Forex Weekly Trading Forecast - 11.16.09

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 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 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: 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 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.