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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Japanese Yen Stumbles, but is a USDJPY Rally Above ¥124 Justified?
Japanese Yen Stumbles, but is a USDJPY Rally Above ¥124 Justified?
Fundamental Forecast for Yen:Neutral
The Japanese Yen finally broke out of its long-standing range versus the US Dollar and fell to decade-plus lows. Momentum clearly favors further US Dollar gains and Yen losses, but key US event risk and a planned speech from the Bank of Japan offer the potential for volatility in the week ahead.
An impressive recovery for the US Dollar pushed the USD/JPY out of its 6-month trading range, but what exactly forced Dollar gains? Many argued that it was simply a continuation of the much larger uptrend, and indeed the USDJPY breakout showed a consistent pattern with sharp rallies of the past. A look at week-over-week performance showed that relatively high-yielding currencies were the worst to fall versus the USD with a key exception in the Yen. This kind of price action is often seen during episodes of market stress; investors flee high-yielders for the relative safety of the Greenback.
Yet the S&P 500 continues near record-highs, and a true flight to safety across financial markets would likely lead to similar Japanese Yen gains as leveraged traders exit short positions. And therein lies the inconsistency: past episodes of sharp Yen declines (USDJPY gains) have coincided with similar rallies in the S&P 500 and the Japanese Nikkei 225. The fact that it hasn’t should be of some concern to USDJPY bulls. We’ll watch reactions to key data in the days ahead for further direction for the US Dollar and the USDJPY in particular.
Upcoming US Nonfarm Payrolls data is likely to force important volatility in the USDJPY, while traders should also watch an upcoming speech by Bank of Japan Governor Kuroda on Thursday for any surrpises. Whether or not Kuroda makes reference to recent JPY weakness will be of special interest as traders gauge officials’ apptetite for further Yen depreciation. It’s shaping up to be a big week for the JPY—whether or not the Dollar sustains a rally above ¥124 could determine momentum for some time to come. - DR
GBP/USD Carves Bearish Pattern Ahead of BoE Interest Rate Decision
Fundamental Forecast for British Pound:Neutral
GBP/USD remainsat risk of facing a further decline in the week ahead should the fundamental developments coming out of the U.K. & U.S. heighten bets of seeing the Federal Reserve normalize monetary policy ahead of the Bank of England (BoE).
The BoE’s June 4 meeting may spur a limited market reaction as the central bank is widely expected to retain its current policy, and the lack of fresh central bank rhetoric may put greater emphasis on the U.S. data prints as Fed officials continue to see a rate hike in 2015. As a result, major economic developments coming out ahead of the Federal Open Market Committee’s (FOMC) June 17 interest rate decision may play an increased role in driving market volatility as BoE members show a greater willingness to normalize monetary policy in 2016.
However, the ongoing slack in the U.S. economy may continue to produce a mixed batch of data prints, and the Fed may largely discuss a further delay in liftoff as disinflationary environment undermines the central bank’s scope to achieve the 2% target for price growth. At the same time, positive developments coming out of the U.K. could highlight a tightening race between the Fed & BoE as Governor Mark Carney sees the spare capacity being fully-absorbed over the next 12-months, and we may see a growing dissent within the Monetary Policy Committee (MPC) in the coming months as a growing number of central bank officials prepare households and businesses for higher borrowing-costs.
Nevertheless, the recent string of lower highs & lows in GBP/USD raises the risk for a further decline in the exchange rate, and the pair may continue to give back the rebound from 1.4564 (April low) as it fails to retain the bullish formations carried over from the previous month. In turn, the next downside region of interest comes in around 1.5190, the 50% Fibonacci retracement from the April advance. - DS
Gold Range Carries Into June- Opening Range in Focus Ahead of NFP
Fundamental Forecast for Gold:Neutral
Gold prices are lower for a second consecutive week with the precious metal off by more than 1.2% to trade at 1191 ahead of the New York close on Friday. The losses come amid continued strength in the greenback with the Dow Jones FXCM U.S. Dollar Index (Ticker:USDOLLAR) posting an impressive 5-day rally into fresh monthly highs.
With time quickly winding down to the Federal Open Market Committee interest rate decision on June 17th, the data prints due out next week may heavily impact the market volatility heading into June with all eyes on the May Non-Farm Payrolls. Consensus estimate are calling for another 225K expansion in employment with the jobless rate widely expected to hold steady at an annualized 5.4%, the lowest since 2008. Ahead of Friday’s key event risk, the employment components for the ISM manufacturing & non-manufacturing surveys may shape NFP expectations amid the ongoing mixed batch of data coming out of the world’s largest economy.
From a technical standpoint, gold broke back below the initial May opening range high at 1200 early in the week before coming into trendline support extending off the yearly low. Note that the decline has continued to trade within the confines of a well-defined descending channel formation off the monthly high with 3-waves down completing a 100% extension off the highs into 1183 (stretch low at 1180).
We’ll take a neutral stance heading into the monthly open with a break lower targeting 1176 backed by the 1.618% extension at 1164. A breach above channel resistance risks a rally back into the near-term bearish invalidation level at the 1200. Keep an eye on the RSI resistance trigger extending off the May high- breach would be bullish.
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 Volatility Ahead on RBA, China PMI and US Jobs Data
Fundamental Forecast for the Australian Dollar: Neutral
Australian Dollar May Decline if RBA Issues Surprise Interest Rate Cut
Chinese PMI, US Employment Figures Poised to Drive Aussie Volatility
Find Key Inflection Points for the Australian Dollar with DailyFX SSI
The Australian Dollar faces a week of sharp volatility ahead as the economic calendar fills out with both home-grown and external event risk. On the domestic front, the spotlight is on the RBA monetary policy announcement. Meanwhile, Chinese PMI figures and a string of high-profile US releases culminating in the much-anticipated Employment report will threaten to deliver shocks from the outside.
The RBA is expected to keep the benchmark lending rate unchanged at 2 percent. However, Australian economic news-flow has increasingly underperformed relative to consensus forecasts since the central bank’s early-May sit-down, driving front-end bond yields sharply lower to reflect building speculation about further easing. OIS- and futures-based measures of the priced-in outlook suggest traders are on-board with economists’ on-hold consensus however, meaning a surprise cut has scope to drive the Aussie lower.
Turning to China, narrow improvements on both official and HSBC-compiled variants of May’s Manufacturing PMI readings are penciled in. Realized outcomes on economic data releases have been aggressively deteriorating compared relative to expected ones since early March, suggesting analysts’ models are underestimating the degree of slowdown in the world’s second-largest economy. That opens the door for downside surprises, which could punish the Aussie. China is Australia’s largest trading partner and sluggish performance there may fuel spillover fears.
Finally, in the US, a laundry list of high-profile activity indicators including the manufacturing- and service-sector ISM readings and the Fed’s Beige Book survey of regional economic conditions will pave the way for May’s Employment data. The economy is expected to have added 223,000 jobs, matching April’s outcome. Leading survey data points to a pickup in the pace of job creation however. In fact, the services industry (which accounts for close to three quarters of the employed) is tipped to have seen the strongest pace of hiring growth since June 2014.
If this proves to foreshadow an upside surprise, the Aussie may decline as an up-shift in the markets’ expected timeline for the onset of Federal Reserve interest rate hikes weighs on risk appetite and punishes the sentiment-linked unit. It ought to be noted however that COT positioning data suggests the USD recovery from mid-May has played out against a backdrop of falling speculative net-long exposure. Furthermore, Fed Funds futures have not materially budged from placing a hike no sooner than October even as the greenback soared to a monthly high. This casts doubt on the ability of US news to generate lasting follow-through, at least for now.
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.