Weekly Outlook: 2014, September 07 - September 14
Forex Weekly Outlook September 8-12
Mark Carney and Haruhiko Kuroda speeches, New Zealand rate decision, Australian employment data, US Unemployment Claims, Retail sales and Consumer sentiment are the major events on our calendar for this week. Here is an outlook on the main market-movers coming our way.
Last week Non-Farm Payrolls declined below the 200,000 level with only a 142,000 job gain in August, considerably lower than the 230,000 gain expected by analysts. The unemployment rate fell by 0.1%, but was attributed to a 0.1 drop in the participation rate. Despite a rebound in economic growth during the second quarter, the recent employment data suggests the economy shifts to lower gear. Will this trend continue?
- Mark Carney speaks: Tuesday, 8:30. BOE Governor Mark Carney will speak in Liverpool and may speak about his intentions to raise rates before wages increase. The International Monetary Fund expects U.K. growth to soar this year. However wage growth is not expanding according to projections. Carney stated that the banks have made “substantial progress” in returning to normal and the expansion trend is gathering momentum.
- New Zealand Rate decision: Wednesday, 21:00. The Reserve Bank of New Zealand raised its official Cash Rate to 3.5% in July from 3.25% in the previous month. This was the fourth hike in five months amid a growth trend in the economy. The rise was in line with market forecast but economists believe this was the last rise in this hike series, after which the Bank will assess the tightening measures impact on the economy. The Reserve Bank has previously announced another rate hike of 1.25% by the end of 2014 and 2015 reaching a ‘neutral’ level of 4.5%. The bank said the economy was expected to expand at an annual pace of 3.7% in 2014. No changes are forecasted this time.
- Australian employment data: Thursday, 1:30. Australia’s unemployment rate soared to a 12-year high of 6.4% in July from 6.0% in the previous month while economists expected the rate to remain at 6.0%. The economy contracted 300 jobs following a 15,900 job addition in June. Full-time positions increased by 14,500 while part-time roles declined 14,800. The participation rate, increased by 0.1% to 64.8%. Economists believe this decline is only a temporary glitch reflecting the volatility of month-to-month data. Australia’s job market is expected to gain 15,200 jobs while the Unemployment rate is expected to decline to 6.3%.
- US Unemployment Claims: Thursday, 12:30. The number of jobless claims increased by 4,000 last week to 302,000, a bit higher than the 300,000 expected by analysts. The four-week moving average of initial claims edged up 3,000 last week to 302,750. The level of continuing claims declined by 64,000 from the previous week and the level of unadjusted continuing claims fell by 95,339 to 2,306,286. Overall, the level of claims last week was well below the 4,388,758 posted a year ago. Jobless claims are expected to increase by 306,000.
- Haruhiko Kuroda speaks: Friday, 6:05. BOJ Governor Haruhiko Kuroda will speak at the National Graduate Institute for Policy Studies in Tokyo. He may talk about the central bank’s intentions to raise the sales tax again in order to narrow government deficit. Kuroda remained optimistic about pulling out of deflation and reaching the 2% inflation target. BOJ Governor is also positive that Japan’s economy will continue to expand in the months ahead.
- US Retail sales: Friday, 12:30. U.S. retail sales unexpectedly halted in July, remained unchanged from June, suggesting some loss of momentum in the economy at the beginning of the third quarter. However gob growth continued to be positive, indicating sales activity is bound to strengthen in the coming months. The main fall occurred in the automobile sector declining 0.2% after a 0.3% fall. Meanwhile, core retail sales, excluding automobiles, gasoline, building materials and food services inched up 0.1% in July. Retail sales are predicted to increase 0.3% while core sales are expected to gain 0.2%.
- US Prelim UoM Consumer Sentiment: Friday, 13:55. American consumer confidence unexpectedly dropped in August to a nine-month low of 79.2 points from 81.8 points in July, missing predictions for a reading of 82.7. The unexpected fall was led by concerns over economic outlook as households projected an inflation rate of 3.4% over the next year, distinctly higher than the 0.4% wage growth forecasted. This pessimistic projection may impact consumer spending in the coming months. American consumer confidence is expected to pick-up to 83.2 this time.
1 Attachment(s)
Dollar Matches Longest Run in 15 Years - A Distinct Reversal Risk
Dollar Matches Longest Run in 15 Years - A Distinct Reversal Risk
Fundamental Forecast for Dollar: Bearish
- Dollar strength is notably concentrated on pairs like EURUSD, GBPUSD and USDJPY which have active counterparts
- A more robust fundamental platform is desperately needed, but the docket is light for support on rates and risk
Attachment 9571
Given the scope of the dollar’s move over the few months, there is certainly an innate quality to its strength. Though not universal, we have seen FX-based volatility readings rise markedly from record lows set through July and August. That in turn bolsters the dollar’s liquidity appeal. Through the ‘return’ element of the currency’s ‘risk-reward’ bearing, Treasury yields and swaps have climbed as the Fed’s return to rate hikes draws nearer. Despite these general developments, there is a material discrepancy between the progress made on the fundamental outlook and the dollar’s performance.
The disparity in market ‘value’ and ‘performance’ starts to show through when we look at the dollar’s performance against its major individual counterparts. This past week would see the single currency leverage a 1.6 percent rally against the Pound, 1.4 percent versus the Euro and 1.0 percent versus the Japanese Yen. These were currencies that were universally pummeled by heavy and active fundamentals winds. Meanwhile, the dollar gained little ground compared to the Kiwi (0.4 percent), was unmoved measured up to the Canadian currency and actually lost ground to the Australian dollar.
If indeed, the dollar is riding high on the difficulties of its most liquid counterparts; then its trend is fragile and at significant risk of stalling. For indirect strength, the Euro is a key patron as the ECB has further turned from the slow tightening path the Fed is on with another round of rate cuts and the announcement of asset purchases. This is certainly not fully priced in, but the recent collapse has drained a lot of short-term excess premium from EURUSD’s position. In comparison, the Bank of England is still on pace to hike rates before its US counterpart; and the market’s overshoot on pricing in an earlier return to the tightening cycle has already proven substantial. As for USDJPY, a sustained rally in risk trends and renewed appetite for expensive carry is very unlikely.
A performance that relies on the synchronized struggle of its major counterparts means that dollar traders will have to be just as vigilant over the global economic calendar as the United States’ own docket. Euro zone inflation figures, Bank of England testimony on the August Quarterly Report and Japan’s 3Q business sentiment survey are just a few scheduled events that pose a dollar risk.
Though, as dependent as the dollar has been on its counterparts for momentum to this point, it wrest back control should its own fundamental themes kick in. Interest rate speculation is the accessible theme. With the FOMC rate decision on September 17 (with updated forecasts and press conference) though, it will be difficult to raise the tide. Virtually no Fed speakers and data more distanced from monetary policy (retail sales and consumer sentiment) will make it even more difficult. The more dramatic but far less probable spark would be through a shift in investor sentiment that sends capital rushing back to the depths of the US financial system – and its currency. Though complacency is far overwrought, it is incredibly stubborn. In other words, it shouldn’t be depended on.
1 Attachment(s)
Japanese Yen to Ignore Domestic Data, Focus on Fed Policy Speculation
Japanese Yen to Ignore Domestic Data, Focus on Fed Policy Speculation
Fundamental Forecast for Japanese Yen: Neutral
- Yen to Overlook Japanese News-Flow on Limited BOJ Policy Impact
- Upbeat US Economic Data May Fuel Risk Aversion, Send Yen Higher
Attachment 9572
The Japanese Yen is unlikely to pay much attention to a busy calendar of domestic data releases on tap in the week ahead. Traders care about economic news-flow in as much as it is able to influence monetary policy. This is not so in Japan, with the BOJ seemingly on auto-pilot. Indeed, central bank Governor Haruhiko Kuroda toed a familiar line in the press conference following last week’s policy announcement, saying the economy continues to exceed expectations and arguing that CPI will reach the target 2 percent within the projected period.
Such rhetoric sounds somewhat dubious considering data outcomes have increasingly underperformed relative to consensus forecasts and priced-in inflation expectations have declined since the beginning of the third quarter. This doesn’t matter all that much from an actionable trading perspective however unless the BOJ is prepared to expand stimulus efforts. What we are hearing from Mr Kuroda and company suggests this is not the case, meaning that Japanese economic news-flow is essentially not a factor in setting the trajectory of the exchange rate (at least for now).
This puts external forces in the driver’s seat, with speculation about the time gap between the end of the Federal Reserve’s “QE3” effort in October the first subsequent interest rate hike still in focus. Last week’s US Employment report did not prove to be as pivotal as advertised. The narrative around the news-wires following the revelation of Augusts’ disappointing 142,000 payrolls increase – a reading far smaller than the 230,000 gain expected – seemed outright dismissive. A chorus of talking heads labeled the outcome a seasonal aberration, pointing to four consecutive years of August jobs data that came in low initially only to be revised meaningfully higher in subsequent releases. That leaves the markets searching for a big-splash catalyst, making for a data-sensitive environment going forward. With that in mind, the week ahead offers a number of potential inflection points.
The JOLTS labor market report – allegedly a favorite of Fed Chair Janet Yellen – as well as retail sales and consumer confidence figures headline the docket. The trend in US economic data in the weeks leading up to Augusts’ jobs report was decidedly rosy. If Augusts’ payrolls print is to be dismissed as a fluke rather than treated as a turning point, another round of upbeat results may fuel bets on a relatively sooner onset of policy tightening.
That has the potential to touch off risk aversion considering the formative role of Fed stimulus in elevating sentiment in recent years. Such a turn of events is likely to bring with an unwinding of Yen-funded carry trades, sending the Japanese unit higher against the majors.
1 Attachment(s)
AUD To Remain Resilient Amid Drive To Yield And Void of Local Data
AUD To Remain Resilient Amid Drive To Yield And Void of Local Data
Fundamental Forecast for Australian Dollar: Neutral
- AUD/USD Consolidates As Dovish Policy Bets Diminish Amidst Return To Yield
- Void of Major Regional Data To Leave ‘Period of Stability’ Rates Scenario Intact
- Carry Demand May Support AUD As Traders Look Past Geopolitical Tensions
Attachment 9573
The Australian Dollar is heading for another relatively flat finish to the week ahead of the Jackson Hole Symposium. The currency was afforded some support as RBA policy expectations shifted away from the more dovish end of the spectrum. This came on the back of a status-quo set of RBA Meeting Minutes and a relatively optimistic set of comments from Governor Stevens on the domestic economy. Additionally, a broader return to high-yielding instruments helped offset some of the negative cues provided by a deterioration in Chinese economic data.
Looking ahead, RBA policy bets as well as general market risk appetite remain the dominant themes to monitor for the Aussie. On the policy front; a void of local economic data is on the calendar heading into the end of the month. This is likely to leave the ‘period of stability’ baseline scenario for rates intact. Which in turn could keep the currency supported via its yield spread over its major counterparts.
Of course, the appeal of the currency’s interest rate advantage is intrinsically linked to broader risk sentiment. Implied volatility remains near multi-year lows despite a small recovery for the gauge over the past month. This suggests traders are pricing in a relatively small probability of major market swings in the near-term. Such an environment raises the attractiveness of carry trades and bodes well for the Aussie.
Further, the threat posed to investor optimism by ongoing geopolitical turmoil appears to have diminished in recent weeks. Storm clouds continue to loom over Eastern Europe and the Middle East. Yet traders seem to have become desensitized to the latest flare-ups. This suggests it would likely take a material escalation in the regional turmoil to threaten the resilience of the Australian Dollar.
1 Attachment(s)
NZDUSD to Face Larger Rebound If RBNZ Removes Verbal Intervention
NZDUSD to Face Larger Rebound If RBNZ Removes Verbal Intervention
Fundamental Forecast for New Zealand Dollar: Neutral
- NZD/USD .8240/60 of Interest for a Low
- US Dollar Profit Taking Ensues on Surprise August NFPs Miss
Attachment 9574
The Reserve Bank of New Zealand (RBNZ) policy meeting on September 10 may heighten the bearish sentiment surrounding NZD/USD should the fresh batch of central bank rhetoric drag on interest rate expectations.
According to a Bloomberg News survey, all of the 12 economists polled forecast the RBNZ to keep the benchmark interest rate steady at 3.50% as Governor Graeme Wheeler adopts a neutral tone for monetary policy, and the New Zealand dollar may face a further decline in the days ahead if the central bank head sees a period of interest rate stability throughout the remainder of 2014. At the same time, Governor Wheeler may continue to highlight weaker commodity prices to favor a weakened outlook for the New Zealand dollar, but the recent slide in the higher-yielding currency may raise the outlook for price growth as it draws imported inflation.
With that said and given the near-term decline in NZD/USD, the biggest risk surrounding the RBNZ interest rate decision will be a removal of the verbal intervention on the kiwi as the central bank sees a more sustainable recovery in New Zealand. As a result, Credit Suisse Overnight Index Swaps continue to show expectations for at least one 25bp rate hike over the next 12-months, but dovish remarks from the RBNZ may push NZD/USD to give back the rally from the February low (0.8050) as market participants scale back bets for higher borrowing costs.
Nevertheless, the 0.8250-60 region remains the next key level of interest as NZD/USD retains the descending channel along with the downward trend in the Relative Strength Index (RSI), but a lack of jawboning from the RBNZ may foster a more meaningful recovery in the New Zealand dollar as the oscillator comes off of oversold territory.
1 Attachment(s)
Gold Holds Support Post NFPs - Bearish Sub $1282
Gold Holds Support Post NFPs - Bearish Sub $1282
Fundamental Forecast for Gold: Bearish
- Gold, Silver Face Make-Or-Break Moment On NFPs As USD Gains Momentum
- Gold Breakdown Risk Intensifies
Attachment 9575
Gold prices are softer this week with the precious metal off by 1.57% to trade at $1266 ahead of the New York close on Friday. The losses pushed the yellow metal to eleven-week lows as persistent strength in the greenback and broader equity markets have continued to weigh on demand. As we head into the second week of September trade, key support for gold comes into view just lower as the USDOLLAR struggles at the 2014 highs- the risk of a near-term pullback begins to mount as our focus turns to the monthly opening ranges.
US employment data disappointed on Friday with the August Non-Farm Payrolls report grossly missing consensus estimates with a print of just 134K. Although the unemployment rate did fall to 6.1% from 6.2% as expected, another downtick in labor force participation took the rate back to the 1978 lows seen early this year at 62.8%. Despite the uptick in wage growth, recent comments from FOMC voting members Richard Fisher, Narayana Kocherlakota and Jerome Powell suggest that the low inflation environment will be the key focus in determining the timing and magnitude of the normalization cycle. As such, the Federal Reserve is likely to retain its zero interest rate policy throughout the remainder of 2014 and Friday’s release will be likely seen as a one-off event.
Looking ahead to next week, the US economic docket will be rather light with only Whole sale inventories, retail sales and the preliminary University of Michigan confidence surveys on tap. The most significant risks to the upside near-term in gold would be escalating geopolitical tensions both in the Europe and the Middle East and/or a broader correction lower in equirty prices.
From a technical standpoint, the outlook for gold remains weighted to the downside while below $1282 with only a breach above the initial September opening range high and key resistance at $1292 shifting our focus back to the long-side off the trade. Support stands at the 100% Fibonacci extension taken from the decline off the July highs at $1258 and is backed by the 61.8% extension off the 20104 highs at $251. Note that operative channel support converges on this $7 range over the next few days and a break below this threshold could see accelerated losses for gold into the May lows and beyond. That said, we’ll look for a definitive break of the September opening range and price action in the USD for guidance with our broader bias favoring selling rallies sub-1282.
