Pepperstone – Full Weekly Forecast
U.S. Dollar.
Our bias BEARISH, we’ll be looking to sell the Dollar on rallies.
FUNDAMENTALS: Last week, the U.S. Dollar finished lower against almost all of its G10 counterparts, continuing the multi-month downtrend ahead of this week’s critical economic data. The markets focus will be on Fridays NFP jobs number and expectations may force sharp, short term moves ahead of the release as the U.S. Dollar nears significant lows against other major currencies. Forecasts call for a 183k jobs gain for the month of February and market participants will be watching the ISM Manufacturing, ADP Employment Change, Initial Jobless Claims, and ISM Services results to gauge the likelihood that the February print will meet the forecast. Meanwhile, the U.S. Federal Reserve shows little urgency in withdrawing QE2 stimulus amidst generally weak inflation data and lackluster jobs growth. The controversial Quantitative Easing measures have been a major driving force behind Dollar weakness with a number of analysts saying it would take a substantial shift in the Fed’s stance and rhetoric to force a sustained Greenback recovery. Without such a change, the Greenback will likely need a broader shift in the financial markets to drive a major rally and subsequent reversal. The CFTC Commitment of Traders data shows that Non-Commercial traders (typically large speculators) remain heavily net-short the U.S. Dollar on a steady downtrend and as such, trend traders will likely favor continued Greenback weakness into the week ahead. Additionally, FX Options market risk reversals likewise suggest that many traders have continued to bet on and hedge against Greenback weakness. Given that the first week of the month quite often sets the pace for subsequent trading, it will be important to pay special attention to whether the U.S. Dollar can show any real sign of recovery through the month of March.
TECHNICALS: Fridays close saw the Dollar at 77.21 after tumbling from an early week rally to the 78.32 level. Price traded all week below the key psychological 78.00 level which now exposes downside risks to 75.63 support over the coming days and weeks with only a sustained close above 78.50 negating our bearish bias.
Euro Dollar.
Our bias BULLISH, we’ll be looking to buy the Euro on dips.
FUNDAMENTALS: Looking ahead this week, the markets preoccupation with Thursday’s Minimum Bid Rate and Monetary Policy Statement expectation is so intense that it has basically ignored a tentative risk aversion move. With the market pricing in 95 bps of hikes over the coming 12 months, undoubtedly the bar has been set high. With that in mind, there will be great interest in Thursday’s ECB rate decision considering the central bank has held its hand on changing rates for nearly two years now. There seems little doubt that the ECB will hold rates steady yet again and all of the recent hawkish speculation will require some level of confirmation from the ECB to maintain the Euro Dollar’s bullish charge. A boost to growth or inflation expectations, rhetoric that suggests a withdrawal of atypical stimulus measures or even a subtle change in key terminology could quite easily boost Euro bulls’ convictions. Supporting interest rate expectations is particularly important for the Euro Dollar’s performance because without the promise of higher returns down the line, the market will once again have to price in the uncertainties related to the region’s sovereign financial troubles. Fear of another financial crisis overtaking another EU member has cooled off these past week’s thanks largely to policy officials’ open-ended vows to expand their support of the region’s troubled economies. With the upcoming EU summit that is to vote on a range of proposals designed to ensure Euro-Zone financial stability, said policy officials rhetoric is likely to be exposed as meaningful or meaningless. Lastly, this week the German unemployment change figures may steer the economic side of market policy expectations but more pertinent though will be the Euro-Zone CPI estimate due Tuesday. Forecasts for an unchanged 2.4% annual growth may keep a hawkish Euro Dollar outlook in place without further accelerating the markets rate tightening expectations.
TECHNICALS: Friday saw price dip below the 78.6 fib of the Feb 2nd – 14th decline to close at 1.3748. Notably, price failed to close below the 9th Feb resistance level by 1.3730 which suggests price may head higher and test the 2011 high by 1.3860 over the coming sessions and beyond that, the key psychological 1.4000 level. At present, we have an open long position from 1.3775 targeting 1.4000, with only a daily close below 1.3700 negating our early week bullish bias.
Japanese Yen.
Our bias NEUTRAL, we’re on the sidelines until a clearer picture emerges.
FUNDAMENTALS: Last week, the Japanese Yen rallied against all of its major counterparts on the back of a sharp drop in risk appetite amid fears that turmoil in the Middle East will push up oil prices and threaten to derail the global recovery. Typically, the Yen strengthens in times of stress as risk aversion spurs an unwinding of carry trades funded cheaply in the perennially low-yielding Japanese currency. This time around however, the story had more to do with US Treasury yields: rising jitters sent capital out of stocks (as well as other risk-geared assets) and into the safety of – among several favorite havens – US government debt. This drove up bond prices, sending yields sharply lower. A firm inverse correlation between a trade-weighted index of the Yen’s average value and the long end of the US yield curve meant that it also translated into strengthening for the Japanese unit. So with this in mind, the coming week promises to be anything but quiet. While worries about the oil price may have calmed a bit after Saudi Arabia pledged to boost production to offset any Libyan-linked shortages, a packed economic docket of scheduled data promises to keep sentiment trends in flux. The US economic calendar alone is reason enough to expect dramatic price movement, with the ISM Manufacturing Survey, the Fed’s Beige Book and the all-important NFP jobs report along with a hefty dollop of second-tier releases all due to cross the wires. This includes a long list of Federal Reserve speakers – headlined by Chairman Ben Bernanke’s semiannual congressional testimony. Additionally, there is the possibility of renewed sovereign jitters in the Euro Zone as Portugal rolls over a tranche of debt while Spain and Belgium tap the markets threatens to compound market volatility. Taken together, this makes for a complicated landscape, with the likelihood of sharp price moves the only firm conclusion to be made about the Yen’s trajectory over the next five days.
TECHNICALS: Last week, price came under some intense pressure to trade back below 82.00, however, overall price action remains largely consolidative and we would expect to see the market once again well supported in the 81.00’s. For now, 81.00 remains the key level to watch below, and only a close below this figure would negate the current range-bound price action and give reason for concern. As such, we like the idea of buying on dips into the 81.00’s in favor of a bullish reversal and daily close above 82.00.
British Pound.
Our bias NEUTRAL, we’re on the sidelines until a clearer picture emerges.
FUNDAMENTALS: Last week, Sterling lost ground against the U.S. Dollar, falling some 1.08% amid uncertainty surrounding the region’s economic outlook, while risk aversion sentiment regained a footing due to tensions in the Middle East and North Africa. This weeks U.K. economic docket will be fairly muted, however, as technical studies begin to paint a bearish picture for Cable, this weeks price action may see additional loses in the Pound. GBPUSD witnessed whipsaw price action over the past 5 days as fundamental developments failed to provide market participants with a clear bearing towards the chance of a rate hike by the Bank of England in the near term. As of late, consumer prices remain stubbornly above the central bank’s target and are expected to push higher due to the increase in VAT. Moreover, BoE Governor Mervyn King warned that inflation could push somewhere in the area between 4 and 5% over the next few months. As a result, the Bank of England Minutes showed that Spencer Dale joined Andrew Sentance and Martin Weale in pushing for a rate hike. Additionally, 4th quarter economic activity posted a -0.6% contraction (-0.5% forecast) while total business investment slumped 2.5% in the same period. Also concerning for U.K. policy makers was the fact that CBI reported sales posted its lowest reading since June 2010. This week, Sterling traders will looking to the Nationwide and Halifax house price index readings, PMI manufacturing, and M4 money supply prints for a bearing going forward. As the U.K. economic outlook comes into question, dismal releases will not only send the Pound lower against most of its counterparts, and may lead the central bank to take a wait and see approach before tightening monetary policy.
TECHNICALS: Price remains largely locked in consolidation after continuously stalling out ahead of key resistance by 1.6300. From here, it is difficult to establish a clear directional bias and we will need to see a sustained close above 1.6300 or below 1.6100 for additional clarity. We have an open short position from 1.6140; however, expected U.S. Dollar weakness this week may see us cut out of the position early until a clearer picture develops.
Canadian Dollar.
Our bias BULLISH, we’ll be looking to buy the Loonie on dips.
FUNDAMENTALS: The Canadian Dollar finished last week stronger against the U.S. Dollar, rallying on the surge in oil prices amid turmoil in the Middle East and North Africa. Surprisingly, Retail Sales dropped for December, falling 0.2% from the month prior. However, stripped of automobile sales, the Retail Sales print actually increased 0.6%, a figure in line with expectations which sent the Loonie higher for the remainder of the session. With the Loonie falling away from parity against the Greenback, key releases this week could dictate whether or not USDCAD tests similar levels once again. The week ahead is packed with significant market moving data from nearly all of the G-7 economies, and the Bank of Canada rate decision and monetary policy statement on Tuesday will be a driving force behind volatility for the North American session after its release at 13:30 GMT. Credit Suisse Overnight Index Swaps price in a 4.0% chance of a 25 bps move, but the market will be paying close attention to the ensuing commentary to get BoC insight with regard to future monetary policy. With inflationary pressures rising in Canada and CPI increasing by 2.3% year-over-year in January, the markets have priced in a 75 bps increase over the next 12-months. Despite the fact that the key interest rate is suggested to hold at 1.00%, with an implied overnight interest rate of 1.32% for March, BoC Governor Mark Carney’s statement will be particularly important as to learn when the BoC believes an actual rate hike will occur. Accordingly, hawkish commentary by Governor Carney could send the Loonie higher against the Dollar. Before Tuesday’s rate decision, Gross Domestic Product data will hit the newswires on Monday. Growth during the fourth quarter of 2010 is forecasted to increase by 3.0% at an annualized rate, in line with moderate growth expectations. However, should the reading come in higher than expectations, market speculators could drive USDCAD lower amid projected hawkish commentary from BoC policymakers.
TECHNICALS: Technical studies point lower for USDCAD with key support coming in by 0.9709. A daily close below this level exposes downside risks toward the 2007 low at 0.9056. Expected U.S. Dollar weakness over the coming days and weeks suggest the short side with this pair is where price is heading.
Australian Dollar.
Our bias BULLISH, we’ll be looking to buy the Aussie on dips.
FUNDAMENTALS: Last week, the Australian Dollar finished slightly higher than the U.S. Dollar after a week of whipsawing price action, falling on sharp U.S. S&P 500 declines only to recover into the Friday close. The market will now look ahead to a packed week of economic data to drive moves in AUDUSD. Given that the Australian Dollar nears important peaks against the U.S. Dollar, it could very well be a key week for the AUDUSDs’ 10 month impressive uptrend. Friday’s U.S. NFP jobs report headlines a busy week and the usual wave of pre-NFP data releases will shape expectations leading up to the event. The Reserve Bank of Australia may likewise drive volatility through their scheduled interest rate announcement on Tuesday at 03:30 GMT. Credit Suisse Overnight Index Swaps (OIS) price in a 0% chance of any change in interest rates, but it will still be important to monitor the post-announcement statement from RBA Governor Glenn Stevens. Those same OIS show that overall interest rate hike expectations continue to trend lower for the Australian central bank; 12-month interest rate expectations remain near their lowest levels since the second half of 2010. Though the RBA has stated concerns that domestic inflation may hit the top end of their target through 2012, recent rhetoric suggests no sense of urgency in further monetary policy tightening. Any hawkish shifts could further fuel Australian Dollar gains. Some second-tier Australian economic data may spark shorter-term volatility, but broader financial market risk sentiment will likely remain the most significant driver of AUDUSD price action. The key question is whether broader geopolitical turmoil may be enough to force a more sustained shift in ‘risk’ and a commensurate correction in financial market sentiment. An Australian Dollar above parity is hardly a sign of market troubles, and indeed we will have to see a much larger AUDUSD turn lower before claiming that the AUDUSD is in danger of a sharp correction.
TECHNICALS: AUDUSD continues to advance, thus a bullish resolution to the sideways trade since October appears increasingly certain. Only a daily close below 0.9800 would confirm a reversal to the downside. The market appears set on testing the recent 1.0255 high over the coming sessions and expected U.S. Dollar weakness over the coming days and weeks is likely to see AUDUSD probe higher.
New Zealand Dollar.
Our bias NEUTRAL, we’re on the sidelines until a clearer picture emerges.
FUNDAMENTALS: Last weeks devastating earthquake is enough to potentially detract 0.5% of growth from the New Zealand economy, further complicating a recovery that was already shaky given the imbalance of domestic factors and the strains of the global stabilization. In the aftermath of the earthquake, the market has seen expectations for one or two quarter-point rate future hikes turn into a forecast for 10 bps of cuts. The market has fully priced in the possibility of a 25 bps cut at the next meeting on March 9th and there is debate that the move could be as large as 50 basis points. Maintaining rates is one thing; but seeing yield potential drop is another altogether. As interest rate expectations have retreated over the past week, we have seen the Kiwi react in kind and while this slide has clear fundamental roots, we need to be cautious in our expectations of a trend reversal. The Kiwis 3.00% yield will offer a strong reason for investors to keep capital in the market until there is confirmation that a rate cut is on the way. At the same time, the view of market wide risk appetite sentiment will play a more prominent role here. Normally, a high yielding currency would still attract support when short term risk appetite sentiment has a corrective pullback, but the wider market’s bearings will be seen as a added weight to the RBNZ’s’ efforts going forward. Apart from the early week Trade Balance and business confidence reports, the economic calendar is empty for the Kiwi which means price action is likely to be determined by wider market sentiment going forward. All in all, the markets panicked reaction to the earthquake and its implications may be slowly retraced over the coming week as investors acclimatize to the new fundamental reality for the Kiwi Dollar with accompanying U.S. Dollar weakness.
TECHNICALS: NZDUSD has continued lower but found support just ahead of 0.7400. A drop below 0.7342 is needed to confirm our bearish bias. Until then, bullish potential does remain (although looking less certain) and a rebound to 0.7655 cannot be ruled out with a daily close above this level negating our bias. Near term resistance comes in by 0.7520/0.7575. We have two open short positions from 0.7475/0.7512 and with expected U.S. Dollar weakness over the coming day and weeks, confidence is waning to the short side. As such, we’ll be monitoring closely and may look to cut out of these positions early in the week to wait for a clearer picture to emerge.
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