Weekly Outlook: 2014, October 05 - October 12

Forex Weekly Outlook October 6-10

Rate decision in Japan and the UK, Employment data in Australia and Canada, US FOMC Meeting Minutes, US Unemployment Claims, Mario Draghi’s speech are the major market movers on FX calendar week. Here is an outlook on the top events coming our way.

Last week, US labor market top release showed a sharp gain of 248K new jobs in September, posting the lowest unemployment rate since 2008. These excellent figures reaffirm the strength in the US economy. The low job addition in August is regarded as a “blip” in the recovering labor market. The unemployment rate also surprised markets, falling to 5.9% from 6.1% in August and may prompt the Federal Reserve to raise rates sooner than estimated.

1. Japan rate decision: Monday. The Bank of Japan (BOJ) maintained its monetary policy on its last meeting in September despite signs of weaker growth. The central bank kept its pledge to increase base money by 60-70 trillion yen, mostly in Japanese government bonds. It was suggested to turn the central bank’s 2 percent inflation target a medium-to-long-term goal was denied by an 8-1 vote. The BOJ expects the moderate recovery will continue since domestic demand remains strong. Inflation is improving but is still way behind the 2% inflation target, projected to reach this goal in 2016, rather than next year.
2. Australian rate decision: Tuesday, 3:30. The RBA kept the cash rate on hold for the thirteenth consecutive month in line with market forecast, amid positive financial conditions. Inflation remains within the Central Bank’s 2-3 per cent target. Volatility in many financial prices remains low. These positive signs suggest the next rate hike will occur only in mid-2015. The number of loan applications in the housing market grew rapidly with a 40% rise in the number of loans for new properties and a 15% increase in construction loans.
3. US FOMC Meeting Minutes: Wednesday, 18:00. The Fed minutes released in August showed that the economy is acting in accordance with the Fed goals of unemployment and inflation. The unemployment rate declined, but many FOMC participants suggested labor market slack as suggested by sluggish wage rates. Inflation is expected to remain around the 2% target. The FOMC will raise rates in case the economy continues to expand. Overall, the Fed is expected to increase rates sooner than earlier believed.
4. Australian employment data: Wednesday, 0:30. Australia’s unemployment rate declined to 6.1% in August from a 12-year high of 6.4% in July. This unexpected decline occurred due to a large addition of 121,000 jobs that month after a 4,000 contraction in July. Economists expected the unemployment rate to decline to 6.3 with a job addition of 15,200. The Reserve Bank governor, Glenn Stevens, noted unemployment is still high, but a rate cut is not expected on the coming months. The economy is expected to add 29,600 new jobs while the unemployment rate is expected to rise to 6.2%.
5. UK rate decision: Thursday, 11:00. The Bank of England has left UK interest rates at a record low of 0.5% in September, living the Bank’s economic stimulus program at £375 billion. Interest rates were unchanged for five years but are expected to rise early next year due to a growth trend in the UK economy. Nevertheless, Bank governor Mark Carney has stated that any rate rises would be small and gradual. Economists believe a rate hike will hurt households and businesses since wage growth is slow.
6. US Unemployment Claims: Thursday, 12:30. The number of new claims for U.S. unemployment benefits declined by 8,000 last week to a seasonally adjusted 287,000, pushing down the total number of beneficiaries to the lowest level in more than eight years. The four-week average fell 4,250 to 294,750. The upward trend in economic activity means fewer layoffs as employers expect continued economic growth. Based off the four-week average for jobless claims, monthly job growth should be close 250,000. The number of new claims is expected to rise to 291,000.
7. Mario Draghi speaks: Thursday, 15:00. ECB President Mario Draghi is scheduled to speak at the Brookings Institution, in Washington DC. He may discuss the recently declared ECB bond buying program and his goal to stimulate bank to lend more to European companies and consumers.
8. Canadian employment data: Friday, 12:30. The Canadian job market contracted by 11,000 positions in August following a 41,700 addition in July, but the unemployment rate remained unchanged at 7%. Economists expected a job growth of 10,000. Declines were registered both full-time and part-time positions. The number of private sector employees decreased in August, while self-employment rose. The Canadian job market is expected to shed 11,000 jobs this time, while the unemployment rate is predicted to remain unchanged at 7%.

Dollar’s Rally Has Grown Even More Extreme

Fundamental Forecast for Dollar: Neutral

• The US Dollar has rallied for a record 11 consecutive weeks, and the quarter is on pace for a 7-year record
• Fed forecasts have done much of the heavy lifting to this point, but risk trends are increasingly important

We are only a few days from the close of the US Dollar’s best quarterly performance since the third quarter of 2008 – at the height of the financial crisis. Back then, the greenback was charging higher as panicked investors were seeking haven for their capital. Few assets and region’s could offer the level of safety traders were seeking, and the world’s most heavily used reserve currency backed by the largest economy stood as a beacon of shelter. Yet, with the current 11-week rally – the longest on record – circumstances are much different.

Volatiltiy levels are close to record lows and investors are still more concerned about yield than they are safety. ‘Fear’ is all consuming and reinforcing, thereby making it a strong fundamental backbone for the currency. Is the dollar’s current drive as enduring? Are there other outlets of strength ready to supplement bulls’ ambitions?

To this point, there have been two primary motivators for the Dollar: rate expectations and the relative deterioration of its major counterparts. Between the two, exceptional weakness for the Euro, Yen , Australian and New Zealand dollars is responsible for the bulk of the USDollar’s 6.4 percent climb over the past two months. With the Eurozone facing economic headwinds and a increasingly desperate ECB, Japan keeping the course on its open-ended stimulus program, Australia suffering China’s managed economic moderation and the Kiwi reeling from rate expectaitons whiplash; there was a potent appetite for strength and stability.

The question moving forward is whether the most liquid counterparts to the dollar will continue to face hardship that redirects capital towards its borders. From an economic standpoint, a downturn in developed and developing world forecasts bolster the robust US outlook. The monetary policy contrast is similarly paced in the Dollar’s favor. While the timing and pace for the FOMC’s return to rate hikes is up for significant debate, even a period of basing would outweigh the active growth in accommodation by the Fed’s three largest counterparts: ECB, BoJ and the PBoC. That said, a considerable discount has been afforded to these imbalances. Further progress requires development of these concerns.

Though it may be in second place as market impetus, rate speculation has played a considerable role in the Dollar’s progress. The USDOLLARcentral bank has just this month reiterated a forecast that a first hike is likely to come in the middle of next year and further upgraded its expectations for the pace of tightening. Yet, on this point, there is room for confidence or doubt to seep in. Where the currency and medium-term Treasury yields (2-year) have advanced, other key market elements have rebuffed the scenario. Fed Funds futures – which are direct hedges to rate forecasts – are showing a dramatic discount to the Fed’s own forecasts. Meanwhile, the ‘low volatility / high risk exposure’ conditions derived from the current glut of stimulus, remain undisturbed.

If there is one particular avenue of untapped potential that can most effectively charge the Dollar higher, it is a full-scale risk aversion – the source for the last rally of a comparable magnitude to this quarter. Volatility levels have not rocketed higher outside of the short-term build around scheduled event risk. However, there is a slow and steady build behind these measures. Volume has slowly started to pick up as well while tallies show capital outflows in riskier asset classes. This is an underlying current that will not shift all at once. That said, a sentiment change can carry the dollar much further than the other top fundamental themes. This week, the NFPs is top event risk, but Monday’s PCE inflation figure is just as important a factor in the Fed’s dual mandate – and thereby rate forecasting. If there is one outlet capable enough to unseat global risk trends, it may very well be monetary policy.

British Pound Selling to Continue on Static BOE, Hawkish FOMC Minutes

Fundamental Forecast for Pound: Bullish

• Status-Quo BOE Announcement to Amplify Slide in Rate Hike Outlook
• Hawkish FOMC Minutes to Help Undermine the Pound’s Yield Appeal

One might have expected the British Pound to move confidently higher after the Scottish Independence referendum passed without disrupting the status quo considering the Bank of England boasts one of the best monetary policy outlook profiles in the G10 FX space. Indeed, traders are pricing in 50 basis points in tightening over the coming 12 months (according to OIS-derived data from Credit Suisse).

A hearty rally was not to be had however: Sterling briefly retraced Scotland-inspired weakness and promptly turned lower anew. This is not altogether surprising. The UK unit had been under pressure before separatist fervor reached fever pitch as rate hike bets began to soften. Indeed, while the BOE is comparatively looking like one of the more hawkish central banks among the majors, tightening prospects look far less robust now than they did just a few months ago.

The Pound’s decline since mid-July has tracked various measures of BOE policy bets including the aforementioned OIS-based gauge as well as front-end UK bond yields. The latest leg of the selloff initiated in mid-September has likewise coincided with the start of an increasingly disappointing run of economic news-flow. In fact, data from Citigroup suggests that on the whole, UK data releases are now underperforming consensus forecasts by the widest margin in a month.

Needless to say, a downturn on the economic data front bodes ill for the hawks on the BOE’s rate-setting MPC committee, who will probably find it that much harder to build a five-vote majority needed to deliver an increase in borrowing costs. That means next week’s monetary policy announcement will likely turn out to be another non-event.

Confirmation of standstill will further erode Sterling’s yield-based appeal, particularly as the BOE’s main competition for “most-hawkish” honors – the Federal Reserve – continues to inch toward policy normalization. Indeed, if the updated rates forecast released after last month’s FOMC meeting is any indication, minutes from sit-down will show Janet Yellen and company on track to tighten quickly after QE3 is wrapped up in a few weeks. On balance, continued Pound selling looks likely ahead.

Japanese Yen Likely to Correct Sharply Higher, but When?

The Japanese Yen fell to fresh post-financial crisis lows versus the surging US Dollar, but a clear slowdown the USDJPY rally warns that it’s near an end. When might we buy?

The difficulty in trading the USDJPY is clear: recent data shows that the trade is extremely crowded, and a sharp correction is possible if not likely. Yet the US Dollar continues to defy our expectations and is plowing higher across the board. We’ll need to wait for signs of concrete turnaround before getting short USDJPY.

An upcoming Bank of Japan Monetary Policy Meeting and Decision dominate event risk for the Japanese Yen in the week ahead, while clear USD outperformance keeps focus on a number of important US data releases. See the full video for our take on what to expect, but in sum: we are likely biding our time and keeping a very close eye on whether the USDJPY breaks above ¥110.

NZD/USD Holds September Low Ahead of China PMI’s, Fed Doves

Fundamental Forecast for NZDUSD: Neutral

• Price & Time:NZD/JPY Bear Pattern Hangs in the Balance
• New Zealand DollarShows Signs of Turnaround

The medium-term outlook for the NZD/USD remains bearish as the Reserve Bank of New Zealand (RBNZ) sticks to a neutral policy stance and retains the verbal intervention on the New Zealand dollar, but the pair may face a larger correction in the days ahead should the fresh back of central bank rhetoric coming out of the Federal Reserve drag on interest rate expectations.

The purchasing manager indices coming out of China during the first full week of October may have a greater impact on the kiwi amid the minor data prints in New Zealand, and a further slowdown in the world’s second-largest economy may dampen the appeal of the higher-yielding currency as it curbs the prospects for global growth. As a result, market participants may continue to look towards the safety of the U.S. dollar as the Federal Open Market Committee (FOMC) is widely expected to halt its quantitative easing (QE) program later this month, but it seems as though the central bank remains in no rush to move away from the zero-interest rate policy (ZIRP) as price growth continues to lag.

Despite the bullish U.S. dollar reaction to the upbeat Non-Farm Payrolls (NFP) report, we may see the group of Fed doves (Narayana Kocherlakota, William Dudley, Charles Evans and Daniel Tarullo) talk down interest rate expectations as weak wage growth continues to cast a subdued outlook for inflation. The prepared remarks may undermine the bullish sentiment surrounding the greenback should the central bank officials highlight the ongoing slack in the real economy, while comments from central bank hawks Richard Fisher and Charles Plosser may largely be ignored as it seems as though the two will continue to be the lone dissenters in 2014.

AUD Hangs Hopes On US Dollar Exhaustion Amid Status-Quo RBA Bets

Fundamental Forecast for Australian Dollar: Neutral

• AUD/USD Recovers From Within Striking Distance Of 2014 Low
• Fundamental Backdrop Remains Unsupportive For Yield-Plays
• Hopes For A Recovery Hinge On Profit-Taking From USD Longs

AUD/USD faced another turbulent week with the currency staging a remarkable recovery after falling to within inches of its 2014 low. There was no shortage of intraday swings throughout the week on the back of surprises to local economic data. Yet follow-through proved difficult amid fairly well-anchored RBA policy bets.

Over the coming week local jobs data headlines the domestic economic docket. Despite last month’s bumper employment change print the Reserve Bank is unlikely to change its tune until more consistent progress is made in the local labour market. Alongside recent mixed domestic data the central bank is likely to reiterate its preference for a ‘period of stability’ for rates when it meets next week.

The stable rate outlook may leave the Aussie’s comparative yield advantage intact. Yet amid elevated implied volatility levels the ‘carry trade’ has become a much less attractive, and risky proposition. Moreover, the recent slide for risk-appetite benchmarks, including the S&P 500, indicates investors are seeking safety over yields. This in turn suggests the AUD may need to search elsewhere for a source of inspiration to generate a recovery.

While AUD/USD faces a less-than-supportive fundamental backdrop a consolidation for the pair should not be precluded. This is based on the prospect of profit-taking on US Dollar longs, which recently reached their highest on record according to COT futures data. After several strong successive weekly advances traders may be tempted to take some chips off the table.

From a technical standpoint, sellers are likely sitting at the psychologically-significant 90 US cent level, which could keep the currency capped over the near-term. Downside risks are centered on the 2014 low at 0.8660, which if broken may set the scene for a descent on the July ‘10 low at 0.8320.

Gold Eyes 2013 Lows Post NFPs- Fed Minutes in Focus

Fundamental Forecast for Gold: Bearish

• Gold Braces For A Bumpy Ride On NFP, Natural Gas Dives On Storage Data
• Gold Holding Up at 1206…1240 Next?

Gold prices are markedly lower this week with the precious metal off by more than 2.1% to trade at $1191 ahead of the New York close on Friday. The losses come on the back of a strong employment report with improving US data and continued strength in the greenback putting pressure on demand for the yellow metal.

Highlighting this week’s event risk was the release of the jobs report with The Bureau of Labor Statistics Non-Farm Payrolls report showing a gain of 248K jobs in the month of September. The data surpassed expectations for a print of just 215K and was accompanied by a surprise drop in the headline unemployment rate to 5.9% - marking the first sub-6% read since 2008. The data prompted renewed strength in the greenback with the Dow Jones FXCM USDOLLAR index pressing into fresh multi-year highs on speculation that the improving economic outlook may pressure the Federal Reserve to raise rates sooner than anticipated.

Looking ahead to next week, traders will be awaiting the release of the minutes from the September FOMC policy meeting on Wednesday. The latest committee meeting saw two dissenters for the first time since 2011 with the Dallas and Philadelphia Fed Presidents Richard Fisher & Charles Plosser opposing the central bank’s dovish forward guidance for monetary policy. Alongside the release next week will be a host of speeches by committee members and we’ll look further clues as to the possible timing and scope of rate hikes.

From a technical standpoint, gold continues to trade within the confines of a descending Andrew’s pitchfork off the March high with prices closing the week just above pitchfork support. Slight divergence has been identified in the daily momentum signature and while our broader outlook remains weighted to the short-side, near-term we’ll look for a reaction off this low. Bottom line- we’ll favor selling rallies while below the October opening range high at $1222 with a break of Friday’s low eyeing support objectives eyed at $1178/80 & $1151/60. A breach of the monthly high invalidates our bias with such a scenario targeting resistance at $1229 and the pitchfork bisector around $1243. Note that we are just opening up the October opening range and we’ll look for the break to offer further conviction on our medium-term directional bias.

S&P 500 forecast for the week of October 6, 2014, Technical Analysis

The S&P 500 fell during the majority of the week, but as you can see found enough support near the 1925 level to bounce and form a nice-looking hammer. The hammer of course suggests that the market is going to continue going higher, especially considering that it is sitting on top of a nice uptrend line. That being the case, we believe that this market will eventually hit the 2020 level again, and then ultimately break out above that level and go much higher levels. We have no interest in selling the S&P 500.

Gold forecast for the week of October 6, 2014, Technical Analysis

The gold markets fell initially during the course of the week, and then just kept driving lower. We managed to break down below the $1200 level during the Friday session, as the nonfarm payroll numbers came out much stronger than anticipated driving the value the US dollar higher. With that, the market should continue to go much lower, heading to the $1000 level. At this point time, this market is one that you can only sell, and we have no interest whatsoever in buying this market. With that being the case, we believe that gold will be hammered.

USD/JPY forecast for the week of October 6, 2014, Technical AnalysisThe USD/JPY pair fell to the 108 level during the course of the week, but then bounced enough to form a hammer. The hammer of course is a very bullish sign, and as a result we feel that this market is going to continue going higher. On top of that, the Bank of Japan continues its ultra-easy monetary policy, which of course will ring down the value of the Japanese yen overall. On the other side the Pacific, we have the Federal Reserve and the tightening of monetary policy via tapering off of quantitative easing, which of course should bring up the value the US dollar.

Ultimately, the US economy is doing better than most other economies, and the employment numbers coming out stronger than anticipated during the session on Friday of course helps too. With that, we believe that the US dollar will continue to strengthen against the Japanese yen, and that we will eventually break above the 110 level. This hammer is just simply the most recent sign that the market is ready to go higher, and we believe that we will eventually hit the 115 level.

Any pullback from here should continue to attract buyers, and we believe that the 105 level is the “floor” in this marketplace. Ultimately, the market will more than likely find buyers every time it falls based upon value, and we have no scenario right now where we would consider selling. Even if we fell below the 105 level, the truth is that there is so much noise underneath that level that we think it’s almost impossible to sell even down there.

We believe that the 115 level is the target by the end of the year, and judging by the way this market has moved recently, that could happen even quicker than that. We have no interest in selling because we recognize that money not only is flowing away from Japan, but it is also flowing into the US stock markets. Ultimately, this could be one of those career making trading situations as people simply buy-and-hold.