Forex Weekly Trading Forecast - 11.09.09

US Dollar Remains in Downtrend After Fed Reiterates Dovish Stance

Fundamental Outlook for US Dollar: Bullish

-    ISM Manufacturing was surprisingly strong at 55.7, reflecting steady expansion in the sector
-    The Federal Reserve left rates unchanged, indicates they would remain “extremely low” for an “extended period.”
-    US non-farm payrolls fell more the expected, pushing the unemployment rate to a 26-year high of 10.2%

The US dollar was easily the weakest of the majors during the past week of trading as fed fund futures shifted to price in a lower chance of rate increases in mid-2010 after as the Federal Reserve left rates at 0.25 percent and indicated that they would likely leave rates “extremely low” for an “extended period.” The other factor to consider was the increase in risk appetite, as evidenced by the concurrent weakness in the Japanese yen (the other “safe haven” currency) and the 3 percent increase in the S&P 500 over the course of the week.

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 Awaits the Signal for Risk Appetite to Finally Reverse

Fundamental Forecast for Japanese Yen: Bullish

- Japanese Finance Minister Fujii says the government will fill the tax short-fall with greater debt issuance
- The interest rate outlook grows more extreme for USDJPY, yet the yen is retains its strength
- Does near-term USDJPY chop distract from a larger reversal in the making?

Though there has been some competition from the US dollar, the Japanese yen is still the market’s ideal funding currency for the recovering carry trade. With an overnight lending rate that is almost assured to maintain a discount to the Fed Fund rate and ample funds to attract investors looking to borrow and leverage on the cheap; it will only be a matter of time before the balance of power shifts and the stigma of the ‘low-yielder’ will shift back to its historical champion. And, considering the developments over the past few weeks, this could be a changeup that happens in the very near future. In the meantime, it will be imperative to keep a sharp on risk appetite. Though the dominant trend for those proxy gauges for sentiment are still overall bullish; momentum has clearly faded and many markets are still hovering at levels that are far off the mark that fundamentals would prescribe to them.

British Pound Could See Breakouts Versus Euro, US Dollar

Fundamental Forecast for British Pound: Neutral

-    The British Pound rallies on Bank of England monetary policy
-    British Pound likely to continue appreciating versus Euro
-    View our monthly British Pound/US Dollar Exchange Rate Forecast

The British Pound was among the top performing currencies to finish the week’s trade, as relatively bullish fundamental developments helped push the currency from major bearish sentiment extremes. The highly-anticipated Bank of England monetary policy statement predictably shook FX markets, sending the British Pound immediately higher on unexpectedly limited actions from the central bank. The BoE expanded its Quantitative Easing measures by ₤25 billion to ₤200Bn—normally a bearish fundamental shift. Yet financial markets are all about discounting expectations, and consensus forecasts of a ₤50Bn change meant that the British Pound actually rallied on the news. Whether or not the GBP can continue recent gains may depend on the coming week’s employment numbers, but previously-extreme FX market positioning suggests that risks remain to the topside through the foreseeable future.
 

Swiss Franc May Decline as Path Clears for Risk Correction

Fundamental Forecast for Swiss Franc: Bearish

- Swiss Unemployment Rate Rises to Highest in 11 Years
- Consumer Prices Shrink For the Eighth Straight Month

With little by way of scheduled event risk on the economic calendar and firmly anchored expectations about monetary policy in place for the foreseeable future, the Swiss Franc is likely to fall in with the overall trajectory of risk sentiment.

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 to Look Past RBA Rate Hike, Trade on Risk

Fundamental Forecast for Australian Dollar: Bearish

- Australian Lending Unexpectedly Shrinks, Threatening Recovery
- New Home Sales See First Drop Since May, Says HIA
- Inflation Hits Decade Low in Q3, Rate Hikes Still Expected
- Business Confidence Surged to Highest in 15 Years, Says NAB
- Producer Prices Drop Most on Record on Currency Gains

The Australian Dollar may find little lasting support after the central bank delivers another interest rate increase as risk aversion undermines demand for the high-yielding currency. The markets have been confident in the likelihood of a November rate hike since the Reserve Bank of Australia became the first among the G20 monetary authorities to begin withdrawing stimulus in the aftermath of last year’s global financial crisis and credit crunch. The tone of the commentary included with October’s rate decision and the subsequent release of the minutes from the policy meeting was unequivocal, with Governor Glenn Stevens saying that it is now time to begin “gradually lessening the stimulus provided by monetary policy” and cautioning that not doing so would be “imprudent”.

New Zealand Dollar May Be Weighed By Weak Domestic Demand

Fundamental Forecast for New Zealand Dollar: Bearish

- New Zealand unemployment rate rose to a nine-year high of 6.5%
- New Zealand technical outlook points toward bearish potential

The New Zealand dollar managed to squeeze out some gains on the week despite holding to a range of 0.7100 – 0.7300. Several major releases home and abroad would generate brief bouts of volatility but failed to lead to any extended rallies. Risk sentiment which drives the “kiwi” continues to ebb and flow as markets look for the next catalyst to drive broader sentiment. The most significant development of the past week for the com-dollar may have been the dovish rhetoric from the RBA following their expected rate hike. The RBNZ is expected to follow their antipode cousin’s lead and embark on their own tightening policy. Last month’s rate holds by the New Zealand central bank and the prospect that Australian policy makers may take a more measured approach could weigh on the “kiwi” as yield expectations diminish. New Zealand unemployment rising to a nine-year high of 6.5% may also keep policy makers from raising rates as premature tightening could threaten the economic recovery.