Weekly Outlook: 2014, August 31 - September 07

Forex Weekly Outlook September 1-5

The euro was the big loser in a week that otherwise saw some profit taking on dollar longs. The first week of September is packed with top tier events as traders return from their vacations. Rate decisions in Australia, Canada, Japan, the UK, and most importantly the euro-zone, and US PMIs leading up to the all-important US NFP report; are the major events in our forex calendar. Check out these events on our weekly outlook.

It was yet another exciting week in markets, as currency action defied the summer heat. The echoes from Draghi’s Jackson Hole speech hit the euro with a gap, and it could never recover. Mediocre EZ data didn’t help. The US reported stronger growth than first estimated: 4.2% growth in Q2 (annualized). Nice consumer confidence and low jobless claims also helped the dollar. But as not all indicators were impressive, it allowed some currencies to recover: the Aussie showed resilience once again, and the loonie made a comeback. On the other hand, the yen suffered from unimpressive inflation data and the pound remained depressed.

1. Australian rate decision: Tuesday, 4:30. Australia’s central bank maintained the cash rate at a record low of 2.5%, saying the nation’s economic outlook remains unclear. The slowdown in mining investment weighs on growth. Therefore, GDP expansion in the June quarter is expected to be weaker than in the previous quarter. Domestic demand is also subdued due to elevated currency. However, lenient monetary policy boosted the housing market. Global issues also contributed to uncertainty tensions in Ukraine and Gaza and the guessing game around the timing of the first rate increase in the US. No change in rats is expected now.
2. US ISM Manufacturing PMI: Tuesday, 14:00. The U.S. manufacturing sector improved strongly in July reaching 57.1 points following 55.3 points in June. Economists expected a reading of 56.1. US Manufacturing remained in expansion territory for 14 consecutive months. New orders advanced to 63.4, rising 4. points from June’s reading of 58.9. Production edged up to 61.2, from 60 and the employment soared to 58.2, up 5.4 points from June’s reading of 53. A slight drop to 57 is forecasted this time.
3. Australian GDP: Wednesday, 1:30. Australia’s economy expanded 1.1% in the first quarter beating expectations for a 0.9% growth rate. The high rise was explained by the unexpected growth to the mining, financial and insurance services and the construction boom. The rate of expansion in the last 12 months to March reached 3.5% indicating the economy is resilient. The RBA projects a growth rate of 2.75% for this year and a rise of 2.5% for 2015. Australia’s economy is predicted to expand 0.4% in the second quarter.
4. Canadian rate decision: Wednesday, 14:00. Canada’s central bank maintained its overnight rate target at 1% as it had been since September 2010. The Bank of Canada said global economic growth was subdued until April Monetary Policy Report, but is expected to pick up in the following months. In light of the lukewarm global outlook, Canada’s GDP is expected to be weaker than previously expected. However, the softer Canadian dollar and forecast for increases in global demand, are expected to expand exports leading to higher growth rate. Real GDP growth in Canada was expected to average around 2 ¼ % in 2014-16. Rates are expected to remain unchanged.
5. Rate decision in Japan: Thursday. The Bank of Japan kept its record stimulus measures to increase the monetary base at an annual pace of 60 trillion yen to 70 trillion yen, after weak releases of production and export data. Exports weakened in June as well as retail sales. Japan’s economy shrank at an annual pace of 6.8% in the second quarter due to by a sales tax hike introduced in April and GDP contracted 1.7% from the first quarter.
6. Rate decision in the UK: Thursday, 11:00. Bank of England policymakers decided to leave interest rates at 0.5% in their August meeting, however, for the first time in three years, two members unexpectedly voted to tighten policy and raise interest rates to 0.75%. The BoE lowered its forecasts for wage growth for 2014 saying it did not want to raise rates until stronger wage rises occur despite a decline in the unemployment rate which may lead to wage growth. Most of the MPC members said the inflation outlook was too weak to justify a rate hike despite a positive growth rate forecast in 2014.No change is expected now.
7. Rate decision in the Eurozone: Thursday 11:45, press conference at 12:30. Mario Draghi dropped the bomb in Jackson Hole, by acknowledging that low inflation is not only temporary, and that inflation expectations are falling. This raises expectations for action in September’s meeting. However, Draghi is likely to look for a wider consensus, especially from his German colleagues. In addition, the TLTROs come into effect this month, and this could lead the governing council to wait. The not too horrible inflation numbers are also a reason to wait now. Nevertheless, we can expect heavier hints about QE and more pressure to keep the euro down, if not even lower. Some also expect another rate cut, but this is unlikely now. Draghi’s words are set to rock the markets.
8. US ADP Non-Farm Employment Change: Thursday, 12:15. U.S. employers hired 218,000 workers in July, posting the fourth months of private job growth beyond 200,000. However July’s reading was lower than the 234,000 reading anticipated by analysts and considerable bellow June’s rise of 281,000. Economists believe the economy will return to full employment by late 2016 if the pace of growth continues. Jobs in professional and business services increased by 61,000 in July, down from 79,000 in June, while positions in the trade, transportation and utilities category grew by 52,000 versus 56,000 in June. An addition of 216,000 jobs is expected now.
9. US Trade Balance: Thursday, 12:30. The U.S. trade deficit narrowed in June to its lowest level since January contracting to a seasonally adjusted $41.5 billion, from $44.7 billion in May. The improvement occurred due to a fall in imports, led by lower shipments of cellphones, petroleum, and cars. Exports climbed 0.1% to $195.9 billion, a record high. While imports fell 1.2%, the most in a year, to $237.4 billion. The unexpected drop implies that growth was stronger in the second quarter than initially estimated. Americans are buying more U.S. products, increasing economic expansion. The economy grew at a 4% annual rate in the second quarter, but this estimate included higher trade deficit than was eventually registered in June. The U.S. trade deficit is expected to reach 42.5.
10. US Unemployment Claims: Thursday, 12:30. The number of Americans applying for unemployment benefits declined by 1,000 last week to a seasonally adjusted 298,000, indicating fewer layoffs and strong hiring. The four-week average, a less volatile measure, fell to 299,750. Employers are more confident in the economy therefore reduce dismissals. Employers added an average of 230,000 jobs a month this year, above the average of 195,000 in 2013. Average job gains since February have been the best in eight years. The number of jobless claims is expected tro increase by 298,000 this week.
11. US ISM Non-Manufacturing PMI: Thursday, 14:00. Service sector activity in the U.S. soared in July to 58.7 from a reading of 56.0 in June, rising at the fastest rate in more than three years. The reading was better than the 56.6 estimated by analysts, suggesting a growth trend in the US economy and a positive outlook for the coming months. The Non-Manufacturing Business Activity Index climbed to 62.4, from 57.5 posted in June, The New Orders Index registered 64.9, from 61.2 registered in June. The Employment Index edged up 1.6 points to 56 from the June reading of 54.4 and indicates growth for the fifth consecutive month. Service sector activity is expected to decline to 57.3.
12. Canadian employment data: Friday, 12:30. Canadian job market rebounded in July with a 42,000 job increase, following a 10,000 decline in the previous month. The reading nearly doubled estimates for a 25,400 job addition. July’s labor market figures were distorted by an “isolated incident” due to “human error” at Statistics Canada. Meanwhile, the unemployment rate declined to 7% in July, from 7.1% reading in the previous month. Canada’s workforce is expected to expand by 10,300 positions while the unemployment rate is predicted to remain at 7%.
13. US Non-Farm Payrolls and Unemployment rate: Friday, 12:30. US nonfarm payrolls edged up 209,000 in July after an upwardly revised increase of 298K in June. The reading was worse than the 231,000 rise projected by analysts. However job growth remained above 200,000 in the last six months. The unemployment rate edged up to 6.2% from 6.1% a month earlier, due to an increase in the labor force. US nonfarm payrolls is expected to gain 222,000 jobs while the unemployment rate is expected to decline to 6.1%.

Dollar Traders Look Ahead to a Return of Liquidity and NFPs

Fundamental Forecast for Dollar: Neutral

• The season is changing from the ‘summer doldrums’ and the Dollar is well positions for the market’s return
• Top event risk this week is August NFPs which can trigger a rebalance between currency and rate speculation

The Dollar closed out a strong August - it has climbed 2.5 percent. Amongst the majors, the greenback has advanced versus all of its peers and gained an impressive 4.1 percent against its most liquid counterpart - the Euro. The ‘bullish’ label is a deserved one. However, further progress requires more substantive fundamental support. Relative performance versus weakened cross currencies and a stable economic footing are unlikely to drive EURUSD below 1.3000 or GBPUSD through 1.6500. The next leg will be decided between Fed rate forecasts and the level of volatility in the markets. As it happens, we happen to have the ingredients to ignite speculation on both fronts.

In assessing the motivation for capital to flow into and out of the US, a market-wide gauge of risk appetite measures the appeal of the currency’s ample liquidity (safe haven attribute) while local interest rate expectations gauge its future return (what I like to consider the dollar’s dividend). While the S&P 500’s charge bullish charge may be a skewed measure of speculative appetite, sentiment was certainly not suffering this past week the kind of crisis-of-confidence that would funnel capital into the greenback and Treasuries. That suggests that rate forecasts likely played a bigger hand in motivating the dollar last week.

Therein lies a problem. Treasury yields, market rates and Fed Funds futures have fallen well behind the pace of the currency. More than just a curb on further gains, this disparity could turn into motivation for a dollar reversal if fundamentals do not reassure the bulls. There is plenty of scheduled event risk to help feed rate forecasts. On the FOMC’s docket, we have the Beige Book due Wednesday and a range of speeches from the Fed’s Mester, Powell, Fisher, Kocherlakota, Rosengren and Plosser. Of those six, only Jerome Powell is a voter in 2015 when the central bank is expected to realize its first hike.

On the data front, there is a plenty to shape growth forecasts. The ISM manufacturing and service sector surveys, July trade balance, IBD economic sentiment survey, and Markit composite PMI is a comprehensive and timely read on economic health. However, its Friday’s labor data that will slice through the ambiguity and directly influence rate speculation. While the flash of the NFPs will elicit headlines; its the jobless rate, participation level and earnings growth that will influence the central bank’s timing. Therefore, that is where we should look. In the Fed minutes released a week ago, the group relayed that “many” officials believed that a strong growth for the labor markets may lead to an earlier rate hike.

While the potential impact from the jobs data is high, we should remember that it falls on Friday. That means there can be an uneasy quiet in the lead up to the release if there isn’t something else to motivate the dollar. Volatility and volume may finally prove a more meaningful counterweight to price action. While it is still early to expect a definitive rise in system-wide trading volume and activity, we are coming to a seasonal turning point which may help spur a fundamental shift in market conditions. The Labor Day holiday – which we are currently passing through – traditionally marks the end of the ‘Summer Doldrums’. With a strong correlation between volume and volatility, this natural return of liquidity can tip a the scales on a precariously balanced complacency. While such a sweeping change is difficult to expect, we should be prepared.

GBP/USD Needs Greater BoE Dissent to Breakout of Bearish Trend

Fundamental Forecast for Pound: Neutral

• GBP/USD Consolidates Under 200 DMA
• British Pound Targets Fresh Lows versus the US Dollar

The GBP/USD may continue to trade in a narrow range ahead of the Bank of England (BoE) interest rate decision on September 4 amid the failed attempts to close above the 1.6600 handle.

Indeed, the British Pound may face additional headwinds ahead of the policy meeting as the economic docket for the U.K. is expected to show a slowdown in private-sector lending, and a series of dismal data prints may keep the central bank on the sidelines as Governor Mark Carney persistently highlights the ongoing slack in the real economy.

There is a risk of seeing a limited reaction to the interest rate decision should the Monetary Policy Committee (MPC) refrain from releasing a policy statement, and the BoE Minutes due out on September 17 may continue to show a 7-2 split as Ben Broadbent retains a rather dovish outlook for monetary policy. Nevertheless, Credit Suisse Overnight Index Swaps are showing growing bets for higher interest rates as market participants now see the benchmark interest rate climbing by at least 50bp over the next 12-months, and the fresh batch of central bank rhetoric may continue to prop up interest rate expectations should the committee show a greater willingness to normalize monetary policy sooner rather than later.

With that said, the Relative Strength Index (RSI) on the GBP/USD suggests that a near-term bottom is taking shape as it threatens the bearish momentum from earlier this month, but the sterling remains vulnerable to a further decline as it retains the downward trending channel carried over from July. As a result, we would like to see a close above the 1.6600 handle for confirmation as well as conviction for a move higher, and the BoE meeting may serve as the fundamental catalyst to trigger a topside move in the GBP/USD should the central bank adopt a more hawkish tone for monetary policy.

Japanese Yen Looks Ripe for a Reversal on Huge Week Ahead

Fundamental Forecast for Yen: Bullish

• USDJPY trades at critical levels ahead of big week
• Japanese Yen unmoved after lackluster inflation data

The Japanese Yen traded to fresh lows versus the resurgent US Dollar on a relatively quiet week of trading. Yet the coming days promise significantly more volatility and may ultimately decide whether the USDJPY continues higher or remains within its year-to-date range.

Five major central bank decisions and a market-moving US Nonfarm Payrolls report will likely drive big currency moves in the week ahead. Japanese Yen traders should pay special attention to the Bank of Japan Monetary Policy decision due early Thursday morning, while the interest rate-sensitive USDJPY exchange rate frequently sees sharp volatility on surprises out of US NFPs data.

Traders widely expect the BoJ will keep their Quantitative Easing policies unchanged through their coming meeting, and indeed recent commentary from Governor Kuroda suggests that officials see little urgency in shifting course. It would likely take explicit reference to deflationary risks—unlikely—to force an important reaction in the Yen.

Focus will otherwise fall to US event risk, and recent declines in US Treasury yields point to muted expectations for key data ahead. Traders kept the US Dollar/Japanese Yen exchange rate near year-to-date highs despite the declines in US yields. Yet the breakdown in correlations can only last so long, and the Dollar remains vulnerable on any disappointments in top-tier data.

The risk of a significant Dollar pullback grew further as recent futures data showed large speculators traders hit their most short the Japanese Yen (long USDJPY) since it traded to ¥105 versus the Greenback. They’re likewise at their most long US Dollar versus the Euro (short EURUSD) since the EUR traded to $1.20 in 2012. Big sentiment extremes are only clear in hindsight, but stretched positions underline the risk of an important USD pullback.

It’s shaping up to be a critical week for the USD versus the Yen, Euro, and other major currencies; big event risk might determine whether it holds the highs or sees a seemingly-inevitable reversal.

AUD Braces for Volatility on Torrent of Top-Tier Events

Fundamental Forecast for Australian Dollar: Neutral

• AUD/USD Remains Resilient In The Face Of Geopolitical Turmoil
• String of Major Domestic Economic Events On The Radar This Week
• Range May Remain In Play If Fresh Data Fails To Shift RBA Policy Bets

The Australian Dollar is set to finish the week marginally higher as traders look past escalating geopolitical turmoil and return to yield plays. A drought of domestic data is set to give rise to a torrent of top-tier economic events over the coming week. These offer the potential to catalyse significant intraday volatility for the Aussie. Yet an escape from its multi-month range against the greenback may prove difficult without the requisite shift in RBA rhetoric.

Retail sales, PMI and building approvals data are all set to cross the wires throughout the week. On balance leading indicators for the health of the Australian economy have demonstrated resilience in the face of a ‘tough budget’. Another round of encouraging data could offer the Aussie a source of support.

While a less timely indicator, second quarter GDP figures will also likely provide the currency with some guidance. Quarter-on-quarter growth expectations are set relatively low (0.4 percent vs 1.1 percent prior). This may leave some room for an upside surprise which in turn would bolster the local unit.

Traders will also be wary of the potential for another surprise from the trade balance data due on Thursday. This follows the sharp decline witnessed for the June figures. Another significantly lower-than-anticipated reading could yield a knee-jerk sell-off in the currency.

However, the potential for all the aforementioned data to leave a lasting impact on the Aussie rests in the capacity to shape RBA policy bets. This may be somewhat limited in light of Governor Stevens’ recent reiteration of the Board’s preference of a ‘period of stability’ for rates. Another status-quo statement from the central bank on Tuesday could keep the Aussie contained between its 92 to 95 US cent trading band.

Finally, tensions in Eastern Europe are likely to remain on the radar for traders. Yet their influence over the high-yielding currencies appears to have waned. At this stage, it would take a significant escalation and greater international response to cause the required panic amongst traders to leave a dent in the AUD.

Canadian Dollar Faces Conflicting Cues from BOC, Key US Data

Fundamental Forecast for Canadian Dollar: Neutral

• Canadian Dollar May Extend Advance on a Hawkish BOC Tone Shift
• Upbeat US Data May Fuel Fed Rate Hike Bets, Undermining Loonie

Last week marked an important turning point for the Canadian Dollar, with prices reversing sharply higher after hitting the weakest level in almost four months near 1.10 against the currency’s US counterpart. The surge gathered momentum after US-based Burger King Worldwide Inc said it will buy Canada’s Tim Hortons Inc for US$11 billion, implying on-coming M&A capital flows favoring the Loonie in the pipeline. The deal’s supportive implications appeared to run deeper however. The news-wires narrative framed the transaction as a poster-child for a broader “inversion” trend, wherein US firms re-domicile abroad to take advantage of favorable tax policies.

While the latest price action demonstrates that M&A considerations are to be respected, their ability to fuel continued Canadian Dollar gains without support from baseline fundamentals seems inherently limited. With that in mind, the outcome of next week’s Bank of Canada (BOC) monetary policy announcement stands out as critical, with the outcome likely to prove formative for the Loonie’s direction in the near term. The last policy announcement in mid-July leaned on the dovish side of the spectrum, with the bank trimming its outlook for growth and establishing a longer timeline for the economy to reach full capacity. A building mound of evidence suggests Governor Steven Poloz and company may opt for a different approach this time around. As if by design, Canadian economic news-flow began to dramatically improve relative to consensus forecasts on the very same day as the BOC issued July’s policy statement, with a Citigroup gauge showing realized data outcomes are outperforming expectations by the widest margin in 14 months. External developments have likewise proved supportive. July’s announcement stressed that Canada’s recovery “hinges critically on stronger exports”. This underscored the vital significance of a pickup in US demand, which accounts for close to 80 percent of cross-border sales. On this front, the landscape looks far rosier today than it did six weeks ago, with a run of supportive US releases suggesting the world’s largest economy is truly on the mend after a dismal first quarter. The Canadian Dollar may find a potent upside catalyst if these considerations bleed into the tone of the statement accompanying the BOC rate decision.

Looking beyond home-grown factors to macro-level considerations, the key theme still in play is the length of the expected time gap between the end of the Federal Reserve’s “QE3” stimulus effort in October and the first subsequent interest rate hike. Next week’s calendar offers plenty of inflection points to drive speculation.

Manufacturing and service-sector ISM readings, the Fed’s Beige Book survey of regional economic conditions and the obsessively monitored Employment report headline scheduled event risk. Persisting strength in US data outcomes is likely to drive speculation that the FOMC will not wait very long before beginning to actively withdraw stimulus. If this triggers a one-sided surge in the US Dollar against its leading counterparts, the Loonie is unlikely to go unscathed.

Gold Posts Monthly Gain But Prices Vulnerable Ahead of NFPs- $1271 Key

Fundamental Forecast for Gold: Bearish

• Gold Responds to Trendline
• Gold Climbs On Ukrainian Turmoil, Crude Oil Cautiously Recovers

Gold prices are slightly firmer this week with the precious metal higher by 0.48% to trade at $1287 ahead of the New York close on Friday. It’s been a lackluster month for gold traders and despite the volatility ($49 or 3.75%) prices are just 0.35% higher for the month of August. As we head into the open of September trade, the focus shifts back onto the economic data front as bullion holds just above the technically significant 200-day moving average.

As tensions in the Middle East and Ukraine continue to escalate, the relative support they have offered gold has continued to wane as the focus shifts back on to the outlook for monetary policy. With steady improvement in US data, interest rate expectations have crept forward keeping a bid under the greenback to the detriment of gold. As such, heading into next week all eyes will be fixated on the economic docket with ISM Manufacturing and Factory Orders on tap ahead of Friday’s highly anticipated non-farm payrolls report.

The shortened holiday week kicks off with ISM data on Tuesday with the consensus estimates calling for a print of 57.0 in August, down from 57.1 in July. Factory orders on Wednesday are seen much stronger with calls for a 10.8% print for the month July, a stark contrast to the 1.1% read seen a month earlier. Highlighting the week’s event risk will be the US employment report on Friday with August Non-Farm Payrolls expected to come in at 225K, up from 209K in July as unemployment downticks to 6.1% from 6.2%. As always, we’ll be closely eyeing the changes in the labor force participation rate when trying to assess the validity of the drop in the headline figure. Look for gold to come under pressure the stronger the data is, with a miss on the print likely to offer some relief to the battered metal.

From a technical standpoint, gold remains vulnerable for further losses as we open up September trade and while we will need to confirm that bias with a break of the monthly opening range, our broader outlook will remain tentatively bearish while below near-term resistance at $1292. A break above this region targets more significant resistance at the confluence of the 50-day moving average and channel resistance dating back to the July high at $1306 and we will reserve this level as our bearish invalidation threshold. Interestingly, gold has alternated positive and negative monthly closes for the last seven months and while we eked out a gain this month, suggests we should be looking lower in September. Key support rests at the August lows and the 78.6% extension off the July high at $1271 with a break below this level eyeing support objectives at $1258/60, $1251 and $1224. Look for major event risk next week to offer a catalyst with central bank interest rate decisions and the US employment report on Friday in focus.

Nikkei forecast for the week of September 1, 2014, Technical Analysis

The Nikkei as you can see fell during the course of the week, but remains hovering near the ¥15,500 level. With that, the market looks as if we are still somewhat supported, and we recognize that ¥15,000 itself is with the support area that the buyers are defending. That area should continue to be an area where we see buyers enter, so therefore we believe that ultimately the Nikkei will go much higher. The ¥16,000 level is the next target. We believe ultimately that the Bank of Japan will get its wish, and the Nikkei should continue to go much higher.

DAX forecast for the week of September 1, 2014, Technical Analysis

The DAX as you can see tried to rally during the course of the week, and even gapped at the open. However, we turned back around and formed a massive shooting star at the €9600 level. Ultimately, we do think that this market goes higher, but obviously the €9600 level acts as if it is going to be massively resistive, but ultimately should be broken above. We believe that the DAX will continue to be one of the more favored indices in the European Union, sewer looking at any potential pullback as a nice buying opportunity as soon as we see signs of support.

We believe that the €9000 level should continue to be supportive, and as a result we feel that any type of support near there is an excellent buying opportunity. We think the buyers will return, so at that point in time we would be very aggressively long of this market. We believe that the €10,000 level should be the target that the market aims for, but should also be very difficult to break above. Ultimately we will though, as the DAX is one of the more reliable stock indices around the world that we follow.

If we got a break down below the €9000 level, we feel that this market would of course fall apart. That would probably have us looking for the €8500 level, which of course is also supportive based upon the fact that we see a cluster from summer of last year, and the large, round, psychologically significant aspect of the €8500 level. On the other hand, if we break out above the €10,000 level, we feel that this is the next leg of the uptrend getting ready to happen, and as a result we would be very willing to hang onto the trade in more of a “buy-and-hold” type of situation once we are above that level. We think that dips going forward and above the €10,000 level will offer buying opportunities, as the market should then head to the €12,000 level.

NASDAQ forecast for the week of September 1, 2014, Technical Analysis

The NASDAQ as you can see gapped at the open on Monday, and then continue to go higher. We never closing at the 4580 level, and as a result we feel that this market should continue to go much higher. Pullbacks will continue to be value, and as a result we feel this market is one that you can only buy, and believe that the 4500 level below will continue to be massively supportive. In fact, we have absolutely no plan whatsoever to sell this market. We believe ultimately that the market does go much higher.