Forex Weekly Trading Forecast - 11.16.09

US Dollar’s Future in the Hands of Speculators

Fundamental Outlook for US Dollar: Bullish

-    Even the IMF pegs the US dollar as the top funding currency for a market  hungry for yield
-    A sharp jump in the trade deficit and drop in consumer confidence contradict an outlook for recovery
-    The US dollar has held its low; but can the greenback finally reverse course or will it once again collapse?

The dollar was able to manage its most aggressive rally against its chief counterpart (the euro) in months this past week; but the move would not last. Without a scheduled or unscheduled event to dramatically alter the dollar’s status in the well-worn carry trade, risk appetite would ensure the currency would remain shackled to its eight-month old bearish trend channel. Looking out over the week to come, the most pressing question for any trader is determining if and when the greenback will finally catalyze its next trend. Some may argue that direction is the primary concern; but without momentum and follow through, the result is fundamental chop that leaves the market open to volatility while slowly building up the pressure behind the eventual breakout. So, is there potential for a clear, dollar trend in the week ahead?

Euro May Regain Fundamental Control with its Own With GDP Numbers
   
Fundamental Forecast for Euro: Bearish

-    The ECB gives no guidance for future rate hikes at its rate decision, but Trichet does call for a pull back in stimulus
-    The fundamental, interest rate and technical outlook for EURUSD points to an overextended pair
-    EURUSD congestion builds tension between trend and reversal

The euro is still the fundamental chameleon of the currency market. Without particularly stimulating forecasts for interest rates (hawkish or dovish) or an economic recovery that looks to keep pace with the US or Japan through 2010; the world’s second most liquid currency doesn’t have the kind of influence that can overcome volatility and trends that emanate from the partner in its various pairs. However, looking at the economic docket for the week ahead; we may finally have a round of European data that can finally distinguish the currency for its own fundamental prospects. On the other hand, this influential release is scheduled at the very end of the week; and late break are rare – trend development as liquidity is draining from the market is even more uncommon. Therefore, general risk appetite will once again have the most time with the euro as traders try to gauge their conviction in their speculative positions.

Japanese Yen Likely to Range Trade Against the US Dollar

Fundamental Forecast for Japanese Yen: Bearish

- Japanese Yen looks increasingly vulnerable as risk appetite grows
- Yen nonetheless outperforms against British Pound
- Forex crowds pointed to potential for USDJPY losses

Continued S&P 500 rallies made the safe-haven Japanese Yen the second-worst performing G10 currency to finish the week’s trade, finishing higher only against the similarly-downtrodden US Dollar. All major world equity indices finished anywhere from 2-3 percent above their weekly open except for the Japanese Nikkei 225—raising serious doubts on investor demand for Japanese financial asset classes and reflecting poorly on the domestic currency. Indeed, the fundamental arguments for Japanese Yen strengths are becoming increasingly scarce—especially through times of healthy financial market risk appetite. 

British Pound Forecast Bullish Versus Euro but watch for BoE Surprises

Fundamental Forecast for British Pound: Neutral

-    Fitch expresses caution on UK sovereign rating, halts British Pound rally
-    Similar caution from the Bank of England likewise hurts Pound
-    Technical support nonetheless keeps the GBP afloat

Swiss Franc to Hold Range as SNB Pledges to Maintain Policy

Fundamental Forecast for Swiss Franc: Neutral

- Swiss Investor Confidence Weakens in November
- Producer & Import Prices Unexpectedly Contract in October

The Swiss Franc ended the week higher against the U.S. Dollar and the Euro, with the USD/CHF continuing to push toward parity as the pair slipped to a low of 1.0034, just 2pips shy of the yearly low at 1.0032, and low-yielding currency is likely to remain range-bound over the following week as investors weigh the outlook for future policy. SNB member Thomas Jordan reaffirmed the central bank’s policy stance during a speech earlier this week and said that the board has reached its goals and does not see any reason to shift policy as it aims “to support an economic recovery during a difficult phase without low rates and an elevated liquidity creating an inadequate evolution.”

Canadian Dollar: Options Markets Show Clear Risk of USDCAD Rallies

Fundamental Forecast for Canadian Dollar: Bearish

-    Canadian Unemployment unexpectedly rises
-    Canadian Dollar outperforms on buoyant risk appetite
-    View our monthly US Dollar/Canadian Dollar Exchange Rate Forecast

The Canadian Dollar finished the week modestly higher against its US namesake, but a sharp end-of-week reversal suggests near-term momentum favors further Loonie pullbacks. Sharply disappointing Canadian Net Change in Employment numbers forced a substantive turn lower in the domestic currency, and the USDCAD quickly broke above its 50-day Simple Moving Average through the close. A comparatively light economic calendar in the week ahead suggests that there will be little event-driven volatility for the North American currency pair. Yet the Canadian Dollar’s near record-high correlation to Crude Oil and other key financial assets suggest we may see yet another eventful week of USDCAD trading.
 

Australian Dollar Looks To March Higher Absent Risk Aversion

Fundamental Forecast for Australian Dollar: Bullish

- Australian economy unexpectedly added 24,500 jobs in October, equaling a six year high
- Westpac Consumer Confidence Fell for the first time in six months by 2.5%
- Consumer inflation expectations fall to 3.2% from 3.5% in October


The Australian dollar rose to a fresh yearly high of 0.9368 against the greenback as continued risk appetite and unexpected job creation in October fueled bullish sentiment. Equity markets continued push higher with the Dow setting a fresh yearly high as traders took comfort in the G-20’s pledge to maintain low interest rates and stimulus programs. However, the RBA isn’t expected to follow the pack as they have already raise rates at their last two policy meetings and markets are currently pricing in an 83% chance that they will continue to tighten at their December (November 30th ) rendezvous. The prospect of higher borrowing costs led to 2.5% drop in consumer confidence, the first in six months. Confidence remains relatively high, but declining optimism could negatively impact domestic consumption which unexpectedly fell 0.2% in September.

The weak demand had raised the prospect that the RBA would take a break from their tightening policy at their December meeting as there are concerns that premature rate hikes could derail the recovery. Additionally, Governor Stevens last week signaled to markets that the strength of the Australian dollar would limit upside inflation risks and give him the scope to slow the pace of future rate increase. However, the surprising job growth re-established expectations for an additional 25 bps hike as it reaffirmed the Governor Stevens statements following November’s meeting that “there have been some early signs of an improvement in labor market conditions. The rate of unemployment is now likely to peak at a considerably lower level than earlier expected.”

New Zealand Dollar Fundamentals may Soon Overwhelm Risk Appetite

Fundamental Forecast for New Zealand Dollar: Bearish

-Disappointing retail and manufacturing indicators bear out RBNZ Governor Bollards economic concerns
-Is NZDUSD working up a bearish reversal to its eight month bull trend?

The New Zealand dollar is living on borrowed time. Risk appetite single-handedly lifted this currency from a six-year low following the hit it took during the worst financial crisis in modern history; and it is only a matter of time before the aggressive rally collapses under it s own weight. Is this kiwi dollar really destined to pace investor sentiment? Yes. Not only does the currency maintain a yield that through history has kept a significant premium over its counterparts; but its mere presence among the list of most liquid currencies can be attributed to its appeal as a place to park capital. In fact, under most scenarios (even a revival in the demand for yield); it is likely that the kiwi will not only retrace its gains but it may actually pace the over-due correction.