Dollar Goes for a Nine-Month Rally with Fed Talk and NFPs on Tap
Fundamental Forecast for Dollar:Bullish
NFPs are scheduled for release on Good Friday – key event risk stirring a key trend on a low liquidity day
After Yellen’s remarks, the focus intensifies on Fed timing with FF futures still dovish but swaps hawkish
Sign up for a free trial of DailyFX-Plus to have access to Trading Q&A's, trading signals and much more!
The Dollar came dangerously close to a nasty speculative spill this past week. While the medium-term fundamental picture supports the currency’s progress over its counterparts, there is enough evidence that the market has ran beyond its quantifiable advantage and is therby exposed to a rebalance. However, it seems to realize a correction in the Dollar’s incredible run, their needs to be a more motivated thrust for profit taking. Soon to close out a record nine consecutive month rally (on the ICE Dollar Index), we face a market more sensitive to week-to-week event risk and a docket that can strike exposed nerves.
Not all market movement must have an academic, fundamental reasoning. In a market derived from a variety of views and objectives, irrationality is unavoidable and pure speculative shifts is inevitable. Therein lies the Dollar’s greatest risk. It has plenty of theortecal advantages it can fall back on for its bullish bearing. Yet, it’s exceptional one-way drive has drawn in more than just the interest rate watchers. Speculators looking to ‘ride the wave’ have different mandates and risk profiles. They act on technical levels, hold no commitment to the long-term and are ready to bail when their profit draws down. For that reason, the distinct trend channel the Dow Jones FXCM Dollar Index (ticker = USDollar) has carved out in its impressive run looks like a moving cliff. Slipping into a dense nest of stops and short entry orders can result in the same tumble as a particularly bad piece of event risk.
With a ‘trader’s’ mentality in mind, bulls head into the new trading week with a little more breathing room. Fed Chairwoman Janet Yellen lended support to to the run in her Friday afternoon speech. As is her method, she offered enough balance to her comments to feed both a dove’s and a hawk’s convictions on where monetary policy is heading. Though potentially interpretive, Yellen remarked that they should not wait until they have returned to the 2 percent inflation target before they move. Given it takes time for policy to filter into the economy, that makes sense. However, from an investor’s perspective, this fits a concerted effort made by the central bank to ready the market for the inevitable – with heavy insinuation that it can happen earlier than many expect.
Indeed, when we look at what the market’s expectations for pricing in monetary policy paths, it is clear that there is plenty of room for adjustment on both sides. The Dollar is perhaps one of the most hawkish reflecting instruments, but that may be due in part to its exceptionally dovish counterparts (particularly the BoJ and ECB). On the other end of the spectrum, we find Fed Fund futures – specifically tailored to hedging rate forecasts – pricing the first hike way out into November and no follow up until March/April of next year. This is enough skepticism in the market that a steady march to mearly meet what is the consensus amongst analysts, economists and primary dealers can generate further Dollar gains.
After the FOMC rate decision two weeks ago and Yellen’s remarks this past week, it is clear that the first hike is increasingly data dependent. That will emphasize the importance of significant fundamental developments in the rates picture. In the register of event risk, few items will outshine the BLS labor conditions report for influence. That said, the March update is due on Friday (Good Friday). From this data though, the wage growth report should be paid specific attention. This is the connection between labor growth and inflation. And, on the topic of inflation, the Fed’s preferred reading – the PCE deflator – is due on Monday. And, between those two high profile book ends, we have no fewer than 10 Fed speeches scheduled. This should be an interesting, speculative week.
Euro Relief Rally May Hit Wall as Market Refocuses on EZ CPI, US NFPs
Fundamental Forecast for Euro: Neutral
- The Euro has seen moderately higher prices in recent days, but the longer-term outlook remains bearish.
- EURUSD traded into a key resistance level, and now the US Dollar may be searching for a bottom post-FOMC.
- Have a bullish (or bearish) bias on the Euro, but don’t know which pair to use? Use a Euro currency basket.
Continued general improvement in Euro-Zone data and a further build of commercial long positioning (now an all-time high of 271.9K net-long contracts) helped buoy Euro exchange rates for a second straight week, although the turn of the calendar from March into April may prove to be more difficult than days past. EURUSD rallied by +0.62% to close last week at $1.0885 and EURGBP jumped by +1.09% to £0.7321, yet both major EUR-crosses settled considerably lower than their high watermarks for the week ($1.1052 and £0.7385 respectively).
In the days ahead, the market has a chance to refocus its attention on two of the major drivers of Euro weakness in 2015: persistently low inflation in the Euro-Zone; and the sustained improvement in the US labor market that is driving a wedge between ECB and Fed policy expectations. On Tuesday, the March Euro-Zone CPI report will be released, where the CPI Estimate is due at -0.1% y/y from -0.3% y/y, and the CPI Core is expected at +0.7% y/y unch. On Friday, the March US Nonfarm Payrolls report is forecast to see job gains of +250K, the thirteenth consecutive month of at least +200K jobs growth in the world’s largest economy.
In a holiday shortened week, these data reports represent the two most obvious landmines to EURUSD traders. The propensity for these reports to impact the market is high despite the potential for diminished liquidity, as speculators have embraced the most bearish view of the Euro on record, having 221.K net-short contracts on the books for the week ended March 24, eclipsing the previous all-time high of 214.4K net-shorts set during the week ended June 5, 2012. Whereas Euro speculative shorts have grown in tandem with commercial longs digging in, speculative traders in the futures market have relinquished the aggressive bullish US Dollar view: Dollar Index (DXY) net-longs contracted by -10.7% to 71.2K contracts.
If EURUSD is to fall back, then, it will need to be due to a combination of soft Euro-Zone CPI data and strong US labor market data – not either/or, but both. Market measures of inflation expectations have steadied, but not by much: the 5-year, 5-year inflation swaps (FWISEU55) ended the week at 1.649%, just below the four-week/20-day average of 1.709%. The recent dip in inflation expectations (1.760% on March 20) can be attributed to the recent relief rally in the Euro, as data otherwise remains relatively strong.
The Citi Economic Surprise Index for the Euro-Zone hit +52.1 at the end of the past week, up from +40.2 from a week earlier. Euro-Zone data has been outpacing US data at its best clip in nearly four and a half years. Markets haven’t priced in the improved Euro-Zone data as a batch that would materially change the pace of ECB easing, however: Morgan Stanley’s ‘months to first rate hike’ index (MSM1KEEU) resides at 45.5 suggesting a December 2018 rate hike.
Overall, the big picture for the Euro remains unchanged, even as it continues to take shape: rising inflation expectations coupled with falling nominal bond yields means prospective real yields are being reduced, fueling the need for investors to search for yield outside of the region; this should accelerate capital outflows as Euros are exchanged for other currencies to as to invest in foreign assets. The time for this view to come back into focus may be nearing, as investors get a first-hand look at the policy differential between the ECB and the Fed with the data due in the days ahead. –CV
To receive reports from this analyst, sign up for Christopher’s distribution list.
USD/JPY Holds 118.20 Support Ahead of Fed Rhetoric, NFP Report
Fundamental Forecast for Japanese Yen: Neutral
The fundamental developments coming out of the U.S. economy may continue to undermine the long-term bullish outlook for USD/JPY as recent headlines point to a growing dissent within the Federal Open Market Committee (FOMC).
At the same time, capital flows will also be closely monitored as Japan kicks off its 2015 fiscal-year, but the fresh batch of Fed rhetoric may largely dictate dollar-yen price action going into April especially as the Bank of Japan (BoJ) endorses a wait-and-see approach for monetary policy.
With a slew of Fed officials (Stanley Fischer, Jeffrey Lacker, Dennis Lockhart, Loretta Mester, Esther George, John Williams Janet Yellen, Lael Brainard and Narayana Kocherlakota) scheduled to speak next week, the new commentary may highlight a further delay in the normalization cycle as an increasing number of central bank officials see scope to retain the zero-interest rate policy beyond mid-2015. As a result, a further deterioration in interest rate expectations may trigger another test of near-term support around 118.20 (61.8% retracement), and USD/JPY may continue to congest ahead of the second-half of the year as the central bank remains in no rush to normalize monetary policy.
Nevertheless, the U.S. Non-Farm Payrolls (NFP) report may generate a bullish reaction in dollar-yen as market participants anticipate another 250K expansion in employment, while the jobless rate is projected to hold at an annualized 5.5% - the lowest reading since May 2008. However, another unexpected downtick in Average Hourly Earnings may drag on the greenback as Fed Chair Yellen highlights a cautious stance on the economy, especially as the central bank struggles to achieve the 2% target for inflation.
With that said, the 118.20 (61.8% retracement) support zone will be closely watched going into the week ahead, and the pair remains vulnerable for a further decline as it continues to carve a series of lower-highs. In turn, a failure to preserve the March low (118.32) may open the door for a move back towards the 117.15 region (78.6% expansion) should the key event risks dampen bets for a mid-2015 Fed rate hike.
British Pound Forecast to Fall Further Across the Board
Fundamental Forecast for British Pound: Bearish
The British Pound fell for the third week of the past four versus the US Dollar, hurt by disappointing economic data and generally dour trading sentiment. Traders could push the Sterling to fresh lows on a key week ahead for the US Dollar and other currencies.
A relatively quiet week for UK economic event risk will keep traders focused on key event risk out of the United States and continental Europe. Yet any important surprises in final revisions to Q4, 2014 Gross Domestic Product growth figures could force GBP-led moves through Tuesday. Larger GBP/USD volatility nonetheless seems more likely on upcoming US Nonfarm Payrolls figures as the US Dollar itself remains volatile.
Interest rates remain the main driver of British Pound moves, and a disappointing UK Consumer Price Index inflation report sent domestic yields and the GBP noticeably lower. Traders had previously sent the British Pound and US Dollar higher versus major counterparts as the Bank of England and US Federal Reserve were the only central banks within the G10 expected to raise interest rates in 2015. Yet a significant correction in GBP/USD yield differentials helps explain recent Sterling underperformance, and it’s difficult to envision a meaningful recovery in BoE yield expectations through the foreseeable future.
Political uncertainty further clouds outlook for the British Pound with UK elections due through early May. FX options traders are clearly bracing for the political risks as GBP/USD volatility prices jump to their highest since the Scottish referendum. Traders remain skittish, and recent CFTC Commitment of Traders data showed that large speculators increased their net-short GBP position for the third-consecutive week.
The British Pound remains at risk ahead of a key week for the US Dollar, and it may take a substantial shift in trader sentiment to force a meaningful GBP recovery.
Gold Stretches Into Key Resistance - April Outlook Hinges on Fed, NFP
Fundamental Forecast for Gold:Neutral
Gold prices are higher for a second consecutive week with the precious metal advancing 1.48% to trade at 1199 ahead of the New York close on Friday. The advance amid a broader risk sell-off as mixed Fed rhetoric & rising geopolitical risks in the Middle East spurred demand for the yellow metal. Although the immediate rally in gold may is vulnerable here (+5% off the monthly low), the recovery remains in focus after last week’s key reversal off critical long-term support.
Looking into next week, all eyes turn to the US Non-Farm Payroll (NFP) report with consensus estimates calling for a 250K print for the month March as unemployment holds steady at 5.5%. Note that this would be the 13th consecutive month of 200+K gains as the jobless rate stands at the lowest level since 2008. However, another dismal wage growth figure may become a growing concern for the Fed and undermine expectations for a mid-2015 rate hike as the central bank struggles to achieve the 2% inflation target. As a result, the slew of Fed rhetoric lined up for the days ahead may continue to highlight the risk for a further delay of the normalization process, which could dampen the appeal of the greenback and spur greater demand for bullion.
From a technical standpoint, gold spiked into a key median-line resistance dating back to September at 1219 before reversing sharply back into the former resistance noted last week, now support, at 1196/98. The trade is vulnerable for a pullback early next week but the bias remains constructive while above the 1167/72 barrier where the 61.8% retracement of the advance converges with a former resistance line off the 2015 high (bullish invalidation). That said, key near-term resistance remains with the March opening range high / ML resistance noted earlier at 1219/23- with a breach above targeting the 200-day moving average at 1238 backed by key resistance at 1245/48. Note that the daily momentum signature has not topped 60 since the January high and a hold below this RSI level puts the long-side at risk heading into to the start April trade. A breach through alongside a move surpassing 1225 reaffirms a broader correction here for the yellow metal.
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 at the Mercy of Risk Trends on Greece, Fed Outlook
Fundamental Forecast for Australian Dollar: Neutral
Aussie Dollar May Rise as Greece, Creditors Strike Bailout Funding Deal
Firming Fed Rate Hike Bets May Cap Aussie Gains on Firm US Jobs Data
Identify Critical Turning Points for the Australian Dollar with DailyFX SSI
Continued quiet on the domestic front is likely to see external forces as the dominant driver of Australian Dollar price action in the week ahead. The currency’s correlation with the MSCI World Stock Index has jumped to 0.68 (on 20-day percent-change correlation studies), the highest since November 2013. That points to an acute sensitivity to market-wide sentiment trends, warning that the breakout of risk aversion will send the Aussie lower while a pickup in investors’ mood will deliver the opposite result.
The spotlight initially falls on Greece. The government submitted a list of proposed reforms that it hopes will unlock the next round of bailout funding on Friday. The so-called “institutions” representing Greece’s creditors – the EU, the ECB and the IMF – will evaluate the plan over the weekend, with a decision expected on Monday. Athens faces €5.8 billion in maturing debt this month in addition to the on-going expense of running the country.
Investors fear that if external funding is not secured, a cash crunch and subsequent default may lead to the country’s exit from the Eurozone. Such an outcome would be unprecedented, carrying with as-yet unknown implications for the financial markets at large. Avoiding that trajectory with an accord that keeps Greece within the currency bloc is likely to prove supportive for risk appetite as well as the Aussie Dollar. Needless to say, failing to reach a deal stands to produce the opposite response.
Both sides of the negotiation are ultimately interested in a deal. Greek Prime Minister Alexis Tsipras and company surely realize that sticking to their campaign promise of ending austerity at the cost of disorderly redenomination will probably compound the country’s economic woes and likely cost them their jobs. Meanwhile, EU and IMF officials no doubt prefer to avoid a “Grexit” scenario for fear of the precedent it may establish, particularly in larger countries with strong anti-austerity movements such as Spain. On balance, this means that some kind of accommodation is probably more likely than not.
Thereafter, Federal Reserve monetary policy expectations return to the forefront. The week ahead will deliver a slew of high-profile economic data releases culminating in the March edition of the Employment report. The economy is expected to add 248,000 jobs while the unemployment rate is seen holding at 5.5 percent, a level broadly associated with “full employment” (a level such that reducing joblessness further would pressure inflation upward).
US labor-market data has bucked the trend of otherwise lackluster news-flow relative to expectations over recent months. Another upside surprise may rekindle bets that the Fed may move to raise rates by mid-year. The prospect of relatively sooner stimulus withdrawal is likely to weigh on sentiment considering the formative role of QE-linked funding in supporting risky assets in the years since the 2008-9 crisis. That means an upbeat payrolls reading stands to hurt the Aussie, and vice versa.
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.