US Dollar at Risk as Traders Cut Exposure Amid Information Vacuum

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US Dollar at Risk as Traders Cut Exposure Amid Information Vacuum

Fundamental Forecast for the US Dollar: Neutral

  • US Dollar at risk of kneejerk volatility as markets struggle to form outlook
  • Murky fiscal policy may limit market-moving potential of 4Q US GDP data
  • Information vacuum may encourage profit-taking on long USD exposure

Where will the US Dollar go in the first quarter of 2017? Get our forecast here!

A mostly thin economic calendar leaves the US Dollar to ponder the implications of a still-murky fiscal policy of newly-minted President Donald Trump in the week ahead. The promise of generous stimulus initially stoked bets on faster growth and inflation, sending shares higher alongside the greenback as investors foresaw richer earnings and a steeper Fed rate hike cycle. The absence of details has soured optimism however and the currency has been mostly on the defensive since the calendar turned to 2017.

Big-ticket fundamental news-flow does not enter the picture until Friday, when market participants will get their first look at fourth quarter US GDP figures. The annualized growth rate is expected to have slowed to 2.2 percent in the final three months of the year, down from 3.5 percent in the preceding period. Robust improvement in US data outcomes relative to consensus forecasts over the same period suggests analysts may be underestimating the economy’s vigor, opening the door for an upside surprise.

Under normal circumstances, such a result might’ve encouraged bets on a more hawkish Fed and sent the US currency upward. It seems unlikely that the central bank will do anything but wait until there is greater clarity about where the White House is steering however. Indeed, FOMC policymakers including Chair Yellen have consistently stressed that much for their outlook depends on the impact of whatever fiscal program Mr Trump pursues. This may mean that the GDP release loses much of its market-moving might.

This makes the US unit vulnerable to kneejerk volatility as markets jump from one headline to the next, attempting to divine direction. If price action so far this year is telling, investors faced with such a backdrop prefer to scale back exposure and wait for greater clarity from the sidelines before committing one way or another. With net speculative long USD exposure still at the highest in over a year (according to CFTC data), ample room for profit-taking remains. This hints that the path of least resistance leads downward.

EUR/USD in Choppy Waters as Dovish Draghi at Odds with Better Data

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EUR/USD in Choppy Waters as Dovish Draghi at Odds with Better Data

Fundamental Forecast for EUR/USD:Neutral

- EUR/USD continues to grind higher, finishing the week up just +0.56% at 1.0698.

- Draghi’s dovish tilt offset in EUR/USD by uncertainty surrounding the early days of the Trump administration.

- See the DailyFX Economic Calendar and see what live coverage for key event risk impacting FX markets is scheduled for the coming days on the DailyFX Webinar Calendar.

See the DailyFX Q1’17 and 2017 Trade of the Year Forecasts

The Euro swung between gains and losses against most of its major currencies (save the Canadian Dollar) at the end of the week, dragged along by competing policymakers on both sides of the Atlantic. The European Central Bank outlined a dovish point of view to its policy approach in the early part of the year, while a lack of clear policy approach by new US President Donald Trump’s administration with respect to the US Dollar kept EUR/USD on edge throughout the week.

The ECB outlined a fairly dovish perspective on Thursday, highlighted by President Draghi’s attitude towards inflation: “we’re looking through [it].” As we’ve covered in previous iterations of this weekly piece, inflation expectations have been edging higher in the Euro-Zone over the past two months, thanks in part to rising yields globally and boosted Brent Oil prices. In a sense, the data has been at odds with the ECB’s assessment. ECB President Draghi will have a chance to further explain the Governing Council’s view during his speech on Monday.

In the coming week, data out of the Euro-Zone is expected to show further improvement for growth prospects, which may make the ECB’s goal of keeping the Euro weak versus its major trading partners more difficult. On Monday, the preliminary January Euro-Zone Confidence reading is due to improve to -4.8 from -5.1. The aggregate collection of PMIs from across the Euro-Zone on Tuesday are expected to culminate in the initial Euro-Zone Composite PMI for January edging higher to 54.5 from 54.4 – an indication for a quarterly growth rate around +0.4% or +0.5%.

While that data aren’t expected to be great, they will show signs of further slow-but-steady improvement in the Euro-Zone’s growth prospects. Yet given the Governing Council’s point of view, it seems that all that will result will be the ECB keeping policy on hold for the foreseeable future (three- to six-months), with the only adjustment likely being to the timeline of the QE program (extending the length of its QE program but reducing the pace of purchases). Any such announcement would come at a meeting with a new set of SEPs, which come in March, June, September, and December.

The US-German 2-year yield spread will be key to watch: on December 23, when it was 1.989%, EUR/USD traded at 1.0456; at the end of last week, it was 1.894%, and EUR/USD traded at 1.0698. If short-term US Treasury yields take another step back, then EUR/USD could easily trade to 1.0850 in the coming days.

--- Written by Christopher Vecchio, Senior Currency Strategist

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Rising U.S. CPI, Hawkish Fed Rhetoric to Tame USD/JPY Pullback

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Rising U.S. CPI, Hawkish Fed Rhetoric to Tame USD/JPY Pullback

Fundamental Forecast for the Japanese Yen: Neutral

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The failed run at the December high (118.66) keeps the near-term outlook for USD/JPY tilted to the downside, but the key developments coming out of the U.S. economy may prop up the exchange rate next week especially as the Federal Reserve appears to be on course to further normalize monetary policy in 2017.

The U.S. Consumer Price Index (CPI) may get increased attention this time around and spark a bullish reaction in the dollar as the headline as well as the core reading for inflation are both projected to pick up in December. Indeed, signs of stronger-than-expected price growth may push the Federal Open Market Committee (FOMC) to further prepare U.S. households and businesses for higher borrowing-costs as officials warn ‘the near-term forecast for consumer price inflation was somewhat higher than in the previous projection.’

Fresh comments from New York Fed President William Dudley, Minneapolis Fed President Neel Kashkari, Chair Janet Yellen and Philadelphia Fed President Patrick Harker may also heighten the appeal of the greenback as the 2017-voting members are scheduled to speak over the days ahead, and the group of central bank officials may endorse a more hawkish outlook for monetary policy as ‘‘the staff's forecast for real GDP growth over the next several years was slightly higher, on balance, largely reflecting the effects of the staff's provisional assumption that fiscal policy would be more expansionary in the coming years.’ In turn, Fed Fund Futures may continue to highlight bets for a June rate-hike, with market participants currently pricing a greater than 60% probability for a move ahead of the second-half of the year, but more of the same from central bank officials accompanied by another set of mixed data prints may drag on interest rate expectations and generate a more meaningful pullback in USD/JPY.

Rising U.S. CPI, Hawkish Fed Rhetoric to Tame USD/JPY Pullback

That said, USD/JPY stands at risk of staging a larger pullback, with the downside in focus for the days ahead as the pair continues to search for support. The failed test of the December high (118.66) may gain increased interest as a double-top formation appears to be taking shape, and we will keep a close eye on the Relative Strength Index (RSI) as it fails to preserve the upward trend carried over from the summer months and flashes a bearish signal.

British Pound Clings to ’Flash Crash’ Range Ahead of UK/US GDP Report

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British Pound Clings to ‘Flash Crash’ Range Ahead of UK/US GDP Report

Fundamental Forecast for the British Pound: Neutral

GBP/USD may continue to face range-bound conditions ahead of the ‘Brexit’ deadline as Prime Minister Theresa May pushes for a clean break from the European Union (EU), but the bearish sentiment surrounding the British Pound may subside over the near-term as the Bank of England (BoE) changes its tune for monetary policy.

Even though the BoE looks poised to retain the highly accommodative policy for the foreseeable future, the recent uptick in the U.K. Consumer Price Index (CPI) may sway central bank officials to adopt a more hawkish tone at the next ‘Super Thursday’ event on February 2, and Governor Mark Carney may show a greater willingness to gradually move away from the easing-cycle as he anticipates a ‘notable’ increase in inflation. With that said, market participants may pay close attention to Governor Carney next week as the central bank head is scheduled to speak at the G20 conference in Wiesbaden, Germany, but more of the same rhetoric may keep GBP/USD within the current range as the Monetary Policy Committee (MPC) warns ‘policy can respond, in either direction, to changes to the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target.’

Looking at the economic docket for the week ahead, the 4Q Gross Domestic Product (GDP) reports coming out of the U.K. & U.S. may generate a buzz as both regions are projected to grow at a slower pace compared to the previous quarter, but the backward-looking data prints may do little to alter the range-bound conditions in the pound-dollar exchange rate amid the diverging paths for monetary policy. Fed Fund Futures are now pricing a greater than 70% probability for a June rate-hike as Chair Janet Yellen argues the Federal Open Market Committee (FOMC) is ‘closing in’ on its dual mandate, and the pickup in interest-rate expectations continues to foster a long-term bearish forecast for GBP/USD as the central bank remains on course for further normalize monetary policy in 2017.

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British Pound Clings to ‘Flash Crash’ Range Ahead of UK/US GDP Report

The failed run at the June low (1.1905) may open up the British Pound ‘flash crash’ range especially as price & the Relative Strength Index (RSI) break out of the bearish formations carried over from the previous month. In turn topside hurdles are in focus for the days ahead, but near-term price action appears to be capped by the 50-Day SMA (1.2417), which stands just shy of the monthly opening high (1.2433).

Gold Off Key Resistance- Trump, US GDP to Determine Depth of Correction

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Gold Off Key Resistance- Trump, US GDP to Determine Depth of Correction

Fundamental Forecast for Gold: Neutral

Gold prices marched higher for a fourth consecutive week with the precious metal up 0.86% to trade at 1207 ahead of the New York close on Friday. Sustained weakness in the greenback continued to offer support for bullion which held near two-month highs as all the world shifted its attention to the inauguration of the 45th President of the United States. The technical & fundamental picture remains precarious near-term and although prices look due for a set-back, the broader outlook remains unchanged.

Heading into next week, traders will be closely eyeing the release of US 4Q GDP figures on Friday. Consensus estimates are calling for an annualized print of 2.2% q/q, down from 3.5% q/q. Keep in mind that interest rate expectations remain firmly rooted for the second half of the year with Fed Fund Futures citing a 74% chance for a hike at the June meeting. However, with the inauguration of a new president and a more ‘business friendly’ administration expected to take the reins, markets may take more cues near-term by the first few days of the Trump presidency. From a trading standpoint, while the broader focus remains constructive, the advance remains vulnerable heading into the last full week of January trade.

XAUUSD Speculative Sentiment Index

Gold Off Key Resistance- Trump, US GDP to Determine Depth of Correction

A summary of the DailyFX Speculative Sentiment Index (SSI) shows traders are net long Gold- the ratio stands at +1.51, down from 1.66 last week. It’s important to note that “SSI has continued to narrow from the 2016-extreme of +5.02 and has been accompanied by a marked change in price behavior.”

Note that the ratio is now approaching more neutral levels and highlights the risk of a near-term pullback in price. It’s too early to tell if this will develop into a more significant turn, but for now, the risk is for a correction lower while below resistance. That said, I’ll be looking for a continued build in short exposure / a flip to next short to suggest that a broader, more significant low is in place.

Gold Daily

Gold Off Key Resistance- Trump, US GDP to Determine Depth of Correction

Last week we noted that "Heading into next week, things get a bit dicey for gold. We can’t rule out a run on critical confluence resistance just higher at 1218, but we’ll generally be looking for an exhaustion pullback in prices with near-term support eyed at 1182.” The outlook / levels remain unchanged. I would be looking for a pullback next week to offer more favorable long entries with a break below interim support at 1200 targeting highlighted confluence slope support at 1182. A breach eyes longer-term resistance targets at 1238/41 & 1248.

---Written by Michael Boutros, Currency Strategist with DailyFX

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Canadian Dollar Looks to Poloz for Further Strength

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Canadian Dollar Looks to Poloz for Further Strength

Fundamental Forecast for CAD: Neutral

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The Canadian Dollar has been a resilient currency at the start of the year. Much of the strength is due in part to Oil’s consistency above a long-term focal point on the chart as well as the perception that improved inflation expectations in the United States could also send inflation expectations higher in Canada too.

On Wednesday, Bank of Canada governor Stephen Poloz will announce what is anticipated to be no change in rates, but in a low rate environment, much of the focus appropriately turns to the Central Bank outlook. Given the sharp rise in the Yield Curve in everywhere except Japan, there is a focus on whether or not Poloz will be discussing the next action from the Bank of Canada as a hike down the economic road as opposed to a stimulus measure or a cut, which could further push the Canadian Dollar higher.

After Wednesday’s Bank of Canada meeting on Wednesday, we will have CPI in Canada on Friday, which, is anticipated to tick higher given the overall tick higher in commodities and borrowing costs. Two components worth keeping in mind as we come to an arguably important pivot point in the Canadian Dollar is its prior stability against the USD and the relative strength it currently enjoys alongside other commodity currencies.

Over the second half of 2016, USD/CAD moved higher by ~6.5%, which is a lot on an absolute basis, but little compared to other major moves lower against the USD as seen by GBP/USD, EUR/USD, and most notably, USD/JPY. These three pairs saw a move between 10-20% in favor of USD, which helps show on a relative basis that the Canadian Dollar had a hard time weakening thanks in part to rising Oil prices.

CAD currently sits as one of the strongest currencies in G10FX alongside AUD that is working on its third weekly advance and NZD with a ~2.5% weekly appreciation. Given the commodity dollar-bloc strength, it’s fair to think that the momentum could continue, which would likely translate further into both technical and fundamental favor likely leading to further CAD strength. Thursday’s USD/CAD move brought the lowest price since October, and the previously mentioned momentum would favor continuation without a USD/CAD close above Wednesday’s high of 1.3293.


--- Written by Tyler Yell, CMT, Currency Analyst/ Trading Instructor

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Follow him in the DailyFX Real Time News feed and Twitter at @ForexYell.

Australian Dollar Figthback Can Continue

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Australian Dollar Figthback Can Continue

Fundamental forecast for the Australian Dollar: Bullish

  • The Australian Dollar has made back about half the losses inflicted by the “Trump trade”
  • Stronger commodity prices and a rethink about the US President-elect have helped
  • Barring data shocks this week, the rally can continue

Is the Australian Dollar in a sweet spot? Well, that might be premature optimism but it’s certainly in a better place than it was back in November.

In the last two weeks, the currency has made back about half of the losses suffered against its big US brother in the aftermath of Donald Trump’s shock election win. How? Higher prices for Australia’s two raw-material export mainstays coal and iron ore have helped.

They’ve risen on hopes for better demand out of China. These hopes in turn hang on twin pegs. The first was a shock December surge in Chinese factory gate prices, to levels not seen since 2011. The second is renewed hope for China’s overall economic showing in 2016. We’ll get official Gross Domestic Product figures on Friday January the 20th, but an estimate already released by the influential National Development and Reform Commission put growth at 6.7%. That would be bang in the middle of Beijing’s January range estimate and, even though it would still be the slowest growth for nearly thirty years, it would be more than enough to offset hard-landing worries.

This belief seems to be very strong. Even a set of Chinese trade data which might charitably be called patchy failed to put a dent in AUD/USD on Friday. It’s possible that currency traders remained focused on rising imports, to the point where they’ve managed to overlook exports’ 6% swoon.

So, that’s China.

The Australian currency’s other big helper has come courtesy of a certain amount of rethinking about what President Trump will mean for the market once he’s behind the Oval Office desk. Trump was maddeningly elusive in his first proper meeting with US journalists this week, failing to put much flesh on the bones of his policy program. Currency investors who’d frantically bid the greenback higher since November, causing it to rise against just about everything including the Aussie, are now more inclined to wait until they hear concrete policy proposals.

Can the Aussie bull-run last another week in this atmosphere? Well, there are risk events, of course. China’s GDP data will be be one, but there are some scheduled data darts that will hit closer to home. We’ll get official employment statistics from the Aussie’s home country, along with home loan volumes and, perhaps most tellingly, a look at January’s consumer confidence. November’s retail sales numbers have already underwhelmed.

However, assuming no huge shocks in these numbers, there would seem little reason to doubt that AUD/USD can go higher yet. It’s probably also worth keeping an eye on President-elect Trump’s Twitter feed!

Quiet achiever? AUD/USD has made back a very good chunk of its “Trump trade falls.

Australian Dollar Figthback Can Continue

Chart compiled using TradingView

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--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter:@DavidCottleFX

Kiwi Shrugs-Off Resignation of PM Key as Wheeler Signals End of Rate-Cut Cycle

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Kiwi Shrugs-Off Resignation of PM Key as Wheeler Signals End of Rate-Cut Cycle

Fundamental Forecast for NZD: Neutral

Earlier in the week, the world was caught by a bit of a surprise with the announcement of the resignation of New Zealand Prime Minister, John Key. Mr. Key was unique in his role as a political leader, as he has considerable financial market experience after his tenure as an FX Dealer at Merrill Lynch. ‘Teflon John’ had become known for his ability to help steer New Zealand through the financial crisis relatively unscathed during his 3-term tenure; and very few were expecting Mr. Key’s resignation.

But during his weekly press conference, Mr. Key announced that he would not be seeking a fourth-term and would be stepping down from the post of Prime Minister; calling it ‘the hardest decision I’ve ever made.’ Stepping in for Mr. Key to take over the National Party until a caucus is held to choose a new leader will be Mr. Key’s prior intra-party rival, Bill English. And while Mr. English is quite a bit different from Mr. Key, with Mr. English being noted for his stability while Mr. Key is known for following his ‘gut instinct,’ it’s difficult to discern a vast amount of divergence in economic policies from this point; so it would appear that this has had a net-neutral bearing on the New Zealand Dollar throughout the most recent week.

However, more pertinent to near-term Kiwi-Dollar spot rates is the speech on Thursday from the head of the Reserve Bank of New Zealand, Mr. Graeme Wheeler. In this speech Mr. Wheeler signaled that the bank felt current policies could achieve the 2% inflation goal; deductively diminishing the prospect of additional near-term rate cuts. Also in that speech, Mr. Wheeler hinted towards optimism while sharing his expectation for monetary policy to remain as accommodative in the near-term. He also went on to say that while there remains considerable global uncertainties, the bank is expecting continued strong growth over the next 18 months as driven by construction, migration and tourism. And while growth is coming-in stronger, inflation remains subdued and below trends over the past two decades, which brings us to the quandary that the RBNZ is likely going to have to continue to contend with for the foreseeable future.

Inflation in New Zealand is asymmetric; with extremely strong real estate prices and inflationary pressures that are significantly-elevated beyond historical norms. This makes the prospect of deeper interest rate cuts appear even more risky given the fact that this additional motivation to homebuyers may driver prices even-higher without necessarily driving-up core inflation to the same degree. This is likely one very relevant reason that NZD/USD has been so well supported around the support zone from .6950-.7050: The RBNZ’s in-between a rock and a hard place and there really isn’t much room for them to operate. Hiking rates to temper real estate price growth runs the risk of choking-off growth to the rest of the economy while driving NZD-higher, which could expose exporters to even more pain down-the-road. Cutting rates maybegin to help core inflation, but real estate prices will likely see an even bigger jump, exposing the potential for a ‘bubble’ within the New Zealand economy.

Next week’s New Zealand economic data is extremely light, with but one medium-importance announcement on the docket with the NZ Performance of Manufacturing Index on Wednesday. Likely more pertinent to NZD on next week’s calendar, and also on Wednesday, is the Federal Reserve’s rate decision. A hike from the Fed is largely assumed here, but far more relevant is how aggressive the bank might be looking to hike rates in 2017; and this can have a strong bearing on near-term NZD/USD price action.

Due to this opaque backdrop – the forecast for the New Zealand Dollar will be held at neutral for the week ahead. Should USD-strength around the Fed’s meeting on Wednesday bring on a revisit to the well-tested support zone between .6945-.7050, bullish positions may become attractive again.

--- Written by James Stanley, Analyst for

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