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The pound and the dollar emerged as winners in a week that saw the euro and the yen retreat. US housing data, the rate decision in New Zealand, German business sentiment, US Durable Goods Orders and Unemployment Claims are the main highlights on Forex calendar. Here is an outlook on the market-movers for this week.
The US economy emerged from the cold winter registering gains in retail sales and manufacturing activity as well as continuous improvement in the labor market. . The Philly Fed Index exceeded expectations in April, providing more evidence of a spring bounce. Overall, the US economy is steadily advancing. In the euro’zone, Mario Draghi managed to send the euro down in a Sunday gap, and the common currency never recovered. GBP enjoyed a sharp drop in the UK unemployment rate to reach new multi year highs. The kiwi stayed behind after weak inflation figures and the loonie took the other direction on positive ones
GBPUSD Fundamentals (based on dailyfx article)
Fundamental Forecast for Pound: NeutralThe British Pound was the only major currency to strengthen against the US Dollar in a holiday-shortened week of trading, but can it continue higher? The high-flying Sterling will need support from the Bank of England to hold near multi-year peaks in the week ahead.
A strong wave of domestic economic data drove the lion’s share of British Pound gains, and indeed Sterling strength coincided with a big improvement in UK bond yields. The spread between the UK and US 2-year government bond yields stands at its largest in three years.
It’s with that in mind that we look for any surprises out of upcoming Bank of England Minutes as a potential catalyst for big GBP moves. The BoE released no details in the policy announcement following its April 10 meeting, and we can only speculate as to whether it remained a unanimous decision to keep rates and Quantitative Easing levels unchanged. And though officials would not have final UK unemployment figures released six days later, it will be interesting to hear whether labor market improvements could force the bank to tighten policy ahead of expectations.
The risks to the British Pound are clear: it has thus far set a fairly ominous daily reversal at multi-year highs. CFTC Commitment of Traders data likewise shows speculators are their most long GBP in over three years when it set a significant top near $1.65. And though important price and positioning extremes are only clear in hindsight, the fact that leveraged trades are stretched warns that gains may at least slow.
Traders have thus far seemed willing to push the British Pound to fresh highs, but it may take something special to keep the high-flying currency near these significant peaks.
XAUUSD Fundamentals (based on dailyfx article)
Fundamental Forecast for Gold: NeutralUSDJPY Fundamentals (based on dailyfx article)
Fundamental Forecast for Japanese Yen: NeutralA further pickup in market sentiment should continue to fuel the near-term rally in the USD/JPY, but the fundamental developments coming out next week may keep the dollar-yen contained within the wedge/triangle formation as the Bank of Japan (BoJ) remains upbeat on the economy.
The recent rise in risk appetite may gather pace as the U.S. earnings season boosts trader confidence, and the ongoing themes in the financial markets may continue to heavily influence the USD/JPY as it remains highly correlated to equity prices.
Nevertheless, it seems as though the BoJ is in no rush to further expand its asset-purchase program as Governor Haruhiko Kuroda remains confident in achieving the 2% target for inflation and another uptick in the region’s Consumer Price Index (CPI) may continue to alter the policy outlook as market participants scale back bets of seeing a larger quantitative-easing (QE) program. With that said, we may see a growing number of BoJ official show a greater willingness to carry the current policy into the second-half of 2014, and the USDJPY may continue to congest ahead of the next central bank meeting on April 30 as Fed Chair Janet Yellen remains reluctant to move away from the zero-interest rate policy (ZIRP).
As a result, the USDJPY may continue to face narrowing ranges as it consolidates within the wedge/triangle formation from earlier this year, and it appears as though we’re going to need a key fundamental catalyst for a major move in the pair as market participants mull the outlook for monetary policy.
AUDUSD Fundamentals (based on dailyfx article)
Fundamental Forecast for Australian Dollar: NeutralThe Australian Dollar’s month-long winning streak ran into resistance last week as the build-up in RBA policy expectations stumbled. A Credit Suisse measure of investors’ priced-in policy bets over the coming 12 months declined for the first time in three weeks. A potentially conflicting set of fundamental event risk in the week ahead promises to keep driving policy outlook speculation and keep volatility elevated.
On the domestic news-flow front, the spotlight will be on first-quarter CPIdata. Expectations suggest the headline year-on-year inflation rate will rise to 3.2 percent from 2.7 percent recorded in the three months through December 2013, marking the highest level in over two years. Data from Citigroup shows Australian economic news-flow has increasingly outperformed relative to consensus forecasts since mid-February, suggesting economists are underestimating Australia’s place in the business cycle.
That opens the door for an upside surprise. Such a result may go a long way toward rebuilding support on from the RBA policy outlook and driving the Aussie higher.
Externally, a busy docket of US activity data will help inform bets on the continuity of the Fed’s effort to “taper” QE asset purchases. Home Sales, Durable Goods Orders and Consumer Confidence figures are in the spotlight. Economic data outcomes from the world’s largest economy showed a notable improvement relative to expectations over the past two weeks. If that trend continues, ebbing doubt about the continued withdrawal of Fed stimulus. That may highlight the immediacy of the Fed’s move to narrow the policy gap compared with the RBA’s apparent preference for inaction in the near term, weighing on AUD/USD.
NZDUSD Fundamentals (based on dailyfx article)
Fundamental Forecast for the New Zealand Dollar: NeutralThe market seems pretty certain that the New Zealand central bank will usher in the strongest wave of monetary policy – and thereby carry increase – of the majors. Yet, if the outlook is so certain and hawkish; why is the performance for the New Zealand dollar not more bullish? The Kiwi reminds us that markets move to price in fundamental considerations as soon as they are deemed probable enough to be acted on; and fundamental impact – as with currency performance – is relative.
On Wednesday at 21:00 GMT, the Reserve Bank of New Zealand (RBNZ) is set to deliberate on the country’s monetary policy. According to the 15 economists polled by Bloomberg, the meeting will end with a 25 basis point (bp) hike to 3.00 percent. The market is equally as convinced that the policy authority will raise rates at back-to-back meetings. Overnight swaps are pricing in a 97 percent probability of another quarter-percent hike.
That certainty inadvertently diminishes the potential for bullish market response to this event while simultaneously leverages the potential and impact of a ‘disappointment’. If the market is certain of an impending hike, carry traders and speculative frontrunners should theoretically already positioned for such an outcome. As such, realizing the move would generated limited reaction for a stronger bullish swell as there would be few that haven’t already accounted for it. Consider, since the March 12 rate hike – the first – the New Zealand dollar has maxed out its bullish move with a 2 percent climb versus the euro. Its performance versus others is materially weaker – and even negative versus the Australian dollar.
And, what happens if the RBNZ decides not to move forward so aggressively with its policy course? If the bulk of the market is positioned for a hike, its absence could lead to a material unwinding of long exposure to account for a more moderate course of tightening. In other words, the market is already pricing perfection; and now RBNZ Governor Wheeler needs to keep pace.
In probability terms, a rate hike is the more likely outcome; but there will still be speculation surrounding subsequent moves. According to Wheeler’s own forecasts, he expected another 200 bps of tightening through the first quarter of 2016. That would mean that there are inevitably gaps between hikes. If that first wait-and-see moment is for the next meeting in June, the kiwi could fall back. The market will look to assess this in the central banker’s usually blunt commentary.
Another factor to keep in mind with this high profile event is that risk appetite dictates the influence that monetary policy changes have. In other words, if there is a market-wide ‘risk aversion’ drive; a 25bp increase in New Zealand’s still-historically low yield will likely do to quell the capital flight. And given the market’s pricing in perfection for the kiwi and New Zealand monetary policy, the risk is again amplified should risk aversion touch off.
The Nikkei had a good week, climbing from the ¥14,000 level to close at ¥14,500 roughly. With that, we feel that the market continues to go higher, and that the selloff recently has merely offered another buying opportunity and suggests that we are probably going to head to roughly ¥16,000 given enough time. We are bullish of the Nikkei, and do think that eventually the uptrend continues itself as there are far to be reasons the think that the Bank of Japan will continue to support the stock market in Tokyo.
The DAX initially fell during the week, but found enough support below the €9200 level to turn things back around. If that’s the case, it appears that the market has found enough bullish orders to push back above the €9400 level. Now that we’ve cleared the €9400 level, we feel that the market heads to the €9700 level. That level is fairly resistive, but once we get above there we feel that this market eventually heads to the €10,000 level, which is our longer-term target for this market place.
The NASDAQ as you can see fell during the beginning of the week, but found the 4000 level to be supportive enough to bounce back and form a nice-looking hammer candle for the week. The shape the candle is just about perfect, and the fact that we are sitting at the 4000 level of course has caught our attention as well as it is a major, round, psychologically significant number. We feel that this market should continue to go higher on a break in the top of the hammer, and most certainly the trend is in our favor, as the buyers have taken control for several months now.
That being the case, we feel that the market should continue, and therefore we have absolutely no interest in selling. We actually see a decent cluster underneath this hammer as well, so quite frankly were not even think about selling going forward. A break of the top this candle should send the market looking for at least the 4350 level, which of course was the most recent high.
This market is heavily tech influenced, as one would expect. However, the most important thing that you need to pay attention to is the fact that the NASDAQ as an extremely interesting market when risk appetite is high. Because of this, we feel that the NASDAQ might be one of the better performers going forward, assuming that everybody is going higher. One of the things you can do is pay attention to other stock markets, and then by this one as a proxy for many of the other indices around the world that we follow here. After all, most stock markets will follow each other over time. If the Nikkei, DAX, and CAC are all going higher, typically the NASDAQ will as well. Because of that you need to look at the entirety of the world marketplace, and recognize that the interconnectivity of the stock markets offer plenty of trading opportunities. Without a doubt, looking at this trend it is roughly perfect, and therefore it is one of the favorite markets in a buying situation.
The MIB initially fell during the week, finding the 20,800 level as support. The support area was strong enough to push market higher, as we closed that the 21,613 level. The market looks like it’s ready to continue going higher, and the trend is most certainly strong at this moment. With that, we are bullish, and have absolutely no interest in selling regardless. Any pullback at this point in time is going to be a buying opportunity as far as we are concerned, and we will treat it as such.