Forex Weekly Trading Forecast - 11.23.09

US Dollar Forecast to Remain Range-Bound versus Euro

Fundamental Outlook for US Dollar: Bullish

-    Ben Bernanke calls for strong US Dollar, but Greenback fails to hold gains
-    Crowd sentiment accurately calls for US Dollar bounce
-    US Dollar surges as traders sell risk following Dell earnings report

The US Dollar finished the week higher against all major currencies except the Japanese Yen, but the downtrodden currency failed to break key range highs against the Euro and other important counterparts. Forex markets remained highly indecisive and traders were seemingly unwilling to bust the Euro/US Dollar exchange rate from its multi-week range. Our DailyFX 1-Week Volatility Index continues to trade near its lowest levels of the year, and it seems FX Options traders are pricing in similar range trading for the holiday-shortened trading week ahead. A number of historically market-moving economic releases may nonetheless force sharp intraday price moves through mid-week trade—especially given the state of relative unease across key asset classes.
 

Euro May Finally See a Breakout Against the Dollar This Week Against
   
Fundamental Forecast for Euro: Bearish

-    European Central Bank takes another small step in unwinding stimulus by upping collateral standards
-    The pace of Euro Zone inflation improves, but the annual figure is still contracting
-    Are technicals leaning towards a EURUSD breakout that spurs reversal or trend continuation?

There is a lot to watch when trading the euro in the days and weeks ahead. In the background, we have a withdrawal of stimulus that is starting to build momentum, developing interest rate expectations and concerns that the Euro-region economy will fall behind in the bid for recovery as government spending tapers off and exposes the true cut of the nation’s health. However, traders will more concerned with what is in the foreground. A range of notable economic indicators will offers some sense of predictability for volatility. But, the intense threat of an impending break and trend revival rests with intangible fundamental dynamics like liquidity and the influence of a domineering US dollar.

Japanese Yen Breakout Looms in Thin, Risk-Driven Trade

Fundamental Forecast for Japanese Yen: Bullish

- Japan’s Economy Expanded Most in Over Two Years in Q3
- BOJ Keeps Rates Unchanged, Conflict with MOF Continues

The Japanese Yen outperformed last week as capital retreated from stocks, commodities and FX carry trades funded in the perennially low-yielding currency. A bland domestic economic calendar and thin liquidity conditions around the Thanksgiving holiday in the US promise more risk-driven volatility ahead.

Swiss Franc Looks To Break Range As Growth Fears Rise

Fundamental Forecast for Swiss Franc: Neutral

- Swiss Retail Sales Fell For  A Consecutive Month By 1.6%
- The Swiss October trade balance surplus rose to 2.46 billion from 1.91 billion as exports gained 0.1%

The Swiss Franc trended lower over the past week against the dollar showing potential to break from its recent range but found resistance at the 50-Day SMA at 1.0217. Price action has held below the technical level since August 12 and a break above would leave significant upside potential. Investors worried that current valuations have outpaced underlining fundamentals have generated safe-haven flows providing support for the USD/CHF. Weak Swiss fundamental data added to the bearish franc sentiment as retail sales fell by 1.6% dimming the outlook for domestic growth. An 8.9% drop in clothing led weakness in tobacco, personal goods and furniture as consumers battling rising unemployment continue to retrench. A 0.1% rise in exports was encouraging but not enough to offset weakness generated by falling equity markets.

Canadian Dollar Tracking its Commodity Compatriots to its Detriment

Fundamental Forecast for Canadian Dollar: Bearish

-    Consumer inflation turns positive, but BoC officials warn against calling an economic recovery
-    The tempered pace in USDCAD matches a similar clip in crude, but is this still a tradable correlation?
-    Can USDCAD extend its bounce into a meaningful reversal or will the pair fall back into a range?

The Canadian dollar was battered this past week - and not just against its benchmark US counterpart. Despite lacking some of the most vital statistics of a carry currency; the loonie has long enjoyed an ill-deserved association to the high-yielding Australian and New Zealand dollar. However, just as surely as the Canadian unit enjoyed the benefits of its alliance; it will also suffer from the short-falls. This leverages a lot of what happens to the loonie this week and beyond on the pace and direction of underlying risk appetite; but this really isn’t a unique situation as most of the market is traveling the same road.  However, a distinctive bond to the US dollar as well as a monetary policy position in flux can certainly complicate things.

Australian Dollar Strength May Succumb To Interest Rate Expectations

Fundamental Forecast for Australian Dollar: Flat

- RBA Policy Outlook Remains An “Open Question”
- Westpac Leading Index Improves For Fourth Month
- Wage Growth Slows In Third Quarter

The Australian dollar surged to a fresh yearly high of 0.9408 earlier this week following the rise in risk appetite however, the high-yielding currency may have reached a top in November as investors scale back expectations for higher interest rates in the $1T economy. Nevertheless, as the rally remains support by the 50-Day SMA at 0.9015, we may see the AUD/USD retrace the four-day decline over the following week as investors weigh the prospects for a sustainable recovery within the region.

New Zealand Dollar at Clear Risk as RBNZ Independence Threatened

Fundamental Forecast for New Zealand Dollar: Bearish

-    New Zealand dollar tumbles, hobbled by interest rate expectations
-    Debate over RBNZ mandates likewise damages the NZD

The New Zealand Dollar was by far the worst performing G10 currency and fell against all major counterparts to end the week’s trade. The antipodean currency languished on similarly lackluster performance in financial market risky asset classes, while fairly bearish interest rate developments likewise sparked NZD losses. New Zealand’s opposition Labour Party leader withdrew his party’s support for an incredibly important facet of Reserve Bank of New Zealand policy. Increased discontent with New Zealand dollar appreciation has led many politicians to question the RBNZ’s inflation-targeting policies—calling for the central bank to control exchange rate fluctuations. It is worth noting that the opposition party currently trails the ruling National Party in opinion polls, but this is nonetheless a legitimate threat to RBNZ independence and could likewise derail confidence in the domestic currency.