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US Dollar May Find Support as Global Outlook Worries Mount

Fundamental analysis, economic and market themes.

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USD

US DOLLAR FUNDAMENTAL FORECAST: BULLISH

  • US government shutdown sidelines data critical to Fed policy outlook
  • China GDP, Eurozone PMI, comments from Davos may spook markets
  • Beijing attempting breakthrough in US-China trade war negotiations

Gain confidence in your US Dollar trading strategy with our free guide!

US Dollar price action has mostly reflected broad-based sentiment trends rather than homegrown fundamentals since November. The currency has been remarkably resilient despite the collapse in Fed rate hike bets.It hit a 20-month high amid a vicious late-2018 market rout before pulling back as risk appetite steadied. That speaks to a strong anti-risk appeal, which is likely rooted in USD’s unrivaled liquidity.

The Fed has been tinkering with its messaging in the meanwhile, dispending with the kind of longer-term guidance that defined policy in the aftermath of the Great Recession and pivoting to a nimbler, data-dependent approach. The markets initially saw the shift as dovish – small wonder that, considering the prior regime’s hawkish bias – but seemed to finally on-board the central bank’s intent ahead of last week’s trade.

While that might have set the stage for greater directional clarity, this was not to be as the US government shutdown derailed the release of critical pieces of economic data that ought to have informed policy speculation. What did arrive from private-sector sources looked ominous. The University of Michigan said its consumer confidence gauge unexpected dropped to a 26-month low in January.

CHINA AND EUROZONE DATA, IMF FORECASTS MAY SPOOK MARKETS

With the US government seemingly no closer to resuming key statistical reporting, the week ahead will probably keep the spotlight on macro-level forces. Monday’s release of Chinese GDP data as well as an updated set of economic forecasts from the IMF will inform worries about a global slowdown. Thursday’s Eurozone PMI surveys will expand investors’ view of the global business cycle further.

If data out of China and the Euro area echo deepening disappointment relative to consensus forecasts over recent months while the IMF update mirrors an analogous release from the World Bank earlier this month, the cumulative message will be worrying. That might trigger another round of broad-based liquidation across financial markets, lifting the Greenback on the back of haven-seeking capital flows.

Soundbites emerging from the annual World Economic Forum gathering in Davos, Switzerland may likewise prove to be market-moving. The policy and financial market bigwigs in attendance will offer a slew of opinions on the state of the global economy, the various macro forces in play, and the outlook going forward. If the overall tone appears to have darkened, anti-risk moves across the markets may be amplified.

MARKETS EYE BREAKTHROUGH IN US-CHINA TRADE WAR TALKS

A breakthrough in US-China trade war negotiations might offer something of a reprieve. Markets cheered Friday amid reports that Beijing has offered their counterparts in Washington DC to boost imports of US goods such that the bilateral trade deficit is closed over six years. Sentiment may find a lifeline if there is meaningful progress along this track next week.

This need not be USD-negative. Indeed, the benchmark unit rose alongside stock prices and bond yields while the priced-in rate hike outlook implied in Fed Funds futures steepened as Chinese officials’ overture made the rounds. This ability to deftly switch from a haven- to a yield-based appeal implies that the Dollar may gain ground even if risk appetite returns in earnest.

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

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

US DOLLAR TRADING RESOURCES

OTHER FUNDAMENTAL FORECASTS:

Australian Dollar Forecast – Slowing China GDP to Curb AUD/USD Flash-Crash Rebound

Oil Forecast – Can Crude Oil Prices Keep Rising as China Slows? Brexit, ECB Eyed

British Pound Forecast –Bulls Taking Control of Sterling



Euro Forecast: Dour Mood Expected at ECB Meeting; PMIs on Wednesday

News events, market reactions, and macro trends.

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Euro Forecast: Dour Mood Expected at ECB Meeting; PMIs on Wednesday

Fundamental Forecast for the Euro: Bearish

- The Euro struggled in the second half of the week, with EUR/USD and EUR/GBP proving sensitive to US-China trade war and Brexit headlines, respectively.

- A deterioration in inflation expectations over the past several months will keep the ECB’s ultra-loose monetary policy intact for the foreseeable future; it’s possible that President Mario Draghi pushes back the timeline for a “summer 2019” rate hike.

- The IG Client Sentiment Indexshows that traders have increased their long EUR/USD positioning during the latest turn lower.

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

The Euro may have only lost ground against four of the major currencies last week, but amid a surge in risk appetite, it’s gains against the Japanese Yen and the Swiss Franc are hardly impressive. Instead, amid elevated political concerns from France’s “gilet jaunes” to Italy’s “anti-EU axis” to Greece’s prime minister surviving his no-confidence vote by a single vote, investors have been feeling a bit more on edge. Yet the most important factors of the past week did not come from continental Europe; instead, the US-China trade war headlines helped sink EUR/USD by -0.93% while Brexit developments weighed on EUR/GBP by -1.15%.

External Factors will Still Play a Role

Although the coming week features the January European Central Bank meeting (more on that shortly), EUR/GBP will still be guided by Brexit as key deadlines approach and EUR/USD by the US-China trade war. Only EUR/USD is likely to see the headlines continue along their current track: both China and the US appear to have the desire and willingness to get a deal done.

Brexit is an issue unto itself, unlike any other. As UK Prime Minister Theresa May seemingly closed off options at the end of the week – including canceling Brexit, a second referendum, and a general election – EUR/GBP reversed some of its earlier losses in a significant manner. If the headlines continue to develop in a manner suggesting that a no-deal, ‘hard Brexit’ outcome is rising in likelihood, EUR/GBP could easily decouple from the rest of the EUR-complex and trade to the topside – regardless of what the ECB does on Thursday.

ECB Attitude to Soften as Inflation Remains Constrained

The latest batch of inflation data from the Eurozone proved to confirm concerns that the sharp decline in energy prices since the start of October was having a significant negative impact on price pressures. With the final December Eurozone CPI report showing topline inflation of +1.6% y/y, it’s difficult to think that ECB President Draghi and the Governing Council will be of the mindset that their four criteria for ending their ultra-loose monetary policy will be met. In particular, reality has disappointed the expectation that “inflation will be durable and stabilize around those levels with sufficient confidence.”

There are two sides to the inflation debate when the ECB meets this Thursday. As mentioned earlier, inflation expectations have been destabilized over the past few months, but the trend is especially pronounced over the past year: the 5-year, 5-year inflation swap forwards peaked in January 2018 at 1.774%; they finished last week at 1.553%. However, with energy prices rebounding in recent weeks – Brent Crude is up by +16.5% over the past month – inflation expectations have stabilized in tandem (the 5-year, 5-year inflation swap forwards are only down by -1.5-bps over the past month).

On balance, we expect these developments to give the ECB reason to soften its tone this coming Thursday. Whereas ECB President Draghi has previously suggested that a rate hike could materialize sometime around “summer 2019,” there is ample evidence to suggest that this event horizon will be pushed back by a few months. It seems doubtful that the Governing Council would want to make any prognostications beyond the end of this calendar year, it still being the first month of 2019 but also due to the fact that Draghi’s term expires in October. The ECB may very well keep a rate hike for 2019 on the table – for now.

Economic Data Momentum Remains Weak

Outside of the ECB meeting this week, the initial January Eurozone PMI readings are due in on Wednesday, and should be a center of attention on the economic docket. At the end of 2018, Eurozone economic data was clearly weakening, a trend that has continued thus far into the New Year: the Citi Economic Surprise Index is still deep in the red at -81.7, slightly improved from -88.6 at the end of last week, but still lower than where it was one month ago at -77.5. The preliminary January Eurozone Composite PMI is due in at 51.4 from 51.1, a modest improvement but nothing that should inspire much confidence. If anything, given the backdrop of consistent data disappointments over the past month (per the Eurozone Citi Economic Surprise Index), the risk is for the PMI readings to disappoint.

Net-Short Euro Positioning…Still Unknown

Finally, in terms of positioning, the CFTC’s COT report for the week ended January 15 showed…nothing. The US federal government shutdown means that the CFTC has shuddered its doors; no reports have been released since December 21 (per cftc.gov). The most recent figures we have available are three-weeks old at this point. For the week of December 18, speculators had decreased their net-short Euro positions to 53.1K contracts, a drop from 56.3K net-short contracts held previously. Positioning had become interesting once more, but this is not a reliable source at present time. Instead, traders may want to look to the IG Client Sentiment Index for insight as to positioning.

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 Flash-Crash Rebound Looks to U.S. Retail Sales for Fuel

Central bank policy, economic indicators, and market events.

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Image of usdjpy chart

Japanese Yen Talking Points

USD/JPY may face range-bound conditions ahead of the next Federal Reserve interest rate decision on January 30 as the central bank adjusts the forward-guidance for monetary policy, but fresh data prints coming out of the U.S. economy may fuel the sharp rebound following the currency market flash-crash should the developments instill an improved outlook for growth and inflation.

Fundamental Forecast for Japanese Yen: Neutral

The Federal Open Market Committee (FOMC) appears to be withdrawing the hawkish forward-guidance as ‘changes in financial conditions appeared to reflect greater concerns about the global economic outlook,’ and the central bank may continue to change its tune over the coming months as ‘participants also reported hearing more frequent concerns about the global economic outlook from business contacts.

It seems as though the Fed is less confident the U.S. economy will be able to tolerate higher interest rates amid the slowdown in global growth, and an increasing number of central bank officials may endorse a wait-and-see approach as Chairman Jerome Powellargues that the FOMC has the ‘ability to be patient and watch patiently.’ In turn, market participants may pay increased attention to Kansas City Fed President Esther George as the 2019 FOMC voting-member is scheduled to speak ahead of the policy meeting, and a batch of cautious comments may produce headwinds for the dollar as U.S. Treasury yields come back under pressure.

Image of fed interest rate forecast

However, updates to the Retail Sales report may heighten the appeal of the greenback as private-sector spending is expected to increase another 0.2% in December, and little to no evidence of a recession may keep the FOMC on track to further normalize monetary policy as the economy sits at full-employment, while inflation holds near the 2% target. In turn, Chairman Powell & Co. may continue to project a longer-run interest rate 2.75% to 3.00%, and the narrowing balance sheet along with guidance for higher borrowing-costs may cushion USD/JPY in 2019 especially as the Bank of Japan (BoJ) remains in no rush to move away from its Quantitative/Qualitative Easing (QQE) Program with Yield-Curve Control.

Image of Fed GDPNow forecast

With that said, signs of a robust economy may challenge the recent shift in central bank rhetoric as the Atlanta Fed GDPNow model forecasts a 2.8% rate of growth for the fourth-quarter of 2018, and USD/JPY may try to stage a larger correction over the coming days as long as the Relative Strength Index (RSI) holds above 30. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

USD/JPY Daily Chart

Image of usdjpy daily chart

Keep in mind, the broader outlook for USD/JPY remains tilted to the downside as both price and the RSI snap the bullish trends carried over from the previous year, but the failed attempt to test the 2018-low (104.63) may generate range-bound conditions as the momentum indicator snaps back from oversold territory.

As a result, the Fibonacci overlap around 109.40 (50% retracement) to 110.00 (78.6% expansion) sits on the radar, but the lack of momentum to hold above the 108.30 (61.8% retracement) to 108.40 (100% expansion) region raises the risk for a move back towards 106.70 (38.2% retracement) to 107.20 (61.8% retracement), with the next area of interest coming in around 105.40 (50% retracement).

For more in-depth analysis, check out the 1Q 2019 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 2019

--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.



GBP Fundamental Forecast: Bulls Taking Control of Sterling

Fundamental analysis and financial markets.

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GBP

Sterling (GBP) Talking Points:

  • Important week ahead may keep Sterling in check.
  • A Soft Brexit or no Brexit at all are now being priced into Sterling.

The DailyFX Q1GBP Forecasts are available to download including our short- and medium-term look at Sterling.

Fundamental Forecast for GBP: Neutral

A very, very close call not to change our Sterling forecast to bullish this week after market sentiment took a marked shift towards a Soft Brexit or no Brexit at all, both GBP positive. On Tuesday PM May’s Brexit bill took a hammering in the HoC with the PM losing the vote by a record margin of 230 votes although the PM did win the subsequent no confidence vote, mainly due to the DUP vote. As a result, PM May must present her plan B to Parliament on Monday, a bill that is likely to look like Plan A. This plan B will be debated all next week. While the option of a No Deal Brexit is now highly unlikely, the PM has yet to say this and is unlikely to ahead of any further discussions with the EU.

Sterling (GBP) Price: Brexit Vote Impact on GBPUSD and EURGBP

Brexit Roundtable Webinar: Outlook for Sterling and Other UK Asset Classes

Sterling took this week’s votes to heart and began re-pricing all GBP-crosses pushing them higher. These moves also made Sterling technical set-ups look more positive, providing another uplift. While I think that Sterling will continue to make weekly gains, next week may well throw out negative headlines which will dampen any rally, although losses should be limited and contained within recent trading ranges. From a technical point of view, sell-offs should now be viewed as potential buying opportunities.

It is likely that we have already made the lows in most if not all Sterling crosses, although the last 2+ years has taught us that nothing can be taken for granted where Brexit is involved. Remain patient and disciplined when looking for entry points.

GBPUSD Daily Price Chart (May 2018 – January 18, 2019)

GBPUSD

IG Client Sentiment data show 52.0% of traders are net-long GBPUSD. We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests that GBPUSD prices may continue to fall. However, the combination of recent daily and weekly positional changes gives us a mixed trading bias.

--- Written by Nick Cawley, Analyst

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

Follow Nick on Twitter @nickcawley1

Other Weekly Fundamental Forecast:

Australian Dollar Forecast – Slowing China GDP to Curb AUD/USD Flash-Crash Rebound

Oil Forecast – Can Crude Oil Prices Keep Rising as China Slows? Brexit, ECB Eyed



Gold Weekly Fundamental Outlook: Will USD Gains and Returning Optimism Fade?

Macroeconomic trends, technical analysis and capital market alerts.

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Gold

Gold Fundamental Forecast: Bullish

Talking Points:

  • Gold price notches its first weekly decline in over a month
  • US-China trade war developments boosted risk-on sentiment
  • Strong US manufacturing data pushed the USD higher despite Fed turning Dovish

The price of Gold has stumbled lower over the last week as risk-on sentiment caused fading investor demand for the precious metal. Since Gold is often looked at as a safe-haven asset that investors can turn to during times of heightened uncertainty, recent stock market optimism and a strong US Dollar contributed to the shiny metal’s 0.5 percent decline since last Friday.

GOLD PRICE CHART: 30-MINUTE TIMEFRAME (JANUARY 11, 2019 TO JANUARY 18, 2019) (CHART 1)

Gold Price Chart

The drop in Gold’s price over the last 5 trading days snapped the commodity’s streak of 4 consecutive weeks of gains. While Gold was trading sideways for most of the last week, price action on January 18 saw a sizeable 0.8 percent dip in XAUUSD wiping out all gains made over the prior few days.

The decline in Gold was attributable to risk assets rejoicing on reports that China may eliminate its trade deficit with the United States in the latest ploy to decelerate the US-China trade war and boost market confidence. The news comes after an interesting week in the financial markets surrounding Brexit drama, the US government shutdown, and mixed economic developments around the world.

Most notably, weaker than expected data out of China led to the country’s leaders stepping up its willingness to support its worsening economy. Chinese officials announced record-breaking liquidity injections and a lowering of the USDCNY fixing from 6.9709 at the end of last week to 6.7560 on Monday when the poor data was released. Due to the strong correlation between XAUUSD and CNYUSD, this initially helped push Gold higher.

USDCNY, DXY, XAUUSD PRICE CHART: 15-MINUTE TIMEFRAME (JANUARY 11, 2019 TO JANUARY 18, 2019) (CHART 2)

USDCNY,DXY,XAUUSD Price Chart

However, this development was negated throughout the week as positive readings on economic data on US housing, jobless claims, business outlook and manufacturing sent the DXY marching higher despite more dovish remarks from Federal Reserve officials.

Looking ahead to next week, the forecast for Gold remains bullish as the fundamental thesis for potential advances remains in tact. If positive trade talk developments further materialize, this could add support to a faltering Chinese economy and bolster its domestic currency. In turn, this could position Gold for further upside. Moreover, the lingering risks that lower GDP poses to stocks in addition to the risk a dovish Fed poses to the Dollar – both a primary result from an extended US Government Shutdown – is increasingly prevalent. Downside risks to the forecast highlights additional gains in the USD or devaluation in the CNY in addition to further risk-on sentiment resulting in traders overlooking Gold.

---

Written by Rich Dvorak, Junior Analyst for DailyFX

Follow on Twitter @RichDvorakFX

Other Weekly Fundamental Forecasts:

Australian Dollar Forecast – Slowing China GDP to Curb AUD/USD Flash-Crash Rebound

Oil Forecast – Can Crude Oil Prices Keep Rising as China Slows? Brexit, ECB Eyed

British Pound Forecast –Bulls Taking Control of Sterling

US Dollar Forecast– May Find Support as Global Outlook Worries Mount



Canadian Dollar’s Shifting Sentiment May Boost Short Term Prospects

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USDCAD Chart

Fundamental Forecast for CAD: Bullish

Talking Points:

  • Expectations for future Bank of Canada interest rate hikes drop
  • OPEC agreement to cut oil production to support the Loonie
  • Event risk to the US Dollar may benefit its Canadian Dollar counterpart

The Canadian Dollar depreciated slightly against its US Dollar counterpart from the 1.3250 level to 1.3300 USD/CAD over the last week of trading. This occurred against a volatile backdrop due to the anticipated policy interest rate decision from the Bank of Canada (BOC), releases of key economic data and speculation over OPEC leaders gathering to agree on curbing oil output.

As widely expected, the BOC decided to maintain their overnight policy rate target at 1.75 percent. In its press release immediately following the decision, Canada’s central bank struck a cautious tone over recent economic developments at home and globally. Key concerns cited cratering oil prices, muted business investment and slowing growth across major developed countries. Consequently, markets interpreted the comments as dovish and significantly reduced their expectations for future rate hikes. However, the steep drop in expectations could be an exaggerated knee-jerk reaction.

BOC Meeting Hike Probabilities

The implied probability of future rate hikes declined for most of November paralleling oil’s steep selloff over the period due to a worsening supply glut as fears of a deteriorating global economy mount. BOC noted that the country’s energy industry “will likely be materially weaker than expected.” In turn, this may evolve into a major headwind for the Canadian economy as well as the Canadian Dollar seeing that oil production accounts for $170 billion out of the country’s $1.8 trillion GDP – just shy of 10 percent of total economic output. While the BOC stated that the Canadian economy expanded in line with projections for the third quarter, this could change over the final months of the year as economic data is suggesting positive momentum is fading.

On a more positive note, business investment should pick up with the recently signed US-Mexico-Canada (USMCA) agreement providing more clarity on trade between the countries. Also, employment numbers reported at the end of the week surprised to the upside. The Canadian unemployment rate dropped to 5.6 percent from 5.8 percent and the net change in employment crushed forecasts by adding over 94,000 jobs compared to the expected 10,000. Another development that could support a beaten down Loonie is the recent agreement by OPEC and its partners to cut oil production by 1.2 million barrels per day. Crude oil leapt nearly 6 percent on the news which also sent the Canadian Dollar higher.

The data dependent BOC will closely examine housing stats reported next week as it looks for signs of a sustained rebound across the sector. As for its American counterpart, the US market could come under pressure from highly anticipated data points that pose material downside event risk to the Greenback. With the US Dollar already starting to lose some of its luster due to weaker than expected economic developments and seemingly dovish remarks from the Federal Reserve, the USDCAD could see some downside in the short term due to the recent shift in sentiment.

--Written by Rich Dvorak, Junior Analyst for DailyFX.com

--Follow on Twitter @RichDvorakFX

Other Weekly Fundamental Forecast:

Japanese Yen Forecast - USD/JPY to Track October Range as Attention Turns to U.S. CPI

Oil Forecast - OPEC And Friends Production Cut Exceeds Expectations, Crude Rallies



Gold Weekly Fundamental Outlook: Will USD Gains and Returning Optimism Fade?

Macroeconomic trends, technical analysis and capital market alerts.

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Gold Fundamental Forecast: Bullish

Talking Points:

  • Gold price notches its first weekly decline in over a month
  • US-China trade war developments boosted risk-on sentiment
  • Strong US manufacturing data pushed the USD higher despite Fed turning Dovish

The price of Gold has stumbled lower over the last week as risk-on sentiment caused fading investor demand for the precious metal. Since Gold is often looked at as a safe-haven asset that investors can turn to during times of heightened uncertainty, recent stock market optimism and a strong US Dollar contributed to the shiny metal’s 0.5 percent decline since last Friday.

GOLD PRICE CHART: 30-MINUTE TIMEFRAME (JANUARY 11, 2019 TO JANUARY 18, 2019) (CHART 1)

Gold Price Chart

The drop in Gold’s price over the last 5 trading days snapped the commodity’s streak of 4 consecutive weeks of gains. While Gold was trading sideways for most of the last week, price action on January 18 saw a sizeable 0.8 percent dip in XAUUSD wiping out all gains made over the prior few days.

The decline in Gold was attributable to risk assets rejoicing on reports that China may eliminate its trade deficit with the United States in the latest ploy to decelerate the US-China trade war and boost market confidence. The news comes after an interesting week in the financial markets surrounding Brexit drama, the US government shutdown, and mixed economic developments around the world.

Most notably, weaker than expected data out of China led to the country’s leaders stepping up its willingness to support its worsening economy. Chinese officials announced record-breaking liquidity injections and a lowering of the USDCNY fixing from 6.9709 at the end of last week to 6.7560 on Monday when the poor data was released. Due to the strong correlation between XAUUSD and CNYUSD, this initially helped push Gold higher.

USDCNY, DXY, XAUUSD PRICE CHART: 15-MINUTE TIMEFRAME (JANUARY 11, 2019 TO JANUARY 18, 2019) (CHART 2)

USDCNY,DXY,XAUUSD Price Chart

However, this development was negated throughout the week as positive readings on economic data on US housing, jobless claims, business outlook and manufacturing sent the DXY marching higher despite more dovish remarks from Federal Reserve officials.

Looking ahead to next week, the forecast for Gold remains bullish as the fundamental thesis for potential advances remains in tact. If positive trade talk developments further materialize, this could add support to a faltering Chinese economy and bolster its domestic currency. In turn, this could position Gold for further upside. Moreover, the lingering risks that lower GDP poses to stocks in addition to the risk a dovish Fed poses to the Dollar – both a primary result from an extended US Government Shutdown – is increasingly prevalent. Downside risks to the forecast highlights additional gains in the USD or devaluation in the CNY in addition to further risk-on sentiment resulting in traders overlooking Gold.

---

Written by Rich Dvorak, Junior Analyst for DailyFX

Follow on Twitter @RichDvorakFX

Other Weekly Fundamental Forecasts:



RBNZ May Sink NZD Prices as 2018 US Midterms Offer it Uncertainty

Classic technical analysis, macro and economic themes.

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NZD/USD

New Zealand Dollar Fundamental Forecast: Neutral

  • Reduction in US China trade war concerns resulted in aggressive New Zealand Dollar gains
  • RBNZ may disappoint monetary policy bets on third quarter CPI data, sending NZD falling
  • US midterms, with Fed rate hikes still in sight, offer level of uncertainty for sentiment and NZD

We just released our 4Q forecast for equities, which may impact NZD, in the DailyFX Trading Guides page

The pro-risk New Zealand Dollar was on pace last week to mark its best performance against the US Dollar in almost two months. After a shaky October for global stock markets, November began on an upbeat as the S&P 500 set itself up for the most upside progress over the course of one week since March. The backdrop for this optimism seemed to be a cooldown in US China trade war concerns which was further bolstered Friday.

This coming week holds a level of uncertainty for NZD prices given multiple critical event risks. Starting with domestic concerns, the New Zealand Dollar awaits both a jobs report and an RBNZ rate decision. The former is due to cross the wires first and may even surprise to the upside. Such has been the case for New Zealand economic data as of late, suggesting economists are underpricing the health and vigor of the economy.

However, overnight index swaps are not pricing in one rate hike from the RBNZ in 2019, suggesting that New Zealand’s jobs report may have limited implications for NZD. Such was also the same scenario for third quarter CPI data which crossed the wires better-than-expected, reducing what was dovish monetary policy bets at the time. That led to a dramatic appreciation in the Kiwi Dollar however, and it may repeat itself.

Since then, the central bank has been relatively quiet and has given no clear signs that the stronger third quarter inflation report might tilt their forward guidance into favoring a rate hike. At the moment, policymakers have left the door open to a cut. Should the status quo remain the case, we may see a selloff in the New Zealand Dollar as bets on the CPI data (and possibly jobs too) unwind and vice versa.

For broader risk trends, the question remains whether or not market mood can continue improving as the Fed is on pace to keep raising interest rates. In the bigger picture, that seems fanciful. But for now sentiment, and thus the New Zealand Dollar, await the outcome of the US 2018 midterms. Polls are anticipating for Democrats to gain control of the House of Representatives while Republicans maintain a narrow majority in the Senate.

As such, the markets are probably pricing that in and an outcome in line with expectations may not do much to surprise traders. Thus the unexpected outcome would be Republicans holding both houses or Democrats gaining control of them. The former allows for US President Donald Trump to pursue his trade agenda without much interruption and vice versa. Given these uncertainties, the NZD outlook will have to be neutral.

Just getting started trading currencies? See our beginners’ guide for FX traders to learn how you can apply this in your strategy!

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

To contact Daniel, use the comments section below or @ddubrovskyFXonTwitter



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