US Dollar At Risk of Sharper Retreat as Rate and Risk Pressure Fade
Fundamental Forecast for Dollar:Bearish
A weak September NFPs has reinforced the market’s doubts of a near-term Fed ‘liftoff’
Data will carry less influence over rate forecasts compared to Fed remarks and minutes ahead
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The Dollar was within reach of 12-year highs this past week; but when the opportunity was presented to revive the long-term bull climb, fundamentals falterd. There are two dominant themes for the FX market, and both favor the US currency: relative monetary policy and global investor sentiment. While the lean from each generally supports the Dollar, both have received significant discount by the market over the months. A more severe policy push would have to come from certainty of a rate hike before year’s end, while catering to the ‘haven’ status would require a committed and market-wide risk unwind. That level of escalation will be difficult to stoke. That said, it is likely only a matter of time before a more significant speculative deleverage and Fed rate hike are realized. As such, swoons from the Greenback will also be limited.
Had last week’s labor report printed differently, the Dollar may have forged the next leg of its rally or been primed to do so with the next catalyst. Instead, the September NFPs significantly lost traction in the fight to erode the doubt over the first Fed hike. In additional to the biggest headline payroll miss in six months, the participation rate further slipped to a 38-year low and wage growth stagnated at 2.2 percent growth. The market was already dubious of liftoff before the end of the year, but with the erosion of the underlying labor figure and inflation pressure solidified the skepticism and deflated some of the Dollar’s first-mover premium.
According to Fed Funds futures, the probability of an October rate hike dropped from 11% to 2%. A move by the final gathering of 2015 in December slid from 42% to 32%. Yet, skepticism of the central bank’s motivation is nothing new. The majority of the speeches given by Fed officials these past weeks have marked a clear effort to ‘warn’ market participants of the appropriateness of a near-term hike, stress its modest importance as a small move from the near zero bound and balance the conversation by noting the risks of maintaining emergency policy efforts for too long. That is a strategy that heavily implies a hike without pre-committing.
Even of the Fed officials intend to follow through with a hike this month or in December, it will be difficult to convince the market of that probability without actually pulling the trigger. The data on this week’s calendar doesn’t carry the kind of weight necessary to alter views. Trade, import inflation, consumer credit and service sector activity figures don’t cut close enough to the monetary policy mandates for full employment and steady inflation. That leaves shaping speculation to Fed communications. There are a number of FOMC’s rank scheduled to speak this week, but they are unlikely to be more clear in their bias than what we have seen the past few weeks. The minutes from September’s meeting may offer better insight into what many officials called a ‘close call’. That may prove the most capable driver through the week.
Meanwhile, the risk bent for the Dollar is a constant opportunity. However, last week offered a considerable buffer to levels where the tough choices will have to be made. The S&P 500 marked a meaningful rebound that puts it well off the year’s lows. For the Greenback, a modest retreat does not meet the exceptional drive necessary to reactivate the currency’s liquidity haven status. We haven’t seen this particular fundamental face for the Dollar appear in years. That said, this too is an inevitable reinforcement. A meaningful and lasting rebound in risk appetite is unlikely as the market’s recent bounce as founded in response to an expected extension of policy accommodation - not exactly the conditions that rally the value investors. If growth did start to take off, it would spur a normalization of policy and necessitate a repricing of leveraged risk taking. Risk ebalancing will eventually lift the Dollar, but it may take longer than bulls would hope for.
Euro in Holding Pattern as Traders Await Clues on ECB’s Next Move
Fundamental Forecast for Euro:Neutral
- The worst US jobs report of 2015 briefly lifted EURUSD back above $1.1300 at the end of the week.
- The retail trading crowd retains a net-short position in EURUSD, offering a contrarian ‘bullish’ bias.
- Have a bullish (or bearish) bias on the Euro, but don’t know which pair to use? Use a Euro currency basket.
The Euro endured a mostly quiet, choppy week of trading as the calendar turned into October and Q4’15, albeit with a general downward bias. Among the EUR-crosses, gains were limited in EURUSD (+0.19%) and EURGBP (+0.15%), while the rest of the pairs slipped only a shade more intensely. EURCAD (-1.22%) was the leader to the downside, followd by EURCHF (-0.63%) and EURNZD (-0.53%).
As expected, with the Euro holding its ground as a funding currency, it has been subject to gyrations in global bond and equity markets in recent days as well; the lack of significant movement over the week translated in a relatively quieter week than the once preceeding it. 1-week EURUSD historical volalility dropped to 5.79% as of October 2, down from 10.27% on September 25. Markets don’t think the volatility lull will last for that long, however, with 1-week EURUSD implied volatility up at 9.10%.
There may be some residual impact from the worst US Nonfarm Payrolls report of 2015 in the coming days, and a repricing of the Federal Reserve’s rate hike path against a backdrop of a weaker US economy will surely provoke larger swings in bonds, commodities, equities, and FX markets alike. However, beyond external influences, traders engaged in the EUR-crosses may not find that much to work with from the economic data side of things over the coming five days. The calendar is particularly light, with only Tuesday’s September PMI data piquing any interest.
In absence of a meaningful economic docket, traders may find the oft-overlooked ECB meeting minutes of greater interest this time around. The minutes will be released as speculation over when the ECB might ease next has heated up, perhaps simply as a response to the Fed keeping rates lower for longer or due to slumping inflation readings (the 5-year, 5-year inflation swaps closed down at 1.580%).
Ahead of the minutes, we already know that the ECB downgraded its growth and inflation forecasts for 2015 to 2017 at the corresponding meeting, which leads us to believe there was also likely a meaningful conversation on what to do should should growth and inflation readings disappoint. Along these lines, any color that can be discerned regarding the ECB’s future policy actions, for example, the path of the interest rate corridor or the prospect of expanding or lengthening the current QE program, could prove material to shaping rate expectations in the near-term.
Until markets pin down the likelihood of the ECB easing later this year or early next, the Euro is very much in a holding pattern. Reflexively, any prolonged period of Euro strength going forward probably raises the probability that the ECB will ease in the coming months, as a stronger trade-weighted Euro will only hurt exporters and dampen inflation. Rallies in the Euro still can draw some energy from a lingering net-short position held be speculators. The CFTC’s most recent COT report showed that speculators held 87.7K net-short contracts at the end of the week of September 29, 2015. Longer-term, however, positioning is not in the way of a further bulld up:traders were much more short in August (115.2K contracts) and in March (226.6K contracts). –CV
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USD/JPY Fails to Break Sept. Range Ahead of Fed Minutes, BoJ Meeting
Fundamental Forecast for Yen:Neutral
The range-bound price action in USD/JPY may unravel in the week ahead should the fundamental developments coming out of the U.S. economy dampen bets for a 2015 Fed rate hike, while the Bank of Japan (BoJ) is widely expected to retain a wait-and-see approach at the October 7 interest rate decision.
Even though the Federal Open Market Committee (FOMC) keeps the door open to raise the benchmark later this year, the data prints coming out of the world’s largest economy may continue to drag on interest rate expectations and sap demand for the greenback as the ISM Non-Manufacturing survey is expected to show a further slowdown in service-based activity. The ongoing slack in the real economy accompanied with the disinflation environment may push the ‘data dependent’ central bank to adopt a more dovish outlook for monetary policy, and the Fed Minutes may do little to shore up the greenback as Chair Janet Yellen remains in no rush to remove the zero-interest rate policy (ZIRP).
In contrast, market participants may continue to scale back their bearish outlook for the Japanese Yen as the BoJ is widely expected to retain its current policy, and the fresh commentary coming out central bank may sap speculation for a further expansion in the quantitative/qualitative easing program (QQE) as Governor Haruhiko Kuroda remains confident in achieving the 2% inflation target over the policy horizon. However, a material shift in central bank rhetoric may fuel speculation for additional monetary support at the October 30 interest rate decision as Japanese lawmakers look for a more accommodative policy stance, and comments foreshadowing a larger asset-purchase program may act as a key catalyst to spark a topside break in USD/JPY amid the deviating paths for monetary policy.
In turn, risk trends may heavily impact USD/JPY ahead of the key event risks next week as global investors treat the Japanese Yen as a ‘funding-currency,’ and the pair may threaten the range-bound price action carried over from September should we see a material shift in the policy outlook surrounding the Fed & BoJ.
Sterling Finds Support Ahead of Pivotal BOE Meeting
Fundamental Forecast for British Pound:Neutral
One of the few bright spots in the Global Economy that isn’t currently being engulfed by continued Central Bank jockeying (looking at you, Federal Reserve) has been the United Kingdom. Just three weeks ago, we looked at how British Inflation could potentially bring a new up-trend into the Sterling. And for a few days, that theme worked beautifully as the British Pound continued driving through resistance levels on heavy volume as traders continued to increase rate-hike expectations for the UK. And then the world ran into the Fed. Or more to the point, the world ran into a Federal Reserve that wasn’t yet ready to hike rates, raising numerous red flags as to the state of the global economy and the largest national economy in a world that’s seeing a ‘recovery’ that’s beginning to dwindle before they could ever kick-up interest rates. The prevailing thought being that the UK and the Bank of England wouldn’t raise rates until after the US; and on the heels of this announcement from the Fed, that previous up-trend in the Pound has been priced out of the market. Earlier this week, we set a new intermediate-term low in GBP/USD as rate expectations for the UK continued to diminish.
But the proverbial rubber meets the road next week as the Bank of England convenes for a rate decision, and this should bring considerable interest and clarity to the continued speculation around UK rate trajectory. BOE member Kristin Forbes stoked this interest earlier in September when she mentioned that a stronger British Pound may, in fact, help inflationary pressures in the British economy. This is the diametric opposite of what’s become accepted as common-fact in this post-Neo-Keynesian world, in which Central Banks have purposefully devalued currencies with the goal of bringing inflation, growth and economic prosperity back into their economies. This clearly hasn’t worked, as six years of QE and ‘extraordinarily accommodative’ conditions have done little to show healthy, sustainable growth on the inflation or employment front in the global economy.
Mr. Mark Carney furthered this point in a speech later that week, in which he said that the UK should prepare for rate hikes ‘sooner rather than later,’ while pointing towards the end-of-the-year for more clarity on the rate-hike front.
While a rate hike at Thursday’s meeting is essentially out-of-the-question, the manner in which the MPC votes could provide more insight into rate-hike plans. We’ve become accustomed to 8-1 votes from the nine-member panel with Ian McCafferty being the lone dissenter. But if he’s joined by Martin Weale (who voted for a hike five times last year) or Kristin Forbes, this could increase rate expectations for the UK considerably, and in-turn, bring strength back into the Sterling.
Perhaps more interesting is the Bank’s outlook on the numerous issues swirling through the global economy right now; like diving commodity prices, an Asian-slowdown that no longer looks relegated to China and the potential for even more conflict in the Middle East. At the last meeting, Mr. Carney had mentioned that concerns about China were a contributing factor for the MPC’s 8-1 vote, and at this announcement we can, hopefully, get more clarity from the Bank on how threatening they consider these factors to be for the British economy.
At this meeting on Thursday, the Bank of England has a prime opportunity to dampen rate expectations by indicating that the wage growth that stoked inflationary hopes earlier in September isn’t being considered as strongly as this multitude of spiraling economic forces. This could lead to a break of the 1.5100 support level that’s held GBP/USD, perhaps even yielding the 1.5000 spot should risk-aversion increase enough. But if we do get a second dissenter, or if we hear more from Mr. Carney to the tune of what he was saying towards the middle of September, we could see a strong reaction off of this 1.5100 support level that’s contained the bottom in GBP/USD for the past three trading days, and provided a fairly attractive morning-star formation on the Daily chart to close out the week.
Gold Sell-Off Approaches Familiar Territory- FOMC to Pave the Way
Fundamental Forecast for Gold:Bearish
Gold put in a peculiar week of price action as four days’ worth of selling were nearly erased by one really strong NFP-fueled rally. NFP printed at an abysmal +142k versus an expectation of +200k, and the details within the report weren’t that much more encouraging. Wage growth was down, labor force participation was down, and unemployment remained flat: There wasn’t much positive to take from this report. So the immediate impact was diminishing rate expectations out of the United States, as what was considered one of the ‘brighter spots’ of the ‘recovery,’ isn’t looking so attractive any longer. This decreased rate-hike expectations even more than what we’ve already seen on the heels of the Fed’s hawkish-hold in September. Now October isn’t looking likely for that first rate hike, nor is December, and expectations for that first hike in nine years are being kicked all the way out to March of 2016. This shows, yet again, that the Federal Reserve’s ‘forward guidance’ is massively disconnected from market expectations and dynamics.
This is a good thing for Gold prices. Inflation, and more to the point, interest rates are the enemy of Gold. Higher rates of inflation bring on tighter monetary policy, and tighter monetary policy brings on higher rates and increases the opportunity cost of holding Gold and Gold-based investments. This is why we’ll usually see an inverse relationship between inflation/rates and Gold.
The good news for Gold bulls is the fact that it really doesn’t look like we’re going to be getting a rate-hike out of the United States anytime soon despite continued verbiage from Fed members indicating as such. External forces such as an Asian-slowdown, or continued pain in commodities or, what is essentially becoming a meltdown within Emerging Markets could all serve to thwart growth within the American economy. At the very least, this combination of risk factors behooves the Fed to take caution, even if we’re talking about a ‘meager’ 25 basis points.
Expect continued Fed jockeying around that first hike to be the primary driver in the Gold market. Continued verbiage towards an earlier rate hike will equate to weakness in Gold prices, while any indications of ‘kicking the can down the road,’ or any more ‘extend and pretend’ will likely bring on additional Gold strength. This can come from any random Fed commentary or indications towards rate expectations, similarly to what we’ve seen on Friday as Mr. James Bullard, President of the St. Louis Fed, remarked that he felt the US economy was still on pace for a 2015 rate hike. After these comments filtered into the market, an intra-day top was set on Gold in the $1,140 region, and we’ve been unable to break through since.
The big item on the calendar for next week is the release of the FOMC minutes from the September meeting. This meeting left many scratching their head as the Fed had taken on a hawkish stance but elected to keep rates flat. This release on Thursday, October the 8th can definitely be market moving, especially in Gold. Also look for volatility around RBA and BOE on Monday night and Thursday morning respectively. Each of these Central Bank meetings are an opportunity for Central Bankers to share their views on the global economy and the swirling forces that have raised the red flags of panic. Overt-bearishness from either of these Central Banks could inspire a continued rally in Gold prices, as further indication of global-slowdown could spell trouble for future US rate-hike expectations.
And on the topic of Central Banker’s opinions: The economic calendar for next week is loaded with Fed speeches. We hear from Esther George on Tuesday morning and John Williams of the San Francisco Fed on Tuesday evening and Wednesday afternoon. Then we hear more from everyone’s favorite perma-hawk, Mr. James Bullard on Thursday morning, followed by Kockerlakota and another speech from Mr. John Williams later in the day. And on Friday, Dennis Lockhart speaks in New York and Evans closes out the Fed-speak for next week with a speech at 1:30 PM. Each of these speeches or commentaries can promulgate price action in Gold.
The extraneous factors here are situations like Russia’s role in Syria, or the continued spread of the slowdown in China. It’s impossible to know what to expect on either front, but should either of these situations become ‘larger-picture’ considerations, that will likely bring continued strength in Gold as those US rate expectations get kicked even further out.
The ‘bigger picture’ trend in Gold is still to the down-side, and that will be the case until Gold prices clear the $1,170 swing high that was set on China’s ‘Black Monday’ of August 24th. Key Fibonacci resistance at $1,155 could provide an attractive long-term short-side entry should resistance develop in this region again, as this is the September high as well as 61.8% of the ‘secondary move’ in Gold (using the 2008 low to the 2011 high).
Should prices stage a continued break above the $1,170 level, the upside in Gold prices becomes considerably more attractive; at which point trend-following, long-biased strategies could be warranted.
CAD Pushes Higher After Hitting 11yr Low, Still Oil Dependent
Fundamental Forecast for CAD: Bearish
Canada’s Consumer Price Index (CPI) expanded an annualized 1.3% in August, a marked slowdown in the core rate of inflation may dampen the appeal of the Loonie.
Oil Gains and a dovish rhetoric from the Federal Reserve have allowed the Canadian dollar to gain nearly one and a half percent against the USD.
For up-to-date and real-time analysis on the CAD, Oil and market reactions to economic factors currently ‘in the air,’ DailyFX on Demand can help.
The Canadian Dollar witnessed a strong rise to end the week after a weak start. The Canadian dollar rebound is mainly due to bounces in commodities and risk that brought USDCAD lower by nearly 200 pips, and other Crosses display more CAD strength. Optimism currently surrounds the Trans-Pacific Partnership, or TPP agreement as Canada and Mexico signaled a willingness to open the North American auto market two parts made from ASEAN economies. However, the current question is whether or not the commodity and risk rally will last and for now the answer appears to be not long.
After a small beat in Canadian GDP, 0.8% vs. expectations of 0.7% last week, this week will bring us the Canadian unemployment rate. While the unemployment rate isn’t typically a trend changer, a definite surprise brings its fair share of volatility to CAD crosses.
From a relative basis, the Canadian dollar books most attractive against other resource exporting nations, such as Australia and New Zealand. However, an assumption of a continuing drop in commodity currencies, G4 FX may continue to attract capital on a haven capital flow play. On September 29, the Canadian dollar hit an 11 year low as USDCAD printed at 1.3457 against the US Dollar, and momentum could continue to carry this further still.
Currently, the correlation of commodity influenced currencies continues to drag down the entire bunch, which could continue to spell trouble for the Canadian dollar. Per the Bloomberg Commodity index, last quarter saw a 14% drop, the biggest since 2008 global financial crisis, and now eyes turned to a hawkish Federal Reserve that could further exasperate the move. Lastly, there is continued risk for political stalemates after next month’s national election that limits the fiscal stimulus to support the company aligning with an overreliance on oil for near-term direction.
Australian Dollar Torn Between RBA Policy Bets, Risk Appetite Trends
Fundamental Forecast for the Australian Dollar: Neutral
Aussie Dollar at Risk if RBA Rhetoric Fuels Interest Rate Cut Outlook
Seesawing Sentiment Trends Likely to Complicate Aussie Price Action
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The Australian Dollar will see domestic monetary policy considerations return to the spotlight after weeks of focus on external forces as the Reserve Bank of Australia convenes for an interest rate decision. Economists expect Glenn Stevens to keep the baseline lending rate unchanged at 2 percent. The markets seem to agree, with OIS pricing reflecting a mere 35 percent probability of another 25 basis point reduction.
An outcome in line with the consensus will see traders combing the policy statement accompanying announcement for guidance on how things ought to evolve going forward. Scheduled commentary from RBA Assistant Governor Guy Debelle and economic research head John Simon two days after the sit-down will add further color to the outlook.
As it stands, the markets are pricing in at least one cut over the coming 12 months. Australian economic news-flow has increasingly deteriorated relative to consensus forecasts since the last policy meeting in early September. Survey-based 2015-17 GDP growth forecasts and priced-in medium-term inflation expectations derived from bond yields have dropped over the same period. This opens the door for a dovish shift in RBA rhetoric to weigh on the Aussie.
The return of homegrown catalysts will not be accompanied by a slowdown in external event risk. The US Federal Reserve and the ECB will both release minutes from their latest policy meetings. Traders will dutifully scour both releases to gauge the degree of concern about global growth dynamics among policymakers. A busy speaking calendar will offer further opportunities to establish officials’ bias.
Cross-market trading patterns following last week’s dismal US employment report suggest dovish rhetoric may prove supportive for risk appetite, offering support for the sentiment-linked Australian currency. On the other hand, reluctance to expand stimulus on the part of the ECB and continued argument in favor of a 2015 rate hike from the Fed will probably have the opposite effect. The pass-through from monetary policy expectations to risk trends has been inconsistent over recent weeks however and another mutation is certainly not out of the question.
NZD Ends Week on Positive Note After Fonterra Upgrades Forecast
Fundamental Forecast for the Kiwi:Neutral
New Zealand annual trade deficit widened to its largest margin since April 2009
Fonterra raised their milk payout forecast on Thursday giving NZD an end-of-week boost
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New Zealand’s dairy industry accounts for roughly ~25% of the economy’s GDP. Because of this, the economy is highly sensitive to the direction of weekly payouts in dairy auctions and is intensely sensitive to the demand drop from China for imported dairy, which has contributed to the prices paid drop of 50%. This combination along with larger macro-economic risks aligned with the easing bias from the Reserve Bank of New Zealand, which has tracked the NZDs descent from mid-2014.
On Thursday, a report came out from Fonterra, the world’s largest dairy exporter that they were raising their forecast for milk payouts on an earnings jump in 2015. This development sent sentiment through the markets that the RBNZ’s easing stance may be too aggressive and therefore less inclined to cut rates in upcoming meetings. This mild but positive surprise for the Kiwi was most seen notably against commodity currencies.
The trade deficits were concerning in regards to the annual dairy exports as well as exports to China, one of the largest consumers of New Zealand products. Per the Statistics New Zealand, annual dairy exports fell by 25% to $11.99B NZD. Additionally, annual exports to China fell by 28% to $8.36B NZD.
Looking ahead, the markets have Building Permits for August as well as the ANZ Business Confidence report this week. Building permits will be gauged vs the prior reading of 20.4% and the Business Confidence index will look to rise from the dismal -29.1 reading last month. A tick up in either readings could carry the New Zealand dollar higher in a continuation of how it closed out last week.