US Dollar Recovery Fighting Liquidity, Growth Headwinds
Fundamental Forecast for Dollar:Neutral
Remarks from Janet Yellen that she still expects a hike this year leveraged an uptick in core CPI and sent the USD higher
Key Dollar pairs (EURUSD, GBPUSD, USDJPY) start off at high profile levels with holiday liquidity and a view to GDP
See the 2Q forecast for the US Dollar and other key currencies in the DailyFX Trading Guides
There is little doubt in the market consensus that the Fed will be the first major central bank to hike rates, and that will maintain a long-term bid for the Dollar. Yet, in the interim, the particular timing of that launch can continue to cause wobbles for the Greenback. The past two months have been marked by consolidation and mild correction for the benchmark currency, while speculation over the fundamental and technical extent of the retreat has gathered volume. To end this past week, a well-timed combination of Fed Chairwoman Yellen commentary and an uptick in core inflation led to a strong rally to critical levels. Now sitting at the cusp of a revived bull trend and holiday-dampened liquidity conditions ahead, FX traders are looking ahead with a high level of anxiety.
Had we not experienced the Dollar’s strong push to close out the past week – moving it to a four-week high versus the Euro and four month high against the Yen – its standing would have already been impressive. The currency was already positioned for an impressive recovery with a three-day rally. Yet, with the combination of inflation data and carefully selected comments from the FOMC head, the FX market will spend the weekend on tenterhooks speculating whether a key breakout will be realized or rejected.
Under normal conditions, the biggest weekly rally in nearly two years (a 1.7 percent advance) would have proven strong support for the belief that the Dollar was returning to its bull trend. Yet, there are complications to this view. While the medium-to-long-term view for monetary policy, growth and haven appeal favor the Greenback; there are counterproductive pockets of speculation that can keep the ‘eventual’ view in the future and momentum sidelined.
Through market conditions, we have closed out an impressive week; but bulls have not yet crested the important hill. EURUSD has reached 1.1100, but not broken below. GBPUSD has returned to its critical 1.5500 border without marking the shift in control. USDJPY stands a 2015’s well-worn range highs – which also happen to be eight year highs. A decisive move to either break or reverse from these levels Monday is made difficult by the fact that there will be a drain on liquidity as the US, UK, Germany and Hong Kong will be offline for market holidays. A break would likely lead to disjointed volatility. A correction will be met with immediate skepticism.
Fundamentally, the charge for a recovery is hampered by the source of this most recent recovery. Yellen – like most of her colleagues – has attempted to be as clear as possible in her communication of monetary policy. They will not ‘pre-commit’ to decisions; but given current trends, it is likely that a hike is realized sometime this year. She carefully shaped this timeframe in her speech Friday. With Fed Fund futures still pricing a first hike out in January of next year, reinforcing a move sometime in 2015 can rouse the bulls. That said, it could be December rather than September. And, the CPI data that reinforced her bearing is similarly non-committal. Core inflation did tick up – and has slowly built support alongside wages these past months. However, it isn’t imminent.
In the week ahead, there are plenty of indicators and Fed speeches on the docket. Yet, few of them really hit the high-profile level that we would expect to single-handedly benchmark the timing for the first rate hike. One indicator in particular that should be kept on our radar is Friday’s 1Q GDP update. This is a revision, which most people would write off. However, given how fine the consideration for a data-dependent policy move is; a meaningful adjustment can trigger a sizeable response.
EUR/USD Rally Checked by ECB Commentary, Better US Data
Fundamental Forecast for Euro:Neutral
- EURUSD fell back to an important technical level of support by mid-week…
- …and eventually continued lower after the first blush dovish FOMC minutes.
- Have a bullish (or bearish) bias on the Euro, but don’t know which pair to use? Use a Euro currency basket.
It was a very rough week for the Euro right from the get-go, as the 18-member currency wiped out all of its gains versus the US Dollar that had accumulated over the prior three-weeks. EURUSD plunged by -3.82% to $1.1008; EURJPY slipped by -1.98% to ¥133.76; and EURGBP fell by -2.28% to £0.7103. The main source of bullishness for the Euro – rising German yields – was abruptly removed from the equation by mid-week, when ECB Vice-President Benoît Coeuré said that the central bank would increase its pace of bond-buying in the short-run in order to balance out the lack of liquidity in markets (thereby making it more difficult for the ECB to achieve its monetary policy goals) in July and August.
In a sense, the ECB’s QE-driven trade – via the portfolio rebalancing channel effect – is dictating asset performances across the risk spectrum. In tandem, European sovereign yields are falling, the Euro is depreciating, and European equity markets are rallying. Investors are front-running the ECB by buying bonds and seeking riskier assets in the process; lower fixed income yields amid recently elevated inflation expectations dictates the need to seek out higher returns along the risk spectrum.
The ECB’s abrupt change of plans is coinciding with the beginning of a shift in US economic data momentum, which more or less has coalesced into the ideal environment for EURUSD declines. After weeks of disappointing economic data – unseasonably weak, even – the US economy has started to see patches of good data. Although the April FOMC minutes initially sparked some downside in the US Dollar, traders have quickly refocused to data released in the interim period since the last FOMC meeting: April US labor market data rebounding back towards its 12-month trend; and April US Housing Starts surging by over +20% to the highest level since November 2007.
The moment for EURUSD to stage a continued, meaningful rally may be behind us at present. While Greece is still a lingering backburner issue, its lack of impact on markets is a reflection of the lack of serious progress or erosion made with respect towards a long-term debt deal; traders have been lulled into a state of complacency and boredom. In turn, this means that Greece’s future potential as a catalyst is limited to explosive tail-risk scenarios only – markets simply don’t care for better or for worse.
If Greece does take a turn for the worse, which is possible with senior Greek government officials pledging to stick to their pre-election platform promises which run contrary to what Greece’s creditors want, there may be significant room for EURUSD to fall further. The market is no longer overcrowded in a short EURUSD position, with EUR speculative short positions having fallen for four straight weeks, and USD speculative long positions having risen for eight straight weeks. The short covering rally period has passed, and it will be easy for EURUSD to achieve further downside levels with so many traders now on the sidelines. –CV
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USDJPY Stands at 2015 High With Fed and BoJ Policy in the Forefront
Fundamental Forecast for Euro:Neutral
The near-term breakout in USD/JPY raises the risk for a run at the 2015 high (122.01), but the fundamental developments coming out of the world’s largest economy may undermine the bullish outlook surrounding the exchange rate should we see a growing number of Fed officials show a greater willingness to further delay the normalization cycle.
Speculation surrounding the Fed policy outlook may play an increased role in driving dollar-yen volatility as the Bank of Japan (BoJ) preserves a wait-and-see approach, and another series of dismal U.S. data prints may drag on interest expectations as the Federal Open Market Committee (FOMC) Minutes show a greater willingness to retain the zero-interest rate policy (ZIRP) beyond mid-2015. The preliminary 1Q U.S. Gross Domestic Product (GDP) report will be in focus going into the last full-week of May, and the updated print may dampen the appeal of the greenback as market participants anticipate a 0.9% contraction in the growth rate versus an initial forecast for a 0.2% expansion.
A marked downward revision in 1Q GDP may encourage the Fed to retain the ZIRP for an extended period of time, and we may see a growing number of central bank officials adopt a more dovish tone should the weakness from the beginning of the year carry into coming quarters. With FOMC voting-members Stanley Fischer, Jeffrey Lacker and John Williams scheduled to speak next week, the fresh batch of rhetoric may ultimately spur a near-term pullback in USD/JPY should the policymakers talk down bets for a September rate hike.
Nevertheless, the technical outlook highlights the risk for a test of the 2015 high as USD/JPY breaks out of the near-term range, and a more bullish formation may take shape in the days ahead should the U.S. developments highlight an improved outlook for the U.S. economy and beat market expectations.
GBP/USD Rally to Benefit from Sticky UK CPI, Rebound in Retail Sales
Fundamental Forecast for British Pound:Bullish
The near-term advance in GBP/USD may gather pace in the week ahead should the fundamental developments coming out of the U.K. economy put increased pressure on the Bank of England (BoE) to normalize monetary policy sooner rather than later.
The BoE looks poised to carry its current policy into the second-half of 2015 as the board narrows its 2015-17 growth forecast, but it seems as though the central bank remains on course to switch gears over the medium-term as Governor Mark Carney continues to prepare households and businesses for higher borrowing-costs. Despite the more neutral tone laid out in the BoE’s quarterly inflation report (QIR), stickiness in the core U.K. Consumer Price Index (CPI) paired with a rebound in Retail Sales may encourage an improved outlook for the region, and the central bank’s policy meeting minutes may reveal a growing dissent within the Monetary Policy Committee (MPC) as the economy gets on a firmer footing.
At the same time, fresh comments from MPC members Martin Weale and Nemat Shafik may also heighten the appeal of the British Pound amid the growing consensus that ‘the most likely next move in monetary policy will be a gradual and limited increase in interest rates.’ The monetary policy outlook may pave the way for a larger advance in the exchange rate as the ongoing series of weaker-than-expected U.S. data raises the risk for a further delay in the Fed’s normalization cycle and tightens the race for higher rates with the BoE.
In turn, GBP/USD may continue to retrace the decline from July 2014 as market participants push back expectations for a Fed rate hike, and positive developments coming out of the U.K. may heighten the near-term bullish sentiment surrounding the sterling as the BoE retains a hawkish forward-guidance for monetary policy.
Gold Outlook Remains Supportive Above 1200- All Eyes on FOMC, GDP
Fundamental Forecast for Gold:Neutral
Gold prices are softer going into the final full week of May, with the precious metal off by more than 1.5% to trade at 1203 ahead of the New York close on Friday. The decline comes amid a sharp rebound in the greenback with the Dow Jones FXCM U.S. Dollar Index (Ticker:USDOLLAR) rallying more than 1.6% to snap a 5-week losing streak. Despite this week’s lackluster performance, gold has continued to hold above technical support and the broader outlook remains constructive while above 1200.
Although the U.S. dollar showed a bullish reaction to the U.S. Consumer Price Index on Friday, the ongoing contraction in the headline reading and the lack of growth in the core rate of inflation may push the Fed to preserve the zero interest rate policy well into the second half of 2015. The committee has stated that conditions need to be in place for the central bank to meet the 2% inflation target before moving the benchmark interest rate amid the ongoing slack in the real economy.
Gold prices have largely reacted favorably to poor U.S. metrics as of late (and vice versa) as markets attempt to gauge the timing & pace of the Fed’s normalization cycle. As such, market dynamics may encourage positive U.S. data to dampen the appeal of the precious metal going into the U.S. event risks scheduled for the days ahead.
Fed speeches, Durable Goods Orders, Consumer Confidence & the second read on 1Q GDP will be in focus ahead into the end of May. Consensus estimates are calling for a downward revision to the initial forecast with expectations now projecting an annualized 0.9% contraction in the growth rate. The print would mark the first negative print since the 1Q of 2014, and a weaker-than-expected read could further kick out interest rate expectations as the FOMC Minutes revealed a June 17th interest rate hike is ‘unlikely.’
From a technical standpoint, gold is hovering just above key support into 1200 where the initial monthly opening range high converges on the lower median-line parallel extending off the yearly low. We will reserve this region as our bullish invalidation level with a break below targeting putting into focus support targets at 1187 & 1176. Resistance is eyed with the 200 day moving average at 1215 backed by 1225. A breach above this threshold keeps the long-bias in play targeting the upper median-line parallel / 1244/46. Note that a multi-month momentum support trigger remains in play off the March lows – break would be bearish.
Swiss Franc Opportunities Seen Beyond Breakneck Volatility
Fundamental Forecast for Swiss Franc: Neutral
SNB Shocker Fuels Highest Swiss Franc Volatility vs. Euro Since 1975
Sharp Counter-Swing Seen Ahead if ECB Delays Launching QE Effort
Buying US Dollar vs. Franc Attractive After Post-SNB Turmoil Settles
The most adept of wordsmiths might be forgiven for struggling to find an adjective strong enough to describe last week’s Swiss Franc price action. A quantitative description is perhaps most apt: realized weekly EURCHF volatility jumped to the highest level since at least 1975, swelling to nearly 2.5 times its previous peak.
The surge was triggered after the Swiss National Bank unexpectedly scrapped its three-year-old Swiss Franc cap of 1.20 against the Euro, saying the “exceptional and temporary measure…is no longer justified.” Appropriately enough, the previous historical peak in weekly EURCHF activity occurred in September 2011 when the Franc cap appeared as suddenly as it vanished. Then too, the SNB acted without warning and sent markets scrambling.
The announcement caught the collective FX space by surprise. Even the world’s top international economic bodies were apparently left in the dark. IMF Managing Director Christine Lagarde quipped that she found it “a bit surprising” that SNB President Thomas Jordan did not inform her of the impending move. “Talking about it would be good,” she added.St. Louis Fed President Jim Bullard hinted the US central bank was not notified either.
The go-to explanation for the SNB’s actions centers around bets that the ECB will unveil a “sovereign QE” program following its policy meeting on January 22. Mario Draghi and company finally secured a green light for large-scale purchases of government debt after the ECJ gave clearance to the similar OMT scheme devised (but never used) to battle the debt crisis in 2012. The SNB presumably scrapped the Franc cap to avoid having to keep pace with the ECB’s efforts.
Another wave of Franc volatility may be ahead next week. While markets seem all the more convinced that an ECB QE announcement is in the cards after the SNB’s about-face maneuver, a delay in the program’s implementation (if not its formulation) is entirely plausible. Securing the acquiescence of anti-QE advocates like Germany to having such an effort in the arsenal is not the same as launching it. The ECB may yet opt to wait through the end of the first quarter as it has hinted previously before pulling the trigger, sending the Euro sharply higher.
Measuring the fallout from the SNB’s actions is likely to be protracted. The full breadth of the various ripple effects will probably emerge over weeks and months, not hours and days. The Franc now looks gravely overvalued against currencies whose central banks are set to tighten policy this year, with the US Dollar standing out as particularly notable. It seems prudent to let the dust settle before taking advantage of such opportunities however.
Australian Dollar Recovery May Resume After US-Linked Interlude
Fundamental Forecast for the Australian Dollar: Neutral
Jitters Ahead of Key US News Undermined Aussie Recovery Last Week
Fading RBA Rate Cut Bets, US GDP Revision May Reboot AUD Gains
Find Key Inflection Points for the Australian Dollar with DailyFX SSI
The Australian Dollar turned lower last week, breaking the win streak against its US counterpart established in early April. As we suspected, the move appeared to reflect repositioning ahead of the release of minutes from last month’s FOMC meeting and April’s CPI report.
Tellingly, supportive comments from RBA Deputy Governor Lowe as well as minutes from May’s RBA meeting failed to underpin the Aussie despite implying that the central bank is in no hurry to cut interest rates further. Meanwhile, the greenback launched a broad-based recovery against all of its top counterparts including AUD, presumably amid bargain-hunting after five consecutive weeks of losses on the off-chance that either FOMC rhetoric or a pop in price growth might fuel rebuilding Fed rate hike speculation.
As it happened, the greenback lost momentum once event risk passed. The Fed minutes’ explicit unwillingness to dismiss the June FOMC meeting as a possible time to raise rates sounded hawkish compared with priced-in market expectations pointing toward tightening late in the fourth quarter. Still, the markets cut short the greenback’s recovery once the coast cleared for continued profit-taking on pro-USD positions that began after speculative net-long exposure hit a record high in March.
The stock of formative event risk looks relatively thin in the week ahead. Australia’s data docket doesn’t seem to feature anything capable of meaningfully derailing the evolution of RBA policy bets, where the path of least resistance favors a shift from dovish end of the spectrum toward a more neutral setting. Similarly, a US calendar shortened by the Memorial Day holiday is populated with primarily second-tier releases.
A revised set of first-quarter US GDP figures expected to bring a sharp downward revision marks a break in the monotony. The report is expected to show that output shrank 0.9 percent in the first three months of the year, marking a stark contrast with the already sub-par 0.2 percent increase initially reported. While the BEA last week acknowledged a “residual seasonality” distortion that has produced unduly soft first-quarter GDP readings for some years, the admission won’t mean dismal readings boost Fed tightening (it will perhaps just limit negative fallout for USD).
On balance, this seems to suggest that after last week’s respite, the broad-based counter trend reversal playing out across the G10 FX space in the second quarter may resume. The Aussie is set to resume its recovery in such a scenario as the range of anti-USD majors retrace, waiting for Janet Yellen and company to signal the onset of stimulus withdrawal so explicitly as to reboot the benchmark currency’s long-term advance. The mid-June meeting still seems like the time to do so, but there is ample time left in the interim.
New Zealand Dollar Looks to 4Q GDP, FOMC Outcome for Direction
Fundamental Forecast for the New Zealand Dollar: Neutral
New Zealand Dollar May Fall if Weak 4Q GDP Fuels RBNZ Rate Cut Bets
FOMC Meeting Outcome to Influence NZ Dollar via Risk Sentiment Trends
Identify Key Turning Points for the New Zealand Dollar with DailyFX SSI
The New Zealand Dollar managed to find support against its US counterpart after the RBNZ signaled it was in no hurry to cut interest rates at its monetary policy meeting. Governor Graeme Wheeler highlighted a range of factors underpinning strong economic growth and dismissed soft inflation readings in the near term as largely reflective of the transitory impact of oil prices. Speaking directly to the benchmark lending rate, Wheeler projected “a period of stability” ahead.
Still, the familiar refrainwarning that “future interest rate adjustments, either up or down, will depend on the emerging flow of economic data” was repeated. This makes for a news-sensitive environment going forward as markets attempt to divine the central bank’s likely trajectory alongside policymakers themselves. With that in mind, all eyes will be on the fourth-quarter GDP data set in the week ahead.
Output is expected to increase by 0.8 percent, an outcome in line with the trend average. On balance, that means a print in line with expectations is unlikely to drive a meaningful re-pricing of policy bets and thereby have little impact on the Kiwi. New Zealand economic data outcomes have increasingly underperformed relative to consensus forecast since January however. That suggests analysts are over-estimating the economy’s momentum, opening the door for a downside surprise. In this scenario, building interest rate hike speculation may push the currency downward.
The external landscape is likewise a factor. A significant correlation between NZDUSD and the S&P 500 (0.52 on 20-day percent change studies) hints the currency is sensitive to broad-based sentiment trends. That will come into play as the Federal Reserve delivers the outcome of the FOMC policy meeting, this time accompanying the statement with an updated set of economic forecasts and a press conference from Chair Janet Yellen. Fed tightening fears have proven to be a potent catalyst for risk aversion since the beginning of the month. That means a hawkish tone is likely to sink the Kiwi, while a dovish one may offer the currency a lift.