Forecasts

US Dollar Gains on Market Turmoil, Eyes Bond Sales and TIC Data

Fundamental analysis, economic and market themes

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US Dollar Price Chart

FUNDAMENTAL FORECAST FOR THE US DOLLAR: BULLISH

  • US Dollar soars as emerging market turmoil stokes haven demand
  • Bond auction results and TIC data may cap yields, cooling the rally
  • Sentiment boost from US/Japan autos deal may not prove lasting

See the latest US Dollar forecast learn what will drive prices in the third quarter!

The US Dollar would not let a lull in local data flow slow upward progress last week, finding a catalyst in deteriorating risk appetite across financial markets. While the benchmark unit’s unrivaled liquidity was expected boost its haven appeal, the simmering US/China trade war was thought to be the likely culprit souring investors’ mood. As it happened, a meltdown in emerging market assets driven by turmoil in Turkey and Russia was the trigger, pushing the greenback to a 14-month high.

The week ahead offers an eclectic mix of would-be stimuli for continued volatility. Retail sales and consumer confidence data will inform Fed policy bets, but it would take an improbably dramatic deviation from forecasts to dislodge status quo expectations. The Economic Symposium in Jackson Hole, Wyoming later this month is likely to be the next real inflection point in the narrative. For now, markets have fully priced in another hike in September and peg the probability of a further increase in December at close to 60 percent.

Elsewhere on the docket, results from a series of bond auctions may generate attention. The markets have been concerned about the growth-negative implications of a spike in borrowing costs as the Treasury seeks to finance a yawning deficit amplified by a $1.5 trillion tax cut and $300 billion in increased spending championed by the Trump administration. The Dollar suffered as yields ticked down after demand was impressively stable at a record-setting 10-year note sale last week.

June’s TIC capital flow data will be similarly interesting. Net foreign purchases of US securities have risen alongside bond yields in the past two years, suggesting higher returns are attracting demand. That might bode well for uptake as the Treasury steps up debt issuance. Data showing more of the same might be supportive for the greenback considering the Fed’s hawkish lead in the G10 space. To the extent that this keeps a lid on borrowing costs however, it may yet be interpreted as limiting scope for appreciation.

Needless to say, turmoil around the broader markets remains an important consideration. US tensions with Iran, Turkey and Russia remain unresolved. Trade war concerns continue to escalate as Washington and Beijing hike tariffs on each other. An accord avoiding auto import tariffs on Japan seems likely. Such a result will probably offer a bit of a respite from risk aversion but the overall landscape seems too treacherous to conclude that this will be sufficient for a lasting ‘risk-on’ shift in sentiment.

FX TRADING RESOURCES

--- Written by Ilya Spivak, Sr. Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter



Euro Forecast: Euro to Remain Under Fire as Attention Stays on Turkey

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Euro Forecast: Euro to Remain Under Fire as Attention Stays on Turkey

Fundamental Forecast for EUR/USD: Bearish

- With the Turkish Lira in freefall, contagion hit European financial markets as investors questioned whether European banks’ exposure to Turkey could provoke another financial crisis in the region.

- Until the Turkey issue gets on the path to resolution – it’s going to get worse before it gets better – there is very little that is going to impact the Euro otherwise (particularly this week’s economic calendar).

- The IG Client Sentiment Index has shifted to a ‘mixed’ outlook from ‘bullish’ earlier last week.

See our long-term forecasts for the Euro and other major currencies with the DailyFX Trading Guides.

The Euro may not have been the worst performing major currency, but it had a terrible end to last week as fresh concerns emerged on its eastern front. With the Turkish Lira in freefall, contagion hit European financial markets as investors questioned whether European banks’ exposure to Turkey could provoke another financial crisis in the region. EUR/JPY dropped by -1.74%, wiping out all of its progress since May 30 in the process, while EUR/USD slid by -1.36%, falling to its lowest level in 13-months.

Needless to say, after a relatively quiet period for the Euro – many of the EUR-crosses had been rangebound over the past two months – volatility has exploded higher in a detrimental manner. What was previously seen as an expected period of monetary policy being on autopilot, now is riddled with questions about whether or not the European Central Bank will even have the ability to withdraw its monetary stimulus on its current projected timeline (reminder: end QE in December 2018; raise rates in “summer 2019”).

According to a report released by the Financial Times on Friday, the ECB’s supervisory wing, the Single Supervisory Mechanism, had been in the process of reviewing European banks’ exposure to Turkey following the sharp depreciation seen in the Turkish Lira in recent months.

ECB regulators have begun to express concern that Turkish borrowers are improperly hedged against Lira weakness, and may begin to default on their foreign currency loans – meaning European banks’ balance sheets could be coming back under pressure. Per the Bank of International Settlements, Turkish borrowers owe Spanish banks $83.3 billion, French banks $38.4 billion, and Italian banks $17 billion.

Accordingly, the juxtaposition between the ECB and the Fed could not be more apparent now, with the Fed on the cusp of raising rates by 25-bps again next month, and the ECB being in the potential position to needing to provide emergency liquidity assistance to financial institutions under its purview. Until the Turkey issue gets on the path to resolution – it’s going to get worse before it gets better – there is very little that is going to impact the Euro otherwise (particularly this week’s economic calendar).

Traders should be looking both ways for volatility moving forward, especially now that positioning has been flattened out. Per the CFTC’s COT report released for the week ended August 7, speculators held +10.6K net-long Euro contracts, a -93% decline from the all-time high set during the week ended April 17 (+151.5K contracts).

Given that the Turkish Lira meltdown didn’t occur until Friday, the ensuing knock-on impact to the Euro wouldn’t have appeared in the most recent COT report; but it would seem very likely that, given the already thin positioning for the week ended August 7, speculators may have turned net-short the Euro for the first time since the week ended May 1, 2017.

FX TRADING RESOURCES

Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher, email him at cvecchio@dailyfx.com

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



USD/JPY Weakness to Persist Bearish Formations Take Shape

Central bank policy, economic indicators, and market events.

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USD/JPY

Fundamental Forecast for Japanese Yen: Bullish

Fresh developments coming out of the U.S. economy have done little to influence the near-term outlook for USD/JPY even as the data prints put pressure on the Federal Open Market Committee (FOMC) to raise the benchmark interest rate, and recent price action raises the risk for a further decline in the dollar-yen exchange rate as it carves a series of lower highs & lows.

The lackluster reaction to the unexpected uptick in the core U.S. Consumer Price Index (CPI) keeps the near-term outlook tilted to the downside, and there appears to be a broader shift in USD/JPY behavior as both price and the Relative Strength Index (RSI) snap the bullish trends from earlier this year.

Bear in mind, the data prints should keep the Federal Reserve on track to further normalize monetary policy as Richmond Fed President Thomas Barkin, a 2018-voting member on the FOMC, warns that ‘it is difficult to argue that lower than normal rates are appropriate when unemployment is low and inflation is effectively at the Fed’s target,’ and the central bank may continue to prepare U.S. households and businesses for higher borrowing-costs as Chairman Jerome Powell & Co. largely achieve the dual mandate for monetary policy.

Japanese yen Target Rate Probabilities for Sep 26 2018 Fed Meeting

In turn, Fed Fund Futures may continue to reflect expectations for four rate-hikes in 2018 as market participants appear to be gearing up for an adjustment in September and December, but recent price action warns of a larger pullback from the 2018-high (113.18) as the exchange rate and the Relative Strength Index (RSI) track the bearish formations carried over from the previous month.

Look ahead, attention turns to the U.S. Retail Sales report as household spending is projected to increase 0.1% in July following a 0.5% expansion the month prior, and signs of slowing consumption may ultimately keep USD/JPY under pressure as it dampens the outlook for growth and inflation.

USD/JPY Daily Chart

Japanese Yen Daily Chart

Recent price action in USD/JPY raises the risk for a larger pullback as it carves a series of lower highs & lows, with the Relative Strength Index (RSI) reflecting a similar dynamic as it appears to be coming off of trendline resistance. In turn, the lack of momentum to push back above the 111.10 (61.8% expansion) to 111.60 (38.2% retracement) raises the risk for a move towards the 109.40 (50% retracement) to 110.00 (78.6% expansion) region, with the next downside region of interest coming in around 108.30 (61.8% retracement) to 108.40 (100% expansion), which sits just above the May-low (108.11).

For more in-depth analysis, check out the Q3 Forecast for Japanese Yen

Additional Trading Resources

Are you looking to improve your trading approach? Review the ‘Traits of a Successful Trader’ series on how to effectively use leverage along with other best practices that any trader can follow.

Want to know what other currency pairs the DailyFX team is watching? Download and review the Top Trading Opportunities for 2018.

Interested in having a broader discussion on current market themes? Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.



GBP: UK Inflation and Wages Data to Help Sterling Consolidate

Fundamental analysis and financial markets.

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GBP/USD

Fundamental Forecast for GBP: Neutral

Sterling (GBP) Talking Points:

  • Inflation and wages may nudge a fraction higher, giving Sterling a much-needed boost.
  • Talk of EU concession in Brexit negotiations gave the British Pound a small leg-up.

The DailyFX Q3 GBP Forecast is available to download.

The market continues to push GBP lower, but investors need to take care if taking a short Sterling position, with one closely followed technical indicator flashing up ‘oversold’ market conditions. GBPUSD has been hit down to a one-year low around 1.2770 which could provide a base for the pair. EURGBP has traded above 0.9030 but quickly reversed and would need another strong driver to break higher again as the euro begins to price in potential banking problems due to the systemic weakness of the Turkish Lira. The RSI indicator for both these pairs is either on or in oversold territory and should be watched closely.

Ahead, the data calendar has UK employment and wages data on Tuesday at 08:30 GMT and the latest inflation release of Wednesday at the same time. Unemployment is expected to stay steady at 4.2% while wages, both with and without bonuses, are seen nudging a fraction higher. Inflation is also set to remain steady with a slight chance of an upside beat, with higher oil prices and a weaker British Pound the likely drivers.

DailyFX Economic Calendar for the week ahead. We will be taking a more in-depth look at UK data releases Brexit and other UK asset market drivers on Monday at 10:30GMT during our UK Key Events and Markets Webinar.

This week a story in The Timessuggested that EU members may be willing to let the UK stay in the common market for goods and allow them to be in control of freedom of movement, one of the four pillars that the EU has previously stated could not be moved. Sterling nudged a fraction higher as this story rippled through the market before the US dollar’s latest surge saw GBPUSD go below 1.2800.

GBPUSD Daily Price Chart (May 2017 – August 10, 2018)

GBP: UK Inflation and Wages Data to Help Sterling Consolidate

Traders may be interested in two of our trading guides – Traits of Successful Traders and Top Trading Lessons – while technical analysts are likely to be interested in our latest Elliott Wave Guide.

--- Written by Nick Cawley, Analyst

To contact Nick, email him at nicholas.cawley@ig.com

Follow Nick on Twitter @nickcawley1



Gold Prices in Tug-Of-War Between USD Strength and Safe-Haven Demand

Short term trading and intraday technical levels

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XAU/USD

Fundamental Forecast for Gold: Neutral

Gold prices are lower for the fifth consecutive week with the precious metal down 0.3% to trade at 1211 ahead of the New York close on Friday. The decline takes price back into key support we’ve been tracking for weeks now and comes amid rising geo-political tensions and as broader equity markets flat-lined. Renewed strength in the US Dollar has been unable to materially impact gold as of late with haven demand starting to offer more meaningful support for the battered metal. But is it enough to turn the tide on this massive multi-month sell-off?

Gold Bears Weigh Risk of Flight to Safety vs US Dollar Strength

Signs that the US economy remains on solid footing were reinforced on Friday with the August US Consumer Price Index (CPI) showing a surprise uptick in the core rate of inflation to the tune of 2.4% y/y. Fed Fund futures are still pricing in a 60% chance for a fourth rate hike in December – remember, expectations for highs rates will typically weigh on gold prices which have already been hampered by continued strength in the US Dollar.

However with mounting geo-political tensions (the China Trade War, the economic rift with Turkey and the announcement of increased sanctions on Russia), a flight to safety may yet offer some support to gold prices which have plummeted more than 11% off the yearly highs. Despite the decline in price, gold has managed to hold just above a key pivot in price and heading into next week the focus remains on a reaction off the recent lows.

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Spot Gold IG Trader Positioning

Gold Trader Sentiment
  • A summary of IG Client Sentiment shows traders are net-long Gold- the ratio stands at +6.71 (87.0% of traders are long) –bearish reading
  • Long positions are 3.5% higher than yesterday and 1.1% higher from last week
  • Short positions are 3.6% lower than yesterday and 9.2% higher from last week
  • We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Spot Gold prices may continue to fall. Traders are more net-long than yesterday but less net-long from last week andthe combination of current positioning and recent changes gives us a further mixed Spot Gold trading bias from a sentiment standpoint.

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Gold Weekly Price Chart

Gold Weekly Price Chart

For weeks now we’ve noted that, “It’s too risky to begin positioning for a turn, but the threat of a near-term recovery remains evident while above the lower 50-line / 2017 March low-week close at ~1204,with our expectations for, “side-ways–to-lower price action.” The outlook remains unchanged heading into next week as prices continue to hold just above support.

“Note that weekly RSI is probing a break into oversold territory and IF prices were to close here, the risk would remain weighted to the downside heading into next week from a momentum perspective. That said, look for interim resistance at 1234/36 where the 200-week moving average and the December low converge on the median-line of the broad descending pitchfork formation we’ve been tracking off the 2017 / 2018 highs. A weekly close above this threshold would be needed to suggest that a more significant low is in place. A break lower from here targets subsequent objectives at the 50-line around ~1190s backed closely by a structural support confluence at 1175/80(area of interest for possible exhaustion / long-entries IF reached).”

Bottom line: “Although the broader risk remains weighted to the downside, gold prices have responded to a major support pivot and could offer a near-term reprieve to the recent selling pressure. The immediate focus heading into next week is on the 1204 support pivot.” For a complete technical breakdown of the near-term Gold price levels (daily & intraday), review last week’s XAU/USD Technical Outlook.

What are the traits of a Successful Trader? Find out with our Free eBook!

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

Follow Michaelon Twitter @MBForex or contact him at mboutros@dailyfx.com



CAD Rate Forecast: NAFTA Concerns Ease, Focus on Canadian Jobs

Fundamental analysis, news events, market reactions and macro trends.

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CAD Rate Forecast: NAFTA Concerns Ease, Focus on Canadian Jobs

Fundamental Forecast for CAD: Bullish

USDCAD Analysis and Talking Points:

  • Bullish CAD as Canadian Data Outperforms US
  • Bond Spreads Tighten in Favour of CAD
  • Eyes on Canadian Jobs Report

See our Q3 CAD forecast to learn what will drive the CAD through the quarter.

Last week, we were bullish on the Canadian Dollar and provided USDCAD remains below 1.30 we see no reason to change this view. The Loonie has continued to enjoy another flurry of strong data points this weeks. Firstly, the most recent GDP data rose above economic forecasts, showing the fastest growth spurt in a year, led by oil prices, while Friday’s trade deficit saw a significant narrowing, consequently supporting the case for another rate hike by the end of this year. Interestingly, recent data has outperformed relative to the US, as shown by the Citi Surprise Index, in which the US index has dipped into negative, relative to Canada which switched to positive, advocating the case for further USDCAD weakness.

US/Canadian Data Outperformance Index

CAD Rate Forecast: NAFTA Concerns Ease, Focus on Canadian Jobs

Interest Rate Differentials Continue to Tighten

Rate hike expectations from the Bank of Canada has continued to firm with around 17bps worth of tightening priced in thus far for the policy meeting in October, while a 25bps rate hike is fully priced in by December. As such, US-CA 2yr yield bond spreads have continued to move in favour of CAD and has breached through the psychological 60bps mark, which has continued to keep USDCAD on the backfoot.

Focus Going Forward for CAD

As we look to next week’s economic calendar, the vocal point for Canada will be the jobs report at the backend of the week, while eyes will also be on headlines regarding NAFTA which continues to present the biggest risk to the Canadian economy.

Next week’s Economic Calendar

CAD Rate Forecast: NAFTA Concerns Ease, Focus on Canadian Jobs

Source: DailyFX

USDCAD PRICE CHART: DAILY TIMEFRAME (December 2017-August 2018)

CAD Rate Forecast: NAFTA Concerns Ease, Focus on Canadian Jobs

Chart by IG

USDCAD Technical Levels

Resistance 1: 1.3000 (Psychological Level)

Resistance 2: 1.3115 (23.6 Fibonacci Retracement)

Resistance 3: 1.3180-1.32 (Resistance Area)

Support 1: 1.2980 (100DMA)

Support 2: 1.2940-50 (Support Area)

CAD TRADING RESOURCES:

--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX



Australian Dollar Faces Plenty of Negatives, But Range Looks Firm

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AUD/USD

Fundamental Australian Dollar Forecast: Neutral

Australian Dollar Talking Points:

  • The Australian Dollar has been stuck in a daily chart range for a couple of months
  • Impetus is arguably building toward the downside
  • However this doesn’t look obviously like the week it boils over

Find out what retail foreign exchange traders make of the Australian Dollar’s prospects right now, in real time, at the DailyFX Sentiment Page

The Australian Dollar has been stuck in a broad trading band since the middle of June and the coming week is unlikely to see it break.

To be sure, we will get plenty of juicy little economic snippets out of the Australia in the next seven days. Business and consumer confidence numbers are due, along with key official unemployment data. They are expected to show continued strong job creation, probably only adding to the conundrum of persistently weak inflation.

However the numbers go, though, the problem for Aussie bulls will remain what it has been all year. None of them will move the dial on Australian interest rate expectations, which remain moribund. Rate futures markets do not fully price-in even a quarter-point increase in the record-low 1.50% Official Cash Rate for all of next year.

Last week’s Reserve Bank of Australia decision to hold once again means that that particular rate is now heading unchanged into its third year – something unprecedented in Australian financial history. The painful comparison with a US in which rates have risen quite sharply- and will continue to do- so remains stark.

Then there’s trade. There’s always trade these days, isn’t there? Australian Dollar investors are casting nervous eyes at relations between Washington and Beijng, as well they might. Australia has a vast trading relationship with the latter and a crucial geostrategic partnership with the former. It has almost as much interest in a resolution as do the main players themselves. And resolution will be a long time coming.

Looming over all this is the suspicion that the RBA has no real problem with a weaker Aussie, given its regular pronouncements to the effect that too much currency strength hurts its ability to hit its goals.

Overall, AUD/USD probably remains biased downwards once this persistent range breaks. However as this week looks unlikely to be the week when it does, it’s got to be a neutral call.

AUD/USD is consolidating, but is still retaining a down-trend.

Resources for Traders

Whether you’re new to trading or an old hand DailyFX has plenty of resources to help you. There’s our trading sentiment indicator which shows you live how IG clients are positioned right now. We also hold educational and analytical webinars and offer trading guides, with one specifically aimed at those new to foreign exchange markets. There’s also a Bitcoin guide. Be sure to make the most of them all. They were written by our seasoned trading experts and they’re all free.

--- Written by David Cottle, DailyFX Research

Follow David on Twitter@DavidCottleFX or use the Comments section below to get in touch!



NZD/USD Drop May Gain on Brexit, Turkish Financial Exposure Fears

Classic technical analysis, macro and economic themes

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NZD/USD

New Zealand Dollar Fundamental Forecast: Bearish

NZD Outlook Talking Points:

  • Dovish RBNZ and concerns over European bank exposure to Turkey sent NZD/USD lower
  • Local economic event risk for the New Zealand Dollar sparse, placing focus on sentiment
  • Brexit and lingering Turkish fears can weaken stocks. USD may also act as a safe haven
  • AUD/NZD may act as “risk neutral”, rising on better-than-expected Australian jobs data

Have a question about what’s in store for New Zealand Dollar next week? Join a DailyFX Trading Q&A Webinarto ask it live!

After consolidating since late-June, the sentiment-linked New Zealand Dollar made its decision and headed lower against the US Dollar. Arguably, it was a dovish RBNZ that sent NZD/USD tumbling the most in a day in six months (-1.3%). But, it did not end there. Worries about European bank exposure to Turkey amidst the Lira’s performance soured market mood. NZD/USD fell about 2.37% last week, the most since October 2017.

A major break lower in NZD/USD begs the question if it could be sustainable. Continuation might mean eventually testing the January 2016 and August 2015 lows. This could be the case, but perhaps not because of domestic event risk. New Zealand’s economic calendar docket is lacking critical events. Even if it did, the central bank’s downgrade in future rate hike expectations undermines its relevance if data outperforms.

Apart from retail sales, the US economic docket is also relatively sparse on key data. Although it may be worth tuning in for the New York Fed’s Q2 household debt and credit report on Monday. We shall see how tightening local credit conditions are impacting borrowing. If lending is still strong and upbeat, it could yet bolster the case for the Fed to raise rates to slow inflation. This could boost USD at the expense of NZD.

With that in mind, the focus for the New Zealand Dollar in the week ahead will likely come from risk trends and how global stock indexes behave. Rising worries around Turkey, and to a certain extent ever-present ones around Italy, could undermine both equities and ECB 2019 rate hike bets. The former could weigh on the Kiwi Dollar while the latter can lift the greenback further at the expense of NZD.

Meanwhile across the English Channel, the risk of the UK inching closer to a “no deal” Brexit outcome also overshadows global stocks. Last week, Trade Secretary Liam Fox said that the chance of one is at 60-40 odds. Prime Minister Theresa May is also preparing the country in the event that one occurs. A meeting to discuss that with her cabinet members is reportedly scheduled to occur in early September.

Next week will also see Brexit talks resume in Brussels on Thursday and Friday. Given that Mrs. May seems to be stepping up preparations in the event that the UK abruptly breaks off with the EU, delays in the progress of negotiations could increase uncertainty as the March 2019 withdrawal deadline approaches. If the markets are unnerved by developments from Brussels, the sentiment-linked New Zealand Dollar could be at risk. This is amplified if the US Dollar takes a role as a safe haven ahead too, adding to NZD/USD downside pressure.

On a side note, AUD/NZD could net out market mood swings as it sometimes behaves as a “risk neutral” currency pair. This allows it to focus more so on developments relating to RBA and RBNZ monetary policy expectations. A better-than-expected Australian jobs report next week could push AUD/NZD higher. Data out of the country has been increasingly outperforming relative to expectations lately. This opens the door for an upside surprise, perhaps boosting RBA rate hike bets amidst a dovish RBNZ.

Check out our 3Q forecasts for the US Dollar and Equities in the DailyFX Trading Guides page

New Zealand Dollar Trading Resources:

--- Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter



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