Dollar Struggles as Rate Disbelief Lingers, Euro and Yen Gain Ground

Fundamental analysis and market themes.

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Dollar Struggles as Rate Disbelief Lingers, Euro and Yen Gain GroundDollar Struggles as Rate Disbelief Lingers, Euro and Yen Gain Ground

Fundamental Forecast for Dollar:Neutral

  • EURUSD and USDJPY present the most pertinent motivators for Dollar movement and both have weighed the Greenback
  • A long list of data releases is topped by the April NFPs while the round of Fed speakers will attempt to thaw rate hike doubts
  • See our 2Q forecasts for the US Dollar and market benchmarks on the DailyFX Trading Guides page

The Dollar dove to end this past week at its lowest level in 11 months. The extension of the currency’s slide from its 13-year high set back in late January (now down over 4.5 percent) was fueled by a distinct loss of traction in rate forecasts. Much of the Greenback’s advance these past years has been founded in one way or another from this projected yield advantage. As that fundamental lead eases, the currency loses lift. The question is how much of its lead will be lost to unfavorable winds? That is just as much a statement on the Dollar’s counterparts as it is reflection of the Federal Reserve’s course. There will certainly be plenty of mileposts throughout the coming week to shape speculation. And, if the tentative slip in risk trends gains purchase; we may find the dormant haven status finally return.

Looking back to this past week, I was expecting the Dollar to stabilize and even regain some lost ground on the basis that moderation from the central bank’s tone and/or softening of US growth would be discounted; and the currency would benefit from the fundamental disadvantage of its counterparts. However, the substantial strengthening of the currency’s primary crosses – the Japanese Yen and Euro –significantly overpowered the passive appeal in the Dollar. In the week ahead, the collective course of these crucial peers may exact as much influence on the Greenback’s course as its own fundamental docket.

To assess how much cross-currency pressure afflicts the Dollar, there are two factors to consider: the influence (liquidity) of the counterpart and its momentum. The Euro easily dominates the field of counterparts. Where, according to the BIS triennial report, the US Dollar is on one side of 87 percent of the world’s currency exchanges (so total of 200 percent); the Euro was second at 33 percent. When the Dollar is adrift, an engaged Euro can render the most indirect influence. With EUR/USD just below 1.1500 – the general zone of resistance back to the start of 2015 – the pressure is material. The Eurozone 1Q GDP report this past week set out a noteworthy beat and put the aggregate economy back above the level that it stood before the recent crisis. Yet, the performance is uneven and a solid foundation for appreciation is proving difficult to register.

The Japanese currency poses the greater threat to the Greenback. The rapid swell in the Yen this past week was a response to the recognition that the BoJ was not going to back shorts with the upgrade in accommodation they were expecting. Further advance for JPY would more likely come through failing confidence in the central bank’s ability to influence its exchange rate which in turn sees deleveraging of exposure aimed at front-running the BoJ and/or collecting the modest carry still left in the pairs. Genuine and market-wide risk aversion would be the more capable mode for this effort, but that would see the Dollar regain its haven status amongst other crosses – likely including the EUR/USD – and the Greenback would find a net inflow and advance.

While crosswinds from other currencies and the ever-foreboding sentiment collapse can lever a passive Dollar, the Greenback can also take charge of its own course. The fading interest in the US monetary policy advantage can be recharged if the event risk can override the market’s skepticism. Both data and Fedspeak will offer an opportunity to shake rate speculation to life. There is a long list of data including sentiment surveys, trade, factory and service activity, housing and credit; but the real weight rests with the April labor report on Friday. The wage figure is where the data still has room to lift the hawks. Fed officials may also maintain their effort to bridge the gap of market skepticism. As of Friday, there are 9 individual speeches scheduled and one panel. Will the market continue to ignore a persistent commitment to 50bps of hikes in 2016 or will belief start to creep in?

EUR/USD Showing Strength, But Data Still a Mixed Bag

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EUR/USD Showing Strength, But Data Still a Mixed BagEUR/USD Showing Strength, But Data Still a Mixed Bag

Fundamental Forecast for Euro: Neutral

The Euro just capped off a fairly strong week, rising against every major currency not named the Yen; but that had its own story behind it. Against the US Dollar, the Euro advanced each of the past five trading days after a brief interaction with a pivotal support level at 1.1212 earlier in the week. And while European data was somewhat mixed from the batch of reports released on Friday, a larger than expected hit to American GDP in Q1 was enough to keep capital flows running into the single currency.

Of that Friday data, inflation came in slightly below expectations while GDP came in slightly higher. But, we’re less than two months from the outsized increase to European QE so it’s likely that the transmission of these recently-triggered policies are not yet showing in these types of prints; and it may take a few more months before we begin to see the progress (or lack thereof) of these recent policy actions out of the European Central Bank.

So, don’t be surprised to see slightly bad data have a tendency to get shrugged-off while positive prints gain a little more traction. Signs of strength in Europe, especially as a massive increase in QE is coming online, could bring additional strength into the Euro while negative prints can be rationalized by the fact that ‘QE isn’t showing up yet’; and given the recent price action trajectory of strength, it wouldn’t be outlandish to look for these moves to continue.

There is but one reason to prevent a bullish forecast for the Euro, and that’s the fact that European data hasn’t been bullish. Expectations for bullishness down-the-road could be well-founded, as we have that recently triggered set of policies out of the ECB mentioned above; and price action is even making a similar case as prices have continued to rise (for the better part of five months now against the US Dollar). But the latter of these thesis are likely more-driven by larger overall macro-economic flows (mainly, the US Dollar being extremely weak) than organic, legitimate strength in the Euro.

This case can change in the week ahead as we get numerous data points out of Europe. Should this data begin to show a positive tonality, the forecast could quickly adjust to bullish; and we have low and medium-importance data to work with each day next week, starting with Germany and Eurozone Manufacturing PMI’s on Monday. The more relevant (and likely leading) data points will be the European Commission Economic Forecasts set to be released on Tuesday, and the OECD Economic Outlook released on Friday.

The Alchemy of Turning a Negative into a Positive

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The Alchemy of Turning a Negative into a PositiveThe Alchemy of Turning a Negative into a Positive

Fundamental Forecast for JPY: Neutral

The Yen has put in a significant movement so far on the day, weakening against the US Dollar by as much as 2.32%; and this is the largest movement of weakness in the Yen since January 29th, when the currency weakened by 2.7% against the Greenback after the Bank of Japan had, surprisingly, made the move to negative interest rates at the January BoJ meeting.

But that movement to negative rates hasn’t worked out too well so far, has it? The move to negative rates was likely a pre-emptive one designed to disincentive capital flows from being driven into Japan and the Yen. With Europe already deep into negative territory, the Federal Reserve taking on a ‘less hawkish’ stance and China on the verge of what could’ve quickly become a hastened slowdown enveloping the economy, the Bank of Japan saw the risk of exuberant risk-aversion flows strengthening the Yen; which threatened to undo the past three years of policy-driven movements in the Yen and the Nikkei.

So, the Bank made the move to negative at their January meeting on the 29th, and what they feared ended up happening anyways: The Yen strengthened massively and the Nikkei took a nasty turn lower. As a matter of fact, the case can even be made that the surprising nature with which the bank had acted actually contributed to the increase in panic-prone risk aversion.

The source of this morning’s weakness is on the back of an incredibly salient report that alludes to the fact that the Bank of Japan may be debating negative interest rate loans; in a similar vein to the recently enacted policy from the European Central Bank. In January, the Bank of Japan imposed negative rates on excess reserves held at the Central Bank, but if this morning’s report comes to fruition, that program would be expanded along with a deeper cut to negative rates, to offer loans to banks bearing negative rates.

Negative rates on excess deposits are, in essence, a cost for a bank; but if that same bank is offered a loan with a negative-rate from the Central Bank, that’s kind of like amortization in an asset. The negative rate on the outstanding balance decreases the loan balance; and if that bank could also make money by loaning the funds to credit-worthy borrowers, this can be thought of a form of two-way stimulus, and the bank can actually make money in both directions; on the negative rate from the Central Bank amortizing the outstanding loan balance simply from the negative rate, as well as the rate spread of what has been loaned to borrowers.

The longer-term question behind such a policy; and this isn’t just relevant for the potential policy being floated by the Bank of Japan but also for Europe, is whether such a program will actually help to create demand for loans, which is kind of the actual problem here (and in Europe). And, unfortunately, it’s going to take quite a bit longer than the one month of evidence that we have (out of Europe) so far to be able to make a probabilistic assertion. This could and should certainly give the Bank of Japan reason enough to take a step back to evaluate matters more fully before embarking on yet another aggressive policy move.

The one thing that is certain is that the Yen is primed for volatility. The prevailing trend is and has been one of Yen strength, and all factors held equal, this wouldn’t be an outlandish expectation for the next couple of weeks. But given this morning’s report, which obviously came from someone very close to the Bank of Japan’s discussions, anything can happen when the BoJ meets next week. And just as we saw when the ECB enacted such a policy, it would be impossible to say definitively that the Yen would strengthen or weaken on the back of such an announcement.

Due to the incredibly opaque nature around the Yen after this morning’s burst of weakness as well as this widely circulated report; and given the fact that we’re essentially watching the Bank of Japan make Neo-Keynesian history, we’re holding a forecast of neutral on the Japanese Yen.

GBP/USD to Face Larger Advance on Lackluster Fed Rhetoric

Central bank policy, economic indicators, and market events.

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GBP/USD to Face Larger Advance on Lackluster Fed RhetoricGBP/USD to Face Larger Advance on Lackluster Fed Rhetoric

Fundamental Forecast for GBP: Neutral

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The slew of fundamental developments coming out of the U.S. economy may play a larger role in driving GBP/USD volatility especially as the U.K. docket remains fairly light for the first full week of May.

Market participants may largely ignore the series of U.K. Purchasing Manager Indices (PMI) as the EU referendum clouds the economic outlook for the region, but the near-term correction in the British Pound may gather pace in the month ahead as the Bank of England (BoE) continues to argue that the next move will be to normalize monetary policy. Even though the Monetary Policy Committee (MPC) remains in no rush to lift the benchmark interest rate off of the record-low, signs of a ‘solid’ recovery in the U.K. may put increased pressure on the BoE to implement a rate-hike sooner rather than later.

At the same time, more of the same from New York Fed President William Dudley, Atlanta Fed President Dennis Lockhart, San Francisco Fed President John Williams, Minneapolis Fed President Neel Kashkari, St. Louis Fed President James Bullard and Dallas Fed President Robert Kaplan may dampen the appeal of the greenback as the central bank once again votes 9 to 1 to retain the current policy in April. Nevertheless, another 200K expansion in U.S. Non-Farm Payrolls (NFP) may put increased pressure on the Federal Open Market Committee (FOMC) to implement higher borrowing costs at the June meeting as the world’s largest economy approaches ‘full-employment.’

With that said, GBP/USD may make a more meaningful attempt to break out of the downward trend carried over from last August especially as the Relative Strength Index (RSI) preserves the bullish formation from earlier this year. A close above near-term resistance around 1.4620 (50% expansion) to 1.4660 (50% retracement) may fuel a further advance in the exchange rate, with the next topside region of interest coming in at 1.4800 (61.8% retracement).

Gold Price Surges to Largest Weekly Gain in 11 Weeks

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Gold Price Surges to Largest Weekly Gain in 11 WeeksGold Price Surges to Largest Weekly Gain in 11 Weeks

Fundamental Forecast for Gold: Bullish

  • Fed rate hike probabilities drop opening the door for Gold prices to push further higher
  • Trader’s look to Friday’s Non-Farm Payroll release for inflationary suggestions
  • FXCM’s Sentiment reading (SSI) for Gold plummets to -2.1

Gold prices surged to the largest weekly gain of the past 11 weeks on the heels of the Fed doing nothing. The FOMC closed out their 2 day meeting this past Wednesday by keeping the target interest rate steady. The Fed tried to keep market participants thinking about future rate hikes only to be brushed aside for now. Fed Funds futures are pricing in a 12% probability of a rate hike in June and a 44% probability of a rate hike by September. These figures are markedly lower following the FOMC meeting this past week.

Since we have US elections later this year, it seems logical the Fed may want to change rates prior to the election (before September) or in the new calendar year to stay away from election time. The market, by virtue of Fed Fund futures is pushing out the hike until 2017 with only a 44% chance of a hike by September. This brought a nice tail wind to gold prices.

Gold prices tend to perform well in an environment of low real rates (nominal rate – inflation rate). Therefore, if you get nominal rates heading south and/or inflation rates heading north, it cultivates an environment for the gold price seeds to grow.

This week, we have seen the nominal US 5 year and nominal US 10 year yield drop a little. At the same time, inflationary pressures appear to be building. I was reading a speech by the Fed Banker Robert Kaplan where he talks about the Trimmed Mean PCE (a form of inflation gauging) bumping up in 2016 to 1.8% and 1.9% whereas it was 1.6% and 1.7% in 2014-2015. As a result, gold prices appear supported for now.

Will the US economy add jobs as expected? That is a question to be answered on Friday May 6. US Non-Farm Payrolls are set to be released and the market is anticipating that 215k jobs were added. If the market sees the jobs report as an inflationary number, then we may see gold price sell off. This, in my opinion, would be the resulting recognition that inflation is trying to bubble up and rate hikes may come sooner. If the market sees the jobs report as a disinflationary figure, Gold prices may continue to bump higher.

Gold Price Surges to Largest Weekly Gain in 11 Weeks

One last data point we’ll be keeping an eye on is real time trader positioning. We have seen unusually large shifts in FXCM’s SSI indicator for Gold (FXCM Ticker: XAU/USD). The SSI ratio has grown negative from +1.1 to the current -2.1. We’ve seen the number of traders positioned long drop 29% from last week and the number of short traders grow 61% since last week…a large divergence! The traders are not believing this break out higher.

Those familiar with sentiment trading will know it is used as a contrarian type of signal. So as the number short traders grows, we’ll look for buying opportunities. There is a wave relationship up near $1305 so a break above there opens the door for a continuation higher. The $1305 zone may also offer some temporary resistance. Therefore, keep an eye on real time SSI for clues about the near term move.

Interested in a longer term outlook for Gold, Equities, or USD? Download our 2Q 2016 forecast here.

Canadian Dollar Retains Upside Risk on Consistent Data Beats

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Canadian Dollar Retains Upside Risk on Consistent Data BeatsCanadian Dollar Retains Upside Risk on Consistent Data Beats

Fundamental Forecast for CAD: Bullish

A perfect storm has developed for Canadian Dollar bears. In addition to Oil having risen ~70% from the February 11 low and the US Dollar falling to levels not seen since June, the Canadian economy continues to outperform rivals in terms of economic new releases relative to economists’ expectations. These developments brought about the Canadian dollar trading at its strongest level in 10 months to against the US Dollar below 1.2500 on Friday morning in New York.

The Recent Economic Data Trend in Canada

Bank of Canada Governor Stephen Poloz made waves this week as he praised PM Trudeau and made clear and cogent arguments against negative interest rates. The Citi Economic Surprise Index on the Canadian Economy recently touched its highest levels since June at a time where other economies like the United States are consistently seeing economic prints fall short of economists expectations.

On Friday, Canadian GDP dropped 0.1*%YoY in February. Consumer consumption was an encouraging sign despite the contraction, which mainly came from manufacturing and drops in mining, quarrying, and the energy sector. Economic prints of this show the wisdom of the Bank of Canada of cutting when they did in 2015 and holding as they have in 2016.

Economic Data on Deck for Canada This Week

The two major fundamental headlines upcoming this week is the Canadian Employment report and the Trade Balance Report for March. The employment report will align with the US Non-Farm payroll, but Canada may grab an unusual amount of attention as traders look for a comparison or favorable narrative to help explain last month’s gain of 40,600 jobs.

Trade Balance is always an important number as it helps to see how trade flows are employed in the economy. Specifically, with the resumption of activity in Emerging Markets and Canada’s role as a supplier of natural resources to Emerging Markets, a boost in the Trade Balance could continue to show that little is slowing the economy down. On the other hand, the 14.5% gain in the Canadian Dollar relative to the US Dollar might be blamed if exports take a dip relative to recent readings as Emerging Markets continue to chug along.

Global Macro Influences on the Canadian Dollar

As mentioned earlier, there are three components that have led to a Canadian Dollar surge since the end of January in Oil, US Dollar, and Canadian Economic Data. However, if you would like to boil these factors down to one market to watch, the closing of the gap in 2Y sovereign yields between the United States and Canada is great.

Since January 15, we’ve seen through the 2yr US/CA spread a visualization of how divergence of respective monetary policy expectations have consistently declined. At the peak of CAD bearishness in mid-January, the spread between US/CA 2yr yields was at 60.34bps showing a significant divergent relationship between US monetary policy and CA monetary policy. Today, a day where USD/CAD traded below 1.2500, the spread was as narrow as 9.8pbs showing a combination of more pessimism about US rate hikes since January aligned with more optimism regarding the Canadian interest rate path.

Sentiment Analysis Shows Futility of Trend Fighting

Canadian Dollar Retains Upside Risk on Consistent Data Beats

The chart above can help you see how sentiment shows turns in the market as well as acceleration points. When looking at sentiment, crowd sentiment has moved positive providing favor for more downside. In the second-half of March, the trend has picked up acceleration as more retail USD/CAD longs join the act. This loading in is visualized with the green line below the sentiment and price chart.

We use our Speculative Sentiment Index as a contrarian indicator to price action, and the fact that the majority of traders are net-long at a bull: bear of 2.01 as 67% of traders are long means that a bearish USD/CAD signal is currently at play.

Recommended Reading:

USD/CAD Technical Analysis: Will Yellen Stop or Strengthen CAD’s Run?

US DOLLAR Technical Analysis: Score One For Seasonality

Bearish USDNOK: Oil Breakout & Macro Trend of Weaker US Dollar

Australian Dollar Volatility to Continue on RBA, US Jobs Data

Fundamental analysis, economic and market themes

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Australian Dollar Volatility to Continue on RBA, US Jobs DataAustralian Dollar Volatility to Continue on RBA, US Jobs Data

Fundamental Forecast for the Australian Dollar: Neutral

  • Aussie Dollar fireworks ahead on RBA rate decision, US jobs data
  • Near-even split on RBA rate cut bets poised to make for volatility
  • Firm US wage growth may boost Fed hike chances, hurting Aussie

Should you follow FXCM traders’ AUD/USD positioning? Find out here!

The Australian Dollar looks set for another volatile week following the latest fireworks on the back of soft first-quarter CPI figures as another round of high-profile event risk comes across the wires. On the domestic front, the RBA monetary policy announcement is in focus. Externally, all eyes will be on April’s US Employment figures.

Investors have become increasingly convinced that an RBA rate cut is at hand. The priced-in probability of a 25 basis point reduction in the cash rate now stands at 57 percent. This makes markets the most convinced of on-coming easing in six months. Still, the two sides of the argument are far enough apart that a sizable contingent of market participants will need to readjust portfolios whatever the outcome, stoking volatility.

Australian economic data has increasingly deteriorated relative to consensus forecasts over recent months, beckoning greater policy support. The RBA has looked on dismissively however, maintaining that there is no urgency to cut further even as soft price growth creates scope to do so. With narrowly better-than-even odds of a move now baked in, a decision to keep the current policy setting may trigger a more violent reaction than the alternative.

Turning to the US, analysts expect a 200k increase in nonfarm payrolls in April – a mild slowdown from the 215k added in March – while the jobless rate holds steady at 5 percent. Equally of note, average hourly earnings are expected to rise at a year-on-year rate of 2.4 percent, making for the first wage inflation increase in four months.

The report will almost certainly prove pivotal for Fed policy expectations after the central bank conspicuously played down global risks in last week’s policy statement (as we expected), refocusing attention on domestic matters. A payrolls print in the vicinity of the trend average (230k) seems unlikely to stir traders’ passions. Wages data may prove more potent however.

While the Fed has made steady progress on the employment side of its mandate, nailing down price growth has proved tricky. The pace of wage expansion is critical here because a steady pickup would signal rising structural inflation pressure, a welcome sign that the underlying trend is heading in the right direction independently of flighty oil- and FX-inspired price swings.

With that in mind, a firm weekly earnings print is likely to boost June rate hike probabilities and lift the US Dollar while weighing on risk-sensitive assets including the Aussie. A soft result portends the opposite dynamic.

China’s Commodity Hunger & Weak USD Support New Zealand Dollar

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China’s Commodity Hunger & Weak USD Support New Zealand DollarChina’s Commodity Hunger & Weak USD Support New Zealand Dollar

Fundamental Forecast for the New Zealand Dollar: Bullish

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The New Zealand Dollar hit 2016 highs this week as the commodity train continued to roll on the back of an increasing China Demand. Unfortunately, spot NZD/USD ended the week on a soft note after falling for three straight days. The New Zealand dollar benefits both from trade flow of commodity-rich countries as well as the capital flow for investors seeking higher yielding government debt.

Since mid-Q1, We’ve continued to see a steady appreciation in risk markets like stocks, commodities like US Oil and commodity currencies like the New Zealand Dollar to rally to new highs. In addition to the rally, a world of panic among financial markets in the first month and a half of the year has completely flipped on the back of the ever weakening US Dollar.

Last week started off strong for the Kiwi with a sharp rise in the Dairy Auction for Whole Milk Powder coming in at $2,156 per ton vs. prior auction outcome of $2,013 for a 2.5% price increase. This positive surprise further lifted the New Zealand Dollar to 10-month highs and would eventually go on to trade at 0.7053 before dropping back toward 0.6850 to end the week. The rise was also in contrast to the March 8 forecasted milk payout by Fonterra to fresh nine-year lows in one of the prices of one of the nation’s most prized commodities.

This week, the major release is Thursday morning’s (U.S. Wednesday afternoon) Reserve Bank of New Zealand Rate Announcement. While the RBNZ is still expected to cut later this year once more, no economists surveyed expect a cute on April 27. Therefore, with rates staying around 2.25%, anything we hear from Wheeler that validates a one-cut view in the near future or now sees that as unnecessary will likely add to the volatility. Some traders have warned that the recent 10-month high in the Kiwi could bring out a more dovish than usual Wheeler. Such a case in light of asset market gains and USD weakness would likely favor buying other commodity currencies against the NZD, such as AUD/NZD or selling NZD/CAD.

Overshadowed by the Reserve Bank of New Zealand rate announcement that is expected to keep rates at 2.25% is Trade Balance that economists expect to see a welcomed boost in exports to take the total trade balance from 339m up to 401m. On Friday, we’ll get the MoM Building Permits activity that saw a 10.8 increase in February. Building Permits will likely be viewed only through the commentary provided by Wheeler and the RBNZ on Thursday.

Considering the upcoming data, NZD/USD may find support as it bounces off the trend line from the late January low. If the New Zealand economy remains stable at the same time that the U.S. Dollar goes without a bid, we could soon move closer to 0.7000.

China’s Commodity Hunger & Weak USD Support New Zealand Dollar

Data source: Speculative Sentiment Index, Chart Source: Python. Prepared by DailyFX Team

At the end of last week, the ratio of long to short positions in the NZDUSD stands at 1.22 as 55% of traders are long. Long positions are 1.8% higher than yesterday and 17.4% above levels seen last week. Short positions are 16.2% lower than yesterday and 25.6% below levels seen last week. We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are long gives signal that the NZDUSD may continue lower. The trading crowd has grown further net-long from yesterday but unchanged since last week. The combination of current sentiment and recent changes gives a further bearish trading bias.

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