US Dollar Volatility Near-Guaranteed, but Which Direction?
Fundamental Forecast for Dollar: Neutral
It was a difficult week for traders as the initial US Dollar breakdown left many (including us) looking for further losses. The Euro/US Dollar first saw its largest three-day advance in six years, but instead of continuing higher it subsequently posted its largest three-day decline since 2011. Such choppy price action made it near impossible to keep any real conviction in market direction or a lasting trading bias. A big week of economic event risk and the new month may nonetheless add clarity for the US Dollar and broader financial markets.
Traders should first watch for any surprises out of a highly-anticipated central banker symposium in Jackson Hole, Wyoming. US Federal Reserve Vice Chair Stanley Fischer will deliver a speech on inflation on Saturday, while Bank of England Governor Mark Carney and European Central Bank Vice President Vitor Constancio will also issue statements at the annual summit.
The critical question remains whether the US Federal Reserve will raise interest rates at its September meeting, and Fischer’s commentary will draw special scrutiny as US Dollar traders attempt to anticipate the Fed’s next moves. It was only two weeks ago that interest rate futures predicted a 60 percent chance of a September hike. Yet those same futures now show an implied 40 percent probability—a big reason why many traders may have rushed for the exits on their Dollar trades.
The next big question is how major global central banks will react to the recent bout of financial market volatility. To that end we’ll watch planned commentary from the BoE’s Carney and the ECB’s Constancio for clues on potential policy responses. We should also note that unplanned comments from other major central bank officials at the summit could likewise force big moves in key assets.
Beyond Jackson Hole, markets will turn to highly market-moving US Nonfarm Payrolls data on Friday for the next clues on US Federal Reserve interest rate moves. The US central bank is fairly unique as its mandate states it must pursue policies of maximum employment while controlling inflation. Recent market volatility and potential knock-on risks to global growth may already make Fed officials less likely to raise rates. But a disappointing US labor market report could sound the death knell for the possibility of a September rate hike.
The possibility of major surprises from global central bankers or US NFPs has pushed 1-week FX volatility prices near multi-month peaks, and the next several days promise to force meaningful shifts across financial markets. The fact that the Euro rallied and the Dollar tumbled as the S&P 500 sold off led many to claim the Euro was a new “safe-haven” currency. We think the opposite is true, but any renewed market turmoil could in fact lead more traders to dump USD-long positions and force Euro rallies. It will be critical to watch how markets open the week and begin trading into the first days of the new month.
EUR/USD August Advance to Unravel Further on Dovish ECB, Upbeat NFP
Fundamental Forecast for Euro:Bearish
The sharp pullback in EUR/USD may gather pace in the week ahead should the European Central Bank (ECB) signal a further expansion of monetary policy, while another 200K+ U.S. Non-Farm Payrolls (NFP) print may boost expectations for a September Fed rate hike as the committee largely retains an upbeat outlook for the world’s largest economy.
Even though the ECB is widely expected to retain its current policy at the September 3rd meeting, the Governing Council may show a greater willingness to expand/extend the scope of its quantitative easing (QE) program as the slowdown in global growth accompanied by the renewed decline in energy prices dampens the central bank’s scope to achieve its one and only mandate to achieve price stability. As a result, a more dovish statement delivered by ECB President Mario Draghi may fuel speculation for additional monetary support, and the Euro remains at risk giving back the advance from late-July should they key developments highlight a growing deviation in the policy outlook.
With only so much data prints remaining ahead of the Fed’s rate decision, the August NFP report may play an increased role in shaping market expectations, and a further expansion in U.S. job growth paired with a downtick in the unemployment rate may boost bets for a rate hike as Fed Vice-Chair Stanley Fischer argues that September remains on the table for liftoff. However, recent comments from New York Fed President William Dudley appears to be highlighting a growing dissent within the committee as the permanent voting-member sees a ‘less compelling’ case of higher borrowing-costs, and the fundamental developments due out in the coming days may set the near-term outlook for EUR/USD as the central bank remains ‘data dependent.’
In turn, the key event risk due out next week may produce a further decline in the euro-dollar, and signs of a greater divergence in the monetary policy outlook may ultimately produce a resumption of the long-term downward trend should the Fed remains on course to remove the zero-interest rate policy (ZIRP). Moreover, the euro-dollar may continue to give back the advance from late-July amid the recent series of lower highs & lows in the exchange rate along with the failure to hold above former resistance around 1.1180 (23.6% expansion) to 1.1210 (61.8% retracement).
JPY Bulls Brace for BOJs Next Bailout
Fundamental Forecast for Yen:Bearish
JPY saw its biggest rally vs. the USD since 2009 throughout this week’s early market turmoil. However, given the central bank stimulus of the 2011 - 2014 move from 75.552 to as high as 125.85, many Yen bears are increasing expectations that the Bank of Japan will come to the rescue once again in order to push JPY lower and USDJPY through resistance. While the risk of sentiment was seen everywhere from the close of last week to the open of this week, what may have been more impressive so far was the rebound.
Monday’s low of 116.07 is yet to be tested. The drop was the strongest Yen move seen in five years as price collapsed from the weekly open of 121.878. Monday’s sell-off earned the moniker, ‘Black Monday’. However, it was met with Turnaround Tuesday, at least in FX. The turnaround point was highlighted as support as per our Volume at Price Indicator.
The rebound on Tuesday through Friday was equally impressive as price on Thursday afternoon came within 60 pips of the weekly high. Equity markets showed an even more impressive rebound bringing to mind the recent October 15, 2014 ‘mini-flash crash’ low, which was followed by new highs. Given the four year bull market in USDJPY and six your bull market in equities, which are highly correlated to USDJPY, it’s understandable that many are wondering if another new multi-decade high is around the corner. Speaking of rebound, as of the time of writing, SPX 500 is now up on the week as well as the Nikkei 225.
From a Fundamental perspective, domestic data for Japan seems to be in line with economists’ expectations although a bit disappointing with the Bank of Japan’s own forecasts given their market support. Currently, external factors could be what forces Abe’s hand for additional support. This week saw Japan July national CPI come in as expected at 0.2% YoY, some were wondering if we would get a negative print due to the commodities depression, but that did not materialize.
Additionally, Bank of Japan presidentKuroda frustrated those hoping for immediate BoJ action by sticking to a hawkish tone in regarding economic developments, but his statements had little positive impact on JPY. The market’s reaction or lack thereof on Kuroda’s speech hints that JPY may remain focused on external asset market moves. Next week hosts a series of tier 1 data points from Japan such as Industrial Production on the 30th, Finalized Manufacturing PMI for August, YoY CapEX, and Yoy Monetary Base. However, as mentioned earlier, eyes will likely be directional bias in global asset markets.
Sterling Runs into Support as Carney Takes the Stage at Jackson Hole
Fundamental Forecast for British Pound:Neutral
The British Pound was caught up in the rollercoaster risk-off/risk-on ride of the week in a very similar manner as the Euro and Japanese Yen; albeit with more subdued price action. With Mark Carney scheduled to speak over the weekend at the Jackson Hole Summit, near-term price action in the British Pound will likely be determined by whether or not Mr. Carney takes on a hawkish or more dovish tone. There are reasons that could be cited for either direction, as the panic exhibited earlier in the week is cause for concern when examining when to raise rates.
Just last week we were looking at a surprise inflation read out of the UK that created breaks of resistance as the Sterling trended higher. The Panic of Monday saw the Cable trade up to previous resistance at the 1.5800 level as carry trades quickly unwound in a ‘flight-to-safety.’ But as cooler heads prevailed while support was coming in across global markets, GBPUSD was free to float with expected monetary policy dichotomies as the Greenback strengthened against most major currencies. All told, the Sterling was one of the weakest performers on the week as that sucker-punch to global growth expectations raises a red flag on expected rate hikes out of the BoE.
From a technical standpoint, the Sterling caught support at a key 1.5350 level, which is the 50% retracement of the Financial Collapse low of 1.3500 to the seven-year high of 1.7190. The 61.8% retracement of this Fib retracement is at 1.5781, which is very near the top that was set on Monday and crossed on Tuesday as the Sterling trended lower.
Breaks below 1.5350 should be construed bearishly, as traders look to open short positions if and when the Sterling sinks to a 2.5 month low. Until then, this is a range with support that could provide an attractive risk-reward ratio by simply trading to the mid-line of the previous range.
Perhaps more attractive are setups in the Sterling against CAD, Aussie or Kiwi. This way traders can avoid the US dollar in the midst of the pandemonium over when/if/how/why this first rate hike may come out of the Fed. Each of these commodity currencies are presenting attractive technical setups against the British Pound, and this can be a prime way of trading the continued melt in commodity prices, which is one of the few themes that markets seem sure of at the current moment.
NFP on Friday will likely shape the weekly performance in GBPUSD; and the Bank of England rate decision in the following week could prove telling as to Monetary Policy Committee and Mr. Carney’s opinion on future rate hikes and policy trajectory given the multiple concerns for global weakness that are currently present.
Gold Reverses as Fed Expectations Rebound- US NFP to Clear the Way
Fundamental Forecast for Gold:Neutral
Gold prices plummeted this week with the precious metal off by more than 2% to trade at 1137 ahead of the New York close on Friday. The decline snaps a 2-week winning streak for bullion prices after reversing sharply off technical resistance on Monday. The pullback eyes near-term support ahead a key U.S. data print that may largely dictate the outlook for September.
Much of gold’s advance has been driven by fears that a slowdown in China coupled with a strengthening dollar and subdued inflation may limit the Fed’s scope for a September lift off. However commentary out of committee members this week suggests that the central bank may yet still be on pace with Fed Vice-Chair Stanley Fischer largely arguing that a rate hike is still on the table as the central bank remains ‘data dependent.’ In contrast, recent remarks from New York Fed President William Dudley may be pointing at a growing rift within the committee as the permanent voting-member sees a ‘less compelling’ case for higher borrowing-costs.
Looking ahead to next week, traders are likely to eye the August Non-Farm Payroll report with greater importance especially as consensus estimates calling for another 220K expansion along with a downtick in the unemployment to an annualized 5.2%. Signs of a further reduction in labor market-slack may boost interest rate expectations as the central bank remains largely upbeat on the economy, and a positive reaction in the greenback could dampen the appeal of the precious metal and fuel the recent selloff.
We noted last week that from a technical standpoint, “rallied nearly 8% off the lows with the advance eyeing a resistance confluence just higher at 1170 where the 61.8% retracement of the May decline converges on the upper median-line parallel extending off the 2014 high.” Indeed the gold advance fizzled just pennies shy of the 1170 barrier before plummeting more than 4.4% before paring a portion of the losses into the close of the week. Interim support stands at 1.1120 backed by key support at 1095/98 where the monthly open converges on the low-week & low-day closes. A break below this level puts the resumption of the broader bear trend back in focus targeting the 1067. Resistance now stands at 1154 with a breach above 11170 needed to invalidate the broader downside bias. We’ll be looking for the monthly opening range to offer more clarity with NFPs on Friday likely to spur added volatility in bullion prices.
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
Help Identify Critical Turning Points for USD/CAD with DailyFX SSI
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.
Australian Dollar at Risk on RBA, Rebuilding Fed Rate Hike Bets
Fundamental Forecast for the Australian Dollar: Neutral
Aussie Dollar at Risk on Rebuilding 2015 Fed Rate Hike Speculation
RBA to Hold Rates But Dovish Rhetoric May Signal Rate Cuts Ahead
Find Key Turning Points for the Australian Dollar with DailyFX SSI
Domestic and overseas monetary policy expectations will be firmly in focus for the Australian Dollar in the week ahead. News-flow from the central bank symposium at Jackson Hole, Wyoming over the weekend will set the tone before the weekly trading open. A much-anticipated speech from Federal Reserve Vice Chair Stanley Fischer will help shape speculation about the likelihood of an interest rate hike at next month’s meeting of the FOMC policy-setting committee.
Speaking in an interview with CNBC on Friday, Fischer pushed back against the notion that recent market volatility has conclusively taken a hike at next month’s sit-down off the table. While he acknowledged that the central bank is mindful of external developments, Fischer down-played spill-over risk from stress in China while talking up US employment and inflation trends. The Vice Chair added that while a final decision will depend on incoming data over the next two weeks – seemingly nodding to next week’s payrolls figures – the case for September liftoff had been “pretty strong” if not “conclusive” before the latest round of risk aversion.
The markets took notice, with priced-in bets on the timing of the first step toward tightening soaring into the week-end. Fed funds futures once again reflect expectations of an increase in October having shown investors abandoning faith in a hike at any point in 2015 as recently as Monday of last week. A hawkish speech from Mr Fischer over the weekend coupled with a firm result on Augusts’ US jobs report may shift the timeline further forward. Consensus forecasts call for a 220,000 payrolls increase, marking a slight pickup from July. Leading survey data reinforces the likelihood of a supportive outcome, pointing to strong hiring trends in the service sector, which accounts for three quarters of the US labor force.
Meanwhile on the home front, the RBA will deliver its monitory policy announcement. As with the Fed, the downturn in market sentiment over recent weeks has rekindled speculation that Governor Glenn Stevens and company will cut rates at least once over the coming 12 months. The priced-in probability of a move at this meeting is at 31 percent however, suggesting the baseline scenario favors standstill. This means traders will look for a directional catalyst in the text of the policy statement and the extent to which it telegraphs a dovish shift in officials’ outlook.
On balance, the reintroduction of near-term Fed tightening risk poses a two-pronged threat to the Aussie Dollar, first on the basis of an adverse shift in expected yield differentials and second via sentiment trends in the event that nearing stimulus withdrawal fuels risk aversion. An accommodative turn in RBA rhetoric stands to compound selling pressure. Needless to say, a surprise interest rate cut would only make matters worse. The currency stalled after spiking to a six-year low against its US counterpart early last week but downside follow-through may be just around the corner.
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.