic outlook strengthens the US labor market. The number of jobless claims is expected to rise to 305,000.
9. Japan rate decision: Friday. The Bank of Japan decided to continue increasing monetary base at an annual pace of ¥60 trillion to ¥70 trillion and lowered its growth forecast for the fiscal year of 2014 to 1%. The pace of recovery was in line with forecasts, despite a decline in domestic demand following the consumption tax hike. The BOE forecasts economic growth will increase in the coming months. Rates are expected to remain unchanged.
10. Canadian employment data: Friday, 12:30. Canadian workforce narrowed by 9,400 jobs in June after a 25,800 addition registered in the previous month. The unemployment rate increased to 7.1% following 7.0% in May. On a yearly base, Canada’s labor market increased 0.4%, the lowest growth rate since February 2010. Canada added 33,500 full-time jobs, while part-time jobs and positions held by youths aged 15-24 dropped 43,000. Youth unemployment remains a major problem. Canadian workforce is expected a job gain of 25,400, while the unemployment rate is expected to reach 7%.

US Dollar Rally at the Mercy of Volatility, Interest Rate Trends

Fundamental Forecast for Dollar: Neutral

- NFPs may have dampened momentum behind rate forecasts just before a true trend was set
- Risk trends may single-handedly carry the dollar’s next move – whether full blown trend or begrudging correction

The Dow Jones FXCM Dollar Index (ticker = USDollar) mounted its biggest rally in six months this past week. That is a serious reversal of fortune from the technical collapse the currency was facing in the first half of July. Yet, the transition from rebound to full-blown rally is a jump the dollar may not be able to make. After grinding out hard-fought gains against its major counterparts, the greenback’s top fundamental drivers are starting to show the tell-tale signs of doubt. Will US interest rate expectations finally hit the same stride that carried the Pound to seven-year highs? Are we on the brink of an all-out risk aversion move?

There is no denying the dollar has put in for a healthy rebound this past week and month. The currency is up against all major counterparts over both time frames. Broad and robust moves typically reflect innate strength. And, that means its primary fundamental drivers – interest rate speculation and appetite for a safe haven – were working together to forge a common platform for bulls. The problem is that both are facing serious headwinds in the coming week.

Arguably the least constrained theme these past months, interest rate speculation was powered by a broad range of important event risk this past week. Following the significant 2Q GDP beat (4.0 versus 3.0 percent expected) and the FOMC’s measured move towards normalization mid-week, rate watchers started to move. Two-year Treasury yields (which fall within the expected time frame for the central bank to shift to a hawkish regime) rallied to three-year highs, while implied rates measured in Fed Fund futures moved closer to Fed forecasts. That run was severely disrupted though by the end of the week the combination of the July employment and June PCE inflation figures – key metrics for the Fed’s main policy targets. Both printed dovish outcomes and the two-year yield ended 19 percent off its mid-week high.

Interest rate speculation can maintain its own momentum – the British Pound is a good example of this – but encouragement is needed especially in the early stages. We simply do not have a clear enough inflation pressure nor a hawkish enough group of voters (hawks Fisher, Plosser and Mester all lose their vote in 2015) to ensure a self-fulfilling cycle. Meanwhile, the docket this week is relatively light for the items that can secure conviction. An ISM service sector report, August IBD economic sentiment survey and June trade figure are top listing. There are no central bankers scheduled to speak.

The most capable backup for the dollar’s run also happens to be the most difficult to ignite. If there was a bigger theme this past week than the dollar’s it was the surge in volatility. The activity barometers maintain their distinct relationship to speculative appetites, and the VIX Index’s advance to 17 translated into the biggest drop from the S&P 500 in two years. The amplitude of the move is a persuasive indication of ‘risk aversion’ on the scale that would activate the dollar’s liquidity / safe haven status.

However, we have seen many similar jumps before over the past years only to have them evaporate as the market buys the pullback and revert quickly back to complacency. What would separate this instance from previous false starts? Consistency. There are early signs that the underlying trend in these volatility measures is turning higher but we are still short of a virtuous cycle. If the selling and deleveraging pressures persist next week, the dollar will likely mount serious gains versus its counterparts. But don’t expect the market to fold so easily.

British Pound Likely to Continue Lower Unless Bank of England Reacts

Fundamental Forecast for Pound: Bearish

• British Pound breakdown looks like the real deal, further losses ahead
• Disappointing UK Manufacturing data sends the GBP to fresh lows

The British Pound tumbled further versus the US Dollar, and the sharp shift in momentum all but confirms that the GBPUSD likely topped and is likely to continue lower.

Traders sent the Sterling lower for the fourth-consecutive trading week, and whether it can recover into the new month may depend on the upcoming Bank of England monetary policy decision on the 7th and Inflation Report due the 13th.

A Bloomberg News survey shows that all economists polled predict that the Bank of England will policy unchanged at their coming meeting. The British Pound thus seems unlikely to see significant volatility on the announcement given that the BoE does not release detailed statements on unchanged monetary policy.
Instead we’ll pay closer attention to the monthly Inflation Report due the following week, and any concrete details regarding the future of interest rate policy will quite likely force big moves out of the domestic currency.

Traders sent the British Pound to fresh multi-year highs as Bank of England Governor Mark Carney warned interest rates could rise sooner than markets expected. Yet the GBP has given back much of those gains as BoE officials have moderated in tone, and a run of soft economic data likewise forced UK yields lower. Thus further guidance from central bank officials may be critical if the GBP is to resume its larger uptrend.

We argue that a sharp shift in sentiment warns that the Sterling has made a significant top and is likely to continue lower. It will be important to watch any game-changing shifts from the Bank of England in the two weeks ahead, but a sharp reversal below the psychologically significant $1.70 mark leaves risks to the downside for the GBP.

USD/JPY Risks Larger Pullback as BoJ Refrains From Expanding QE

Fundamental Forecast for Yen: Neutral

• USD/JPY Rallies as US GDP Rebounds Strongly in the Second-Quarter
• USD/JPY Attempting to Breakout

The USD/JPY broke out of the bearish trend from earlier this year as the Federal Open Market Committee (FOMC) scaled back its dovish tone for monetary policy, but the Bank of Japan (BoJ) interest rate decision on August 8 may boost the appeal of the Japanese Yen as the central bank remains confident in achieve the 2% inflation target over the policy horizon.

It seems as though the BoJ will once again refrain from further expanding its asset-purchase program as Governor Haruhiko Kuroda remains upbeat on the Japanese economy, and we may get more of the same from the central bank as the current BoJ projections account for a 10% rise in the sales-tax. With that said, a further shift in the policy outlook may limit the near-term advance in the USD/JPY as the pair fails to put in a close above the 103.00, and the dollar-yen may face a near-term correction during the first full-week of August as the Non-Farm Payrolls (NFP) report fails to boost interest rate expectations for the U.S.

At the same time, it seems as though the USD/JPY is decoupling with risk sentiment following the FOMC interest rate decision, and the fundamentals may have a greater impact in driving future price action for the dollar-yen as the Fed scales back its dovish outlook for inflation. As a result, a growing dissent within the FOMC may continue to heighten the appeal of the greenback, and the USD/JPY may continue to pare the decline from earlier this year should we see a more material shift in the policy outlook.

Nevertheless, the USD/JPY may face a near-term pullback during the first full-week of August as the Relative Strength Index (RSI) turns around ahead of overbought territory, but we will revert back to the approach of looking for opportunities to ‘buy dips’ in the dollar-yen as the pair breaks out of the downward trend from earlier this year.

Gold Trades Heavy as USD Goes Bid on Fed, GDP- August Open In Focus

Fundamental Forecast for Gold: Neutral

• Gold the Commodity or Gold the Currency?
• Weekly Price & Time: Critical Test Coming Up For Gold

Gold prices are lower for a third consecutive week with the precious metal off by 0.90% to trade at $1295 ahead of the New York close on Friday. The losses mark a 2.47% decline for the month of July and come amid renewed strength in the greenback with the Dow Jones FXCM Dollar Index breaking through trendline resistance dating back to the 2013 high on the back of a stellar 2Q GDP print and a more upbeat assessment of the economy from the Federal Reserve. However with a miss on the July employment report and a massive sell-off in broader equity markets, the gold bulls may not be ready to give up just yet.

The release of the second quarter GDP figures on Wednesday fueled a massive rally in the US Dollar after the print showed an annualized growth rate of 4% q/q, far surpassing expectations of a 3% read. The release also saw an upward revision to the 1Q print from -2.9% to -2.1% with personal consumption and also topping market estimates. The FOMC interest rate decision released later that day further exacerbated the dollar’s move with the policy statement citing a more cautiously optimistic assessment of the labor markets and inflation while explicitly noting the reasons for the sole descent from Mr Charles Plosser, “who objected to the guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for "a considerable time after the asset purchase program ends," because such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee's goals.” The developments saw interest expectations bought in with the greenback mounting an offensive that took to the dollar index to highs not seen since April as US Treasury yields moved higher.

The July NFP report came in short of market expectations with a print of 209K missing calls for a read of 230K with the headline unemployment rate ticking higher to 6.2% from 6.1%. Despite the uptick however, it’s important to note that the move was accompanied by a broadening of the labor force with the participation rate moving up to 62.9% from 62.8% and an upward revision to last month’s blowout print NFP print from 288K to 298K. With the dollar seemingly well supported here, topside advances in gold are likely to remain limited with the biggest variable for gold traders being the recent sell-off in risk assets. Looking ahead to next week, traders will be closely eying the slew of central bank rate decision on tap with the RBA, BoJ, ECB and BoE on tap. Look for broader market sentiment to steer gold prices with a more significant sell-off in stocks likely to help support the battered metal in the near-term.

From a technical standpoint, the July calendar month proved to be a textbook opening range play with the break of the initial monthly lows on the 14th shifting the bias to the short side mid-month. The end result saw gold close July AT THE LOWS before rebounding off near-term support on the back of Friday’s NFP miss. Support now stands at the 61.8% retracement of the June advance at $1280 and this level will now serve as our initial range low as we open up August trade. Key support and our bullish invalidation threshold rests just lower in the zone between $1260-$1270- a region which is defined by key longer-term Fibonacci ratios and has served as a major pivot in gold dating back to June of 2013. Resistance stands at last week’s high at $1312 and is backed by our bearish invalidation level at $1320/21. Friday’s rally has now pared the entire Thursday decline and with the USDOLLAR index looking to post an outside reversal candle at fresh three-month highs, the risk for a near-term continued push higher in Gold (lower in USD) to open the month remains. As such, while our broader outlook remains weighted to the downside we’ll maintain a more neutral tone heading into the start of the month pending a break of the initial July opening ranged. Bottom line: looking for an early-mid month rally to sell.

Australian Dollar May Bounce Before Selling Pressure Builds in Earnest

Fundamental Forecast for Australian Dollar: Neutral

• Australian Dollar May Rebound as Markets Retool Fed Policy Outlook
• Jobs Report May Overshadow RBA Rate Decision as Aussie Catalyst

The Australian Dollar faced heavy selling pressure last week, with prices dropping through the bottom of a range that contained price action since the beginning of June. The force behind the move lower came from external factors: an impressively strong second-quarter US GDP figure and an easing of the FOMC’s concern about persistently low inflation hinted Janet Yellen and company may move swiftly to raise rates after the QE3 asset purchase program is wound down in October.

That boosted the yield profile of the US Dollar, sending it higher against all of its key counterparts. It likewise undermined risk appetite built upon a foundation of monetary stimulus. That bode doubly ill for the Aussie, sending the currency down nearly a full percentage point against its US namesake to yield the worst performance in ten weeks. US economic data cut the selloff short just as it had sparked it. Friday’s release of the US jobs report proved disappointing, with a 209,000 rise in nonfarm payrolls falling short of economists’ expectations calling for a 230,000 increase. That poured to cold water on swelling Fed tightening speculation, allowing the Aussie to reclaim a bit of lost ground. More of the same may be in store early next week as markets continue to digest the balance of last week’s news-flow to recalibrate the priced-in policy outlook.

The recovery may prove short-lived however as domestic factors return to the spotlight. The RBA monetary policy announcement seemingly ought to take top billing, but officials are unlikely to offer up anything unheard of in recent months. Another restatement of the commitment to hold rates unchanged for the foreseeable future may force a pause in the Aussie’s recovery, but the likelihood of another strong push lower will probably hinge on July’s employment figures. A net jobs gain of 13,200 is expected, marking a slowdown from the previous month’s 15,900 increase. Furthermore, Australian economic data has increasingly underperformed relative to consensus forecasts since mid-April, opening the door for a downside surprise. Such a result is likely to extend the perceived length of the standstill on the monetary policy front, undermining yield-based support for the Aussie and forcing prices lower in earnest.

USD/JPY forecast for the week of August 4, 2014, Technical Analysis

The USD/JPY pair rose during the course of the week, but as you can see the 103 level, the top of the recent consolidation area, has held it back yet again. Because of that, we feel that nothing is really change in this marketplace, and that buying dips for short-term traders will be a great strategy, but quite frankly the longer-term trader isn’t getting much out of it. If we managed to break above the 103 level, then fine, we could be buyers. If we broke down below 101, we would expect to see plenty of support all the way down to 100.

USD/CAD forecast for the week of August 4, 2014, Technical Analysis

The USD/CAD pair went higher during the course of the week, breaking above the 1.09 level. Because of this, we feel that this market will more than likely try to get to the 1.10 level, but we have gotten a bit of had of ourselves at the moment, so pullbacks probably likely first. With that pullback though, we think that the 1.08 level will offer support going forward, giving us a nice buying opportunity. We do see a lot of noise above, and that will be difficult to get above, which is exactly why we need the pullback.

Gold forecast for the week of August 4, 2014, Technical Analysis

The gold markets as you can see fell during the course of the week, but overall found enough support just below the $1300 level to bounce and form something along the lines of a hammer. This hammer of course isn’t perfect, but it does tell us that the market still has a bit of a fight in it as far as keeping somewhat afloat. Ultimately, we believe that the market has back towards the $1350 level, and as a result we have no interest in selling. We think it could be choppy, but ultimately this market is fairly bullish.

NZD/USD forecast for the week of August 4, 2014, Technical Analysis

The NZD/USD pair fell during the course of the week, dropping down to the 0.8450 region, and then closing at the 0.85 handle. Because of that, it appears that the market is ready to bounce, and on a break of the top of the hammer we believe that this market returns to the 0.88 level. With that, we feel that this market can be bought, but that being the case we feel that a move below the 0.84 level would in fact be very bearish. Either one of those two moves gets us involved in this market.