Forecasts

US Dollar in Danger of Further Losses – Here are the Key Risks

Quantitative analysis, algorithmic trading, and retail trader sentiment.

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US Dollar in Danger of Further Losses – Here are the Key RisksUS Dollar in Danger of Further Losses – Here are the Key Risks

Fundamental Forecast for Dollar: Neutral

The US Dollar tumbled for the second straight week against the Japanese Yen and other major counterparts in a volatile week for global markets. Yet upbeat economic data suggests that the move has been overdone, and it seems fairly clear that broader market turmoil remains the biggest driver of currency moves. A US market holiday on Monday makes continued near-term volatility less likely, but the true fireworks will likely come on Sunday night when Chinese traders return from Lunar New Year holidays.

Sharp declines in China’s stock markets acted as catalyst for the recent stretch of global financial market turmoil. China’s Shanghai/Shenzhen CSI 300 Index has nonetheless been spared from the past week of stock market sell-offs as domestic markets remained closed for New Year celebrations. Big moves out of the world’s second-largest financial market could once again set the pace for the rest of the world, and the key question becomes whether further market turbulence will send the Dollar to fresh lows.

FX traders could continue to sell the US Dollar—particularly against the Japanese Yen—if we see continued sell-offs in the S&P 500 and broader ‘risk’. The S&P itself is on its worst losing streak since the heights of the global financial crisis in 2008/2009. At that time any sell-offs in global markets coincided with US Dollar and Yen appreciation, but more recent stock market tumbles have actually produced Dollar losses.

This isn’t the first time this has happened—we saw much the same dynamic in August of last year as many believed the Euro had suddenly become a safe-haven currency. And indeed the US Dollar will likely remain correlated to moves in ‘risk’ for the foreseeable future. Yet traditional fundamental drivers of currency moves suggest that the USD could stage a comeback once one-sided speculative positions are fully unwound.

Any surprises out of upcoming US CPI inflation figures or the release of minutes from the US Federal Reserve’s January policy meeting could thus force important swings in US Dollar pairs. The Fed famously ended its zero interest rate policy at its December meeting and decided to keep rates on hold when it met through late January. In keeping rates unchanged, the FOMC statement showed officials feared sudden financial market turmoil could hurt growth prospects. Fed Chair Yellen spoke to such fears in her testimony to the US Legislature. Yet it will be important to see the extent to which the broader Federal Open Market Committee fears such risks. Any especially dovish commentary could force further US Dollar losses.

Volatility risks remain high on what promises to be another big week for the Dollar and broader markets. Whether or not the Greenback finally stages a recovery may ultimately depend on price action out of China and late-week Fed commentary.

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EUR/USD Rally May Slow as Markets Reassess ECB, Fed Policies

News events, market reactions, and macro trends.

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EUR/USD Rally May Slow as Markets Reassess ECB, Fed Policies

Fundamental Forecast for EUR/USD: Neutral

- EUR/USD jumped higher as markets priced out any Fed rate hikes this year.

- The retail crowd has quickly reversed positioning in EUR/USD – follow with live SSI updates.

- Compares the Euro’s performance one-third of the way through the quarter to our Q1’16 forecast.

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The European Central Bank may now see that it has a problem on its hands. As soon as markets priced out the possibility of the Federal Reserve raising rates in 2016, EUR/USD immediately rallied. The underpinning of EUR/USD’s decline since May 2014 – diverging policy as the Fed looked to raise rates and the ECB looked to loosen policy further – seems to be in question. Yet now that EUR/USD has jumped back towards $1.1200, it’s time to reassess central bank policy on both sides of the pond.

First and foremost, it seems that markets are operating around the belief that major central banks will only act around policy meetings in which they were armed with revised economic forecasts to support their data revisions. The ECB is well-aware of this, which is why they chose to take on a more dovish stance in January. By doing so, they kept their credibility in check, with markets convinced that March remains a possible launching point for the next round of easier monetary policy.

Market participants will be intensely focused on what the ECB and the Fed will do next at their respective March policy meetings, the next time when either central banks update their respective economic forecasts. For the US Dollar side of the equation, there may be a bit of a floor forming in the rates market: Fed funds futures stopped pricing in a rate hike in 2016 for a time midweek last week, yet the Fed continues to beat the drum that it will be raising rates gradually this year. After a rather mixed (overall, slightly positive) US labor market report for January, any data that suggests the Fed will raise rates at least once before June this year will help insulate the greenback from further steep losses (unless recession risks increase further; the Atlanta Fed’s GDPNow tracker is suggesting quite the opposite as of February 7, 2016).

From the Euro's perspective, it’s important to consider why the ECB cut its deposit rate on December 3 – and did not make changes above what the markets had already priced in for the QE program. Financial conditions were not considered a headwind with the EUR/USD trading nearly -5% below the ECB’s EUR/USD NEER (nominal effective exchange rate, the technical assumption underpinning the ECB’s growth and inflation forecasts) at the time of the December meeting. The ECB deemed it wasn’t time to use its “bazooka,” and the Euro screamed higher.

However, the Euro exchange rate, particularly after this past week with the US Dollar’s breakdown, may once again prove to be unpalatable for ECB policymakers:

Chart 1: EUR/USD Spot versus ECB’s EUR/USD NEER (August 3, 2015 to February 3, 2016)

EUR/USD Rally May Slow as Markets Reassess ECB, Fed Policies

A stronger EUR/USD makes the price transmission mechanism in the Euro-Zone slower, which is becoming problematic for the ECB now that the spot rate is rising above the ECB’s NEER. With the ECB’s NEER technical assumption due at $1.0900 for 2016, the closing price last week of $1.1152 was +2.31% above the ECB’s technical assumption for 2016. At its max closing level last week, this differential was +2.81%. Ahead of the ECB pre-announcing its deposit rate cut at its October meeting, EUR/USD had closed as high as +3.37% above the ECB’s technical assumption for 2015 (at the time: $1.1100).

These observations lead us to believe that we’re starting to get into the territory where ECB policy officials may start to become a bit more vocal about the exchange rate. As we stated in our Q1’16 Euro quarterly forecast, we believe that, reflexively, a stronger EUR/USD has increased the probability of the ECB acting again in March.

Going forward, as it pertains directly to the Euro, rather than a symptom of the global erosion in risk sentiment, traders may want to keep an eye on EUR/SEK. Earlier this January, the Riksbank codified its intention to intervene in FX markets. If you’re unfamiliar or want more background information, you may find the article “Riksbank Intervention Threat Aims to Lift EUR/SEK Prices” helpful.

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It’s the Bank of Japan versus the Rest of the World

Price Action, Swing & Short Term Trade Setups

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It’s the Bank of Japan versus the Rest of the WorldIt’s the Bank of Japan versus the Rest of the World

Fundamental Forecast for Yen:Bullish

It’s been quite the week for the Yen, and taking a step back, it’s been quite the two-week stretch for the Japanese currency. Two weeks ago, the Bank of Japan made the surprise move to negative rates. This was shocking: Few saw this coming, and even fewer know what all this might entail. In the week after this move, we began to get an idea. While the design of negative rates is to get excess reserves from banks that are on deposit at the Central Bank, the actual reaction has been one more of fear than anything else. Yen weakness did not follow like the BoJ was likely looking for, and instead we’ve seen massive strength.

This week is when matters appeared to have come undone. Rampant Yen strength throughout the week leading into Thursday morning made it look as though a full-fledged run on the currency was about to take place. While the Yen strengthened by 3.75% against the US Dollar last week, by Thursday morning this week’s tally was already up to 4.97%. And then, all of a sudden at 7:19 AM (ET), the Yen dropped like it had been hit with an anvil. This lasted for about three minutes and saw USD/JPY trade from 111.39 all the way up to 113.68. This was a 2% range in less than three minutes.

The prevailing thought at the time, and this was even reported by some of the more popular financial blogs was that this was the Bank of Japan intervening as they felt a run on the Yen coming on. This couldn’t be confirmed, and the BoJ gave a ‘no comment’ on the matter. So, that still remains for debate. But deductively speaking, there isn’t much out there that can create such a strong and wide-spread move in a currency in such a short period of time. So this is a factor that we may have to contend with moving forward.

Nonetheless, the Bank of Japan has been down this road before. They’ve been warned by the G7 set of nations against artificially weakening their currency simply to prop up their exports. This happened in February of 2013 just as ‘Abe-nomics’ was beginning to fire up the Japanese economy. And as my colleague Kristian Kerr points out, they’re probably going to want to avoid any obvious and overt, heavy-handed intervention considering that there is a G20 meeting at the end of this month.

The other factor of consideration is China: China was closed this week in observance of Lunar New Year while global markets were showing significant signs of weakness, and last weekend, Chinese Foreign Reserves showed another massive capital outflow in January. As China continues to face headwinds, more and more capital is likely going to run out of the country, and that’s going to need a place to go. And in Japan, those negative rates are only imposed on bank deposits at the Central Bank, and they haven’t yet filtered down to individual deposit holders. So, for Chinese residents, the idea of keeping cash in a Japanese bank account at no yield while China continues to face headwinds could be a really attractive investment option.

This just puts even more pressure on the Bank of Japan, and that makes the likelihood of additional intervention from current levels less likely. Moving forward we’re adjusting the forecast for the Yen to bullish, but just like last week – one must pick their spots. This theme of Yen strength on the back of continued risk aversion could be especially attractive against US Dollars, British Pounds, Australian and New Zealand Dollars, or in any cross synthetic paired up with an emerging market currency like the South African Rand or the Mexican Peso. To create such a synthetic cross, a trader can match up equally sized (and equal risk) setups in USD/JPY and then in USD/ZAR, or in USD/JPY and again in USD/MXN. The goal would be to offset the US Dollar risk in each pair, and instead focus the exposure on short Pesos or Rand against Long Yen. So, by going short USD/JPY and long USD/ZAR, the trader would effectively be exposed to short ZAR/JPY.

https://www.dailyfx.com/calendar?ref-author=Stanley



GBP/USD 2016 Rebound Vulnerable to Upbeat Fed Testimony

Central bank policy, economic indicators, and market events.

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GBP/USD 2016 Rebound Vulnerable  to Upbeat Fed TestimonyGBP/USD 2016 Rebound Vulnerable  to Upbeat Fed Testimony

Fundamental Forecast for British Pound: Neutral

The near-term rebound in GBP/USD may continue to unravel in the week ahead should the Federal Reserve’s semi-annual Humphrey-Hawkins testimony with Chair Janet Yellen highlight a further deviation in the policy outlook.

Indeed, the British Pound avoided the most bearish scenario as Bank of England (BoE) Governor Mark Carney talked down expectations for a further reduction in the benchmark interest rate, but the unanimous vote to retain the current policy may further dampen the appeal of the sterling as the Monetary Policy Committee (MPC) appears to be in no rush to normalize monetary policy. With mixed expectations surrounding the U.K. production figures on tap for next week, a string of dismal data prints may produce headwinds for the sterling as market participants push out bets for a BoE rate-hike.

In contrast, Fed Chair Yellen may largely endorse an upbeat outlook for the U.S. economy as the Non-Farm Payrolls (NFP) report shows sticky wage growth, an unexpected decline in the Unemployment Rate accompanied by a pickup in the participation rate, and the ongoing improvement in the labor market may fuel interest rate expectations especially as the region approaches ‘full-employment.’ Moreover, a rebound in U.S. Retail Sales may also boost the near-term outlook for the greenback as it reinforces Chair Yellen’s expectation for a ‘consumer-led’ recovery and puts increased pressure on the Federal Open Market Committee (FOMC) to implement higher borrowing-costs over the coming months.

In turn, the wait-and-see approach at the BoE accompanied by a more hawkish tone from the Fed Chair may undermine the near-term rebound in GBP/USD, and the pair remains at risk of retaining the downward trend carried over from the summer of 2015 as Governor Carney and Co. continue to lag behind their U.S. counterpart. The opening monthly range will certainly be in focus as the pound-dollar marks a high of 1.4668 in February, with the pair at risk of moving back towards the 2016 low (1.4078) amid the deviating paths for monetary policy.



Gold Rockets to Fresh Highs as Equity Rout Continues

Short term trading and intraday technical levels

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Gold Rockets to Fresh Highs as Equity Rout ContinuesGold Rockets to Fresh Highs as Equity Rout Continues

Fundamental Forecast for Gold: Neutral

Gold prices soared for a fourth consecutive week with the precious metal rallying more than 5% to trade at 1247 on Thursday evening in New York. The advance to fresh yearly highs comes amid the continued rout in global equity markets with weakness in the dollar & falling treasury yields driving demand for the perceived safety of the yellow metal.

In her two-day semi-annual Humphrey Hawkins testimony before congress, Fed Chair Janet Yellen maintained that the central bank remains on a wait-and-see approach as it pertained to normalizing monetary policy while at the same time leaving the door open for further easing. When pressed on the likelihood of negative interest rates, Yellen said that the notion was not, “off the table,” suggesting that the central acknowledges the recent slump in global markets and is ready to take further accommodative measures if necessary. Ironically, the remarks come less than 2-months after the Fed moved to hike rates for the first time in nearly a decade.

Further evidence of growing global growth concerns were apparent this week with the Swedish Riksbank deciding to cut interest rates deeper into negative territory. The move comes amid continued easing measures from global central banks - offering a tailwind to gold prices as uncertainty & tightening global growth fuel haven flows into the lower yielding, “safer” assets as a store of wealth.

As rate expectations from the Fed are pushed out further, look for persistent weakness in the dollar & increased volatility in broader risk markets to help prop-up bullion prices. Heading into next week, traders will be closely eyeing U.S. data with housing starts, building permits & industrial production data on tap. The January CPI figures highlight the docket next week with consensus estimates calling for core inflation to hold at 2.1% y/y. With the US labor market close to the Fed’s “natural rate” of unemployment, the inflation figures have become increasingly important as the Yellen & company remain committed to achieving the dual mandate of fostering maximum employment & price stability.

From a technical standpoint, gold has now broken through numerous resistance zones & while our broader outlook remains higher, we’ll want to tread lightly here on the back this recent advance. To put things in perspective, Thursday’s trade session saw the largest single-day range since December 2014 (6.49%) and the largest single-day advance since March 19th of 2009.

Interim resistance stands at the 2015 high-week close at 1293 backed by the 2015 high-day close at 1301 & the 200-week moving average at 1345. A look back at the 200-week moving average sees the MA offering clear resistance from late-1999 through the 2001 when prices finally broke higher. The average didn’t come back into play until 2013 when prices broke back below with bullion maintaining a steady trajectory lower into the close of 2015. We’ll be looking for this technical feature to offer resistance yet again on this advance. Expect some back-and-fill after this rally with interim support seen at 1177/81 Backed by our bullish invalidation level at 1155/56.

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

To contact Michael email or follow him on Twitter: @MBForex

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Canadian Dollar Has Found Life Outside The Price Of Oil

Position Trading based on technical set ups, Risk Management & Trader Psychology.

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Canadian Dollar Has Found Life Outside The Price Of OilCanadian Dollar Has Found Life Outside The Price Of Oil

Fundamental Forecast for CAD: Neutral

The Canadian Dollar continues to claw back some of the 23% drop since the May 2015 low against the US Dollar. Much of the rise of the CAD, and subsequent fall on USD/CAD had to do with persistent weakness in the US Dollar that was seen this week. Now, attention will turn to two key fundamental releases next week in Canada along with a look at Oil to see if it can continue to build on Friday’s rally of ~12%.

Looking beyond this week’s economic print of New Housing Price Index, which decreased from 0.2% in November to 0.1% in December, traders will look to see if Friday’s CPI and Retail Sales can build on recent prints. CPI is expected to build on December’s print of 1.6% up to 1.7%. While such a print would keep inflation below the Bank of Canada’s 2% inflation target, it would still likely be the envy of many central bankers whose own inflation readings are near zero.

Retail Sales do not look to have such a stable reading as economists polled expect a drop to -0.7%, down from 1.7% last month.

Suggested Reading: WTI Crude Oil Price Forecast: Oil Bounces 12 % Off A 12 Year Low

A meaningful development that we’ve seen is a divergence from performance in the Canadian Dollar and US Oil. A rolling 20-day correlation shows that US Oil has an inverse correlation with the Canadian Dollar of -0.62 at market’s close on Friday, whereas it had a -0.78 correlation reading at the end of January. A negative correlation means that when the price of Oil moves lower, as it has in general since summer of 2014, the Canadian Dollar moves higher, as it also has over the last few years. The closer the number is to -1, the stronger is the negative correlation.

Now, the Canadian dollar could benefit by not being subject to weakness in Oil. However, further upside continuing in Oil from Friday’s move would likely benefit the market’s perception of the Bank of Canada to hit their inflation target. In other words, the Canadian Dollar could strengthen on strong fundamental news or if the price of Oil can stabilize. However, should either of these developments fail to develop, the Canadian Dollar could weaken again as well.

From a sentiment perspective, we've seen traders through our speculative sentiment index or SSI aggressively adjust their USD/CAD exposure on the move lower. Now, our retail FX trader data warns that the US Dollar is looking for a driver for it’s next big move. If sentiment turns markedly higher, as a contrarian indicator, it would warn instead that the US Dollar may trade lower versus its Canadian counterpart.



Australian Dollar at Risk on RBA Outlook, Global Sentiment Trends

Fundamental analysis, economic and market themes

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Australian Dollar at Risk on RBA Outlook, Global Sentiment TrendsAustralian Dollar at Risk on RBA Outlook, Global Sentiment Trends

Fundamental Forecast for the Australian Dollar: Neutral

  • Aussie Dollar pares losses after dropping to lowest in almost 4 years
  • Updates on Fed, ECB outlook to drive Aussie alongside risk appetite
  • Has the Aussie moved as DailyFX analysts expected? Find out here!

The Australian Dollar dropped to the lowest level in close to four years against its major counterparts but prices launched a sharp recovery against the backdrop of a late-week rebound in risk appetite, erasing more than half the decline. Looking ahead, a busy docket of high-profile event risk offers ample scope for continued volatility.

On the domestic front, minutes from February’s RBA policy meeting and January’s employment report are in focus. The latter seems like a more potent catalyst for price action than the latter: RBA minutes rarely offer much by way of new content beyond the policy statement released at the time of the rate decision. A neutral tone there and in subsequent testimony from Governor Glenn Stevens is likely to see the markets focused on economic data.

Labor market figures are expected to show a net 13k jobs gain while the unemployment rate holds unchanged at 5.8 percent. Australian economic news-flow has stumbled relative to consensus forecasts over recent weeks and markets have taken notice, with the priced-in 12-month RBA rate path implied in overnight index swaps shifting deeper into dovish territory. Leading survey data suggests hiring weakened in the first month of 2016, opening the door for more of the same and threatening the Aussie.

Turning outward, global monetary policy trends and their influence on market-wide risk sentiment remain a critical consideration. Europe will share the spotlight with the US this time around as ECB President Mario Draghi testifies before an EU Parliament committee and the central bank releases minutes from January’s meeting. In both cases, traders will be keen to glean additional clues suggesting an expansion of stimulus is on tap in March. Comments to that affect are likely to boost overall risk appetite, offering support to the sentiment-linked Aussie.

On the US side of the equation, minutes from January’s FOMC meeting as well as the CPI data set are in the spotlight. The former will help shed light on the degree to which policymakers feel recent volatility has undermined their projected rate hike path. Last week’s comments from Chair Yellen suggested a deliberative posture but highlighted that officials are not as dovish as the priced-in market view implies. Investors have slashed policy bets to erase any further tightening from the 2016 outlook. The latter will help gauge whether the Committee has sufficient scope to act.

Leading survey data paints a relatively upbeat picture of price growth trends. Service-sector inflation – while still tepid – firmed for a fourth consecutive month. Meanwhile, manufacturing sector output prices grew at the fastest pace since August. If this translates into an uptick on the pace of core year-on-year CPI expansion against backdrop of Fed rhetoric extolling data dependence, returning rate hike bets may hurt risk trends and the Aussie Dollar alike.



New Zealand Needs a Relief Rally to Take Eyes Off RBNZ Rate Cut Bets

Position Trading based on technical set ups, Risk Management & Trader Psychology.

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New Zealand Needs a Relief Rally to Take Eyes Off RBNZ Rate Cut BetsNew Zealand Needs a Relief Rally to Take Eyes Off RBNZ Rate Cut Bets

Fundamental Forecast for the Kiwi:Bearish

Risk markets are no longer staring at the abyss as they were at the beginning of last week, which is benefitting markets like equities, Oil, & the New Zealand Dollar. From the start of the year, the New Zealand Dollar has been on its back foot as traders were quick to look at the slack of high-interest rates that the RBNZ could cutto get the economy running smoothly again. The apex of this ‘sell the kiwi against anything,’ move was after the disappointing CPI print on the 19th.

Inflation dropped to 0.1% YoY in the last quarter of 2015, showing the lowest print since 1999. Oil’s precipitous fall has hurt global inflation readings everywhere, and the RBNZ referenced China in their December meeting where they noted a further slowdown would, “warrant a mix of a lower New Zealand Dollar exchange rate and more-stimulatory monetary policy.” Most economists surveyed by Bloomberg do not expect a cut now, but rather in the spring if the global economy shows deterioration.

Since that statement, the growth in China has been tepid, and the maturation that goes from being a manufacturing economy to becoming a consumer economy has been awkward for the world’s second largest economy. Recent readings after the RBNZ’s statement showed growth in China did fall to 6.8% YoY in the last quarter of 2015, which was the lowest growth rate in 25-years, and well below the 7.2% & 7.6% growth rate in 2014 & 2013 respectively. These data points and the potential for others like it could keep New Zealand’s CPI below long-term averages giving the RBNZ further scope to cut next Wednesday.

After the RBNZ decision next week, we’ll see New Zealand Merchandise Trade Balance, which is expected to tick up from -779m to -131m due to a seasonality boost. Last month's print showed the widest annual trade deficit in 6.5 years.



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