GBPUSD Fundamentals (based on dailyfx article)
The 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)
USDJPY Fundamentals (based on dailyfx article)
A 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 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)
The 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)
The 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
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
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
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.