Speculators' interest in overwrought risk trends is intensifying as talk
of bubbles is even infecting the bullish camp. Given the exceptional
impact a change in risk appetite can have given the underlying
circumstances of our current bearing, we cannot afford to look away.
However, active trades on the theme should wait for the change in tide.
In the meantime, EURUSD and GBPUSD
are forging progress on another front: monetary policy expectations.
From rate hikes to stimulus programs, we are widely divergent programs
and a docket loaded with important data next week. We take our current
bearings and discuss what lies ahead in the weekend Strategy Video.
It has been a rough few months in the stock market especially after the
steady rise of stock prices in 2013. At the end of last year, it was my
view that 2014 would be a more difficult market, but so far, it has been
even choppier than I thought it would be.
The investment pros, as measured by hedge fund performance, have also
had a tough time, with negative returns in both March and April. Global
hedge fund assets rose to a new record in the 1st quarter, but I would
imagine some of those investors are having second thoughts.
The decline in interest rates in 2014 has also been a surprise to many
especially in the past few weeks as the economic data, including the
sharply higher employment numbers, would typically cause rates to move
The yield on the 30-year T-bond has fallen from the December 31 close of
3.964% to 3.415% early Friday. The yield on the 10-year T-note closed
2013 at 3.026% and is now at 2.618%. So is this the start of a new bond
bull market as some are predicting?
USDJPY Fundamentals (based on dailyfx article)
The Japanese Yen trades at critical resistance versus the US Dollar
(USDJPY trades at support). Given extremely low volatility expectations
it seems unlikely we see a major USDJPY breakdown, but any major
surprises out of upcoming Japanese data could force sharp currency
FX traders sent 1-month volatility prices on USDJPY derivatives to their
lowest levels on record, and it’s obvious that very few expect to see
big things through the foreseeable future. Our forex technical forecasts
as well as sentiment-based outlook subsequently favor a USDJPY bounce
off of the lows. Yet expectations often beget disappointment; what could
force a major Japanese Yen breakout?
Top economic event risk comes from Japan’s Q1 GDP Growth numbers
due Wednesday night/Thursday morning, and any surprises could shake the
currency from its tight trading range. Consensus forecasts call for a
substantial 4.2 percent annualized rate of economic growth in the first
quarter. Such lofty expectations arguably leave risks to the downside
for the data itself and the Japanese currency. But why is the JPY stuck
in such miniscule trading ranges across the board?
Put simply, forex volatility is near record-lows as risky asset classes
continue to outperform. Yen volatility may trade to further lows if the
US S&P 500 and Japanese Nikkei 225 continue to trade onto fresh
In that sense it will be important to watch how Japanese equities
respond to key economic data; any Nikkei 225 losses might actually
result in Yen strength (USDJPY weakness) regardless of the economic
implications of the news results.
The absence of any major surprises in upcoming event risk would likely
leave the status quo intact. It’s important to note that the Yen has
historically fallen in times of low volatility, and indeed we would
argue that a further compression in vols should keep the USDJPY above
key support. The risk is that material disappointments in data could
force equity market tumbles and, by extension, a USDJPY breakdown.
GOLD (XAUUSD) Fundamentals (based on dailyfx article)
Gold prices are softer for the second consecutive week with the precious
metal off by nearly 1% to trade at $1287 ahead of the New York close on
Friday. The losses come on the back of a broad-based USD rally that saw
the Dow Jones FXCM USDOLLAR index reverse off fresh 6-month lows,
paring the entire April decline by the end of the week. The index is now
virtually unchanged since the monthly open and traders will be looking
ahead to next week’s docket as the US data front picks back up.
The calendar was light for the US this week with gold prices giving up
early gains after Fed Chair Janet Yellen noted in her testimony before
congress that the central bank’s accommodative stance was warranted
given the relative strength of the labor markets and subdued inflation
metrics. The greenback regained its footing with a rather dovish ECB
President Mario Draghi on Thursday further supporting the dollar
rebound. The subsequent rally has continued to weigh on gold prices
which look to close the week just off the low.
Looking ahead to next week, US data will be back in focus on the heels
of this week’s Yellen testimony with Retail Sales, the Consumer Price
Index (CPI) and Industrial Production on tap. Inflation figures on
Thursday may prove pivotal for bullion with consensus estimates calling
for a slight increase in the y/y and m/m prints with core CPI expected
to fall to 0.1% from 0.2% m/m and hold at 1.7% y/y. Should the data show
a faster-than-expected pace of price growth, look for gold prices to
come under pressure as expectations for a 2015 Fed rate-hike take root.
From a technical standpoint, gold completed a 100% Fibonacci extension
off the April lows with this week’s push into the $1310 barrier. The
subsequent reversal has continued to be supported by the 100-day moving
average, currently around $1287 and a break below this level puts back
into focus key support at $1260/70 (bullish invalidation). That said, we
cannot discount another assault on the highs as we continue to hold
within the initial May opening range with a breach above $1310
suggesting that a more significant low may have been put in last month.
Such a scenario looks back to a region defined by last month’s high and
the 50% retracement of the March sell-off at $1327/34. With the current
positioning and key US inflation data on tap next week, we will maintain
a neutral stance into the open with the Sunday/Monday opening range
likely to offer further clarity on a near-term directional bias.
The Nikkei as you can see fell during most of the week, but the ¥14,000
level offered enough support to turn things background inform a hammer.
We believe that this area should offer quite a bit of support, so a
break above the top of the hammer which is at the ¥14,500 level, that
would in fact be a signal to start buying as we should head to ¥15,250
level. Above there, we would more than likely head to the recent highs
again. Going forward, we fully expect this market to have buyers.
NASDAQ as you can see had a back-and-forth week, but continues to
respect the 4000 level as support. Because of this, we believe that
ultimately this market will probably go higher, but recognize that there
is a significant amount of resistance just above as well, with that
being the theme of the last month. Because of this, we think that this
market will continue to sideways, but ultimately will breakout to the
upside in a move above the 4200 level should begin the next leg higher,
which could be much higher.
The Parisian index went back and forth during the course of the week,
testing the €4400 level for support, while testing the €4500 level as
resistance. With that, it appears that the market is trying to breakout
above the top of the two shooting stars from the previous weeks. That
being the case, and the fact that the market ended up forming a bit of a
hammer, we believe that will see a massive breakout above the €4500
level, and as a result the market will then head to the €5000 level.
Selling is not an option.