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Haruhiko Kuroda’s speech US housing data, German Ifo Business Climate, US CB Consumer Confidence, US Durable Goods Orders, Mark Carney’s speech are the main highlights on FX calendar. Here is an outlook on the main market-movers for this coming week.
Last week, the Fed continued its $10 billion bond tapering, reaching $35 billion, but delivered mixed messages at the press conference on Wednesday evening. The Federal Reserve reduced economic growth forecast to 2.3%, but also a lowered unemployment projection to 6-6.1%, while nearly maintaining its inflation forecast to 2.1-2.3% describing the recent inflation data as “noisy” saying, the FOMC will take its time about interpreting CPI data. Yellen also stressed that the Fed is taking a “balanced approach” to monetary policy and is being very watchful to unfolding economic events. Will the growth trend continue?
USDJPY Fundamentals (based on dailyfx article)
Fundamental Forecast for Japanese Yen: NeutralThe Japanese Yen finished the week almost exactly where it began, but continued consolidation within a tight range suggests a breakout is inevitable. When, where, and how might the JPY move?
Record-low volatility for the Japanese currency leaves us looking for clues on when the Yen might finally break its recent range. Yet if there’s going to be a fundamental catalyst it could very well come on upcoming Japanese Consumer Price Index inflation figures. A key question remains whether the Bank of Japan will look to boost its aggressive Quantitative Easing measures.
BoJ Governor Kuroda emphasized the central bank is only halfway to achieving its inflation target and talk of pulling back monetary policy stimulus is premature. And indeed it might take a significant surprise in CPI inflation results to force a large reaction in the Yen. It is then little surprise to note that 1-week volatility prices on US Dollar/Japanese Yen finished Friday at record lows. Or in other words: traders have never bet on/hedged against slower JPY moves.
One crucial thing to understand about volatility is that it doesn’t stay high or low forever; it eventually returns to its long-term average. It’s with that in mind that we view a USDJPY breakout or breakdown as inevitable, and indeed our Senior Strategist highlights key price levels to watch through near-term trading.
It’s ultimately a fool’s errand to try and pick major market turning points, and traditional fundamentals give few clues on the Yen’s next moves. We’ll watch market reactions to economic data with interest, but it will likely require a broader shift in market conditions to force a large Japanese Yen move. Last week we argued that a Japanese Yen breakout might indeed spark a larger shift in forex market conditions.
GOLD (XAUUSD) Fundamentals (based on dailyfx article)
Fundamental Forecast for Gold: BullishWhat To Make of Gold’s Bullish Move
Gold price are sharply higher on the week with the precious metal up nearly 3% to trade at $1315 ahead of the New York close on Friday. Thursday saw bullion post its largest daily range in nine months as prices surged through key technical levels before teetering out just above the May high. The move comes amid escalating geopolitical tensions in the Middle East and a more dovish tone from the FOMC this week as equities continued to march higher. But does this really change things for the broader gold outlook? The answer is simply- Yes.
As expected the central bank tapered QE purchases by another $10billion this week bringing the monthly pace of asset purchases down to $35billion. The accompanying quarterly projections however showed a slight shift in the committee’s outlook on interest rates with both the timing and the longer-run rate expectations suggesting a greater leniency towards a more accommodative stance on monetary policy. During her presser, central bank chair also talked down the threat of inflation suggesting that the data remains “noisy” and that underlying metrics remain in line with the Fed’s broader expectations.
Thursday’s rally broke through a confluence of key technical metrics including trendline resistance dating back to April, a longer-dating trendline resistance dating back to the 2012 high, the 61.8% retracement of the decline off the May high, the 200 & 50-day moving averages AND the weekly opening range high. Bottom line: the medium-term focus on gold shifts to the topside while above $1286 with a breach above key resistance at 1316/21targeting the 61.8% retracement of the decline off the 2014 high at $1334. A move back sub-1260/70 would be needed to shift the outlook back to the short-side of the trade.
Looking ahead into next week investors will be closely eyeing the final read on 1Q GDP with consensus estimates calling for another downward revision from an annualized -1.0% q/q to -1.8% q/q. Durable goods orders and housing data are also on the docket with existing home sales, new home sales and the Case Shiller home price index on tap. The USD remains in a vulnerable state heading into the releases and should the data disappoint, look for gold to remain well supported with a pullback early next likely to offer more favorable long-entries.
AUDUSD Fundamentals (based on dailyfx article)
Fundamental Forecast for Australian Dollar: BearishThe Australian Dollar stumbled after three consecutive weeks of gains, failing to mount a sustained push above 0.94 figure against its US counterpart yet again. As we expected, minutes from June’s RBA meeting proved to be a major hurdle as policymakers added color to a seemingly status-quo policy announcement with decidedly dovish rhetoric. This led the Aussie sharply lower as rate hike bets unwound, with a Credit Suisse gauge tracking investors’ priced-in 12-month policy outlook dropping to the lowest level in nearly three weeks.
Downside follow-through proved limited however, with the Aussie mounting a swift recovery in the aftermath of the FOMC policy announcement. Investors looked beyond a generally upbeat statement from the rate-setting committee and an even-handed performance from Chair Yellen at her quarterly press conference to focus on a sharp downgrade in officials’ 2014 GDP growth outlook. The Fed’s central projection now sees the upper bound on growth this year at 2.3 percent, an dramatically lower number than the 3 percent estimate given in March. Traders seemed to interpret this to mean that interest rate hikes are becoming an increasingly distant prospect following the end of QE3 asset purchases expected in the fourth quarter.
Such sentiments may be short-lived. A cutback in 2014 growth bets reflecting the widely-known slump in the first quarter should not to be surprising for market participants at this point. Investors also ought to find it telling that the Federal Reserve has conspicuously opted not to alter the policy normalization process after the downturn, arguing the soft patch was a transitory aberration rather than a real threat to recovery. Put simply, this means the 2014 GDP growth downgrade reflects old news rather than a new piece of the puzzle that is likely to alter the course of policy going forward. On the contrary, a particularly chipper tone in the policy statement and a hawkish shift in baseline rate hike expectations are far more noteworthy.
The week ahead will bring plenty of opportunities for the markets to reconsider their initial FOMC reaction. A slew of economic indicators including home sales, consumer confidence, durable goods orders, and PMI figures are on tap. The trend in US economic news-flow marked an important upturn relative ton consensus forecasts in early April and has broadly (if unevenly) continued to improve since. More of the same from upcoming releases may show investors they ought to be looking ahead to shape their Fed outlook, not dwelling on backward-looking reflections of weakness that policymakers have already dismissed.
Scheduled commentary from regional Fed Presidents Plosser, Williams, Lacker and Bullard may help this cause. This means post-FOMC moves across the asset class spectrum may be swiftly unwound, sending the Aussie lower in the process.
Why China Will Win The 2022 FIFA World Cup
With the FIFA World Cup finals being under way in Brazil, a popular joke in China tells the story of a fairy visiting Earth, appearing in front of a group of Chinese and telling them that they will be granted one wish. The first request is for lower prices for apartments, so that all Chinese can afford to buy one. Seeing the agonized expression on the fairies face, another person offers a different wish: “Could you help the Chinese football team to qualify for the next World Cup?” Taken aback, the fairy is silent for a long time before saying: “OK, let’s talk about property prices.”
The No. 1 international traveller from the No. 1 international tourism source market, Chinese President Xi Jinping, is using every opportunity abroad to display his love for the “beautiful game”. In the USA in 2012 he met with David Beckham, in Ireland in the same year he kicked around a ball at a stadium in Dublin in front of the international press. During his visit in Europe in March this year he used the official gala dinner hosted by the king of the Netherlands for a long chat with the Dutch goal keeper Edwin van der Sar and a few days later in Berlin he watched an entire game of 11-14 year old boys from China and Germany at the Olympic Stadium.
The result of the boys game: China 0, Germany 2. That may point to the German undue preference to success rather than hospitality, but it also reflects on the state of the game in China. Again, China is not competing in the FIFA World Cup. The only time the Chinese team could qualify in 2002, they were sent home after three games without scoring a single goal. After that shameful performance, China set a goal for its men’s national team to be ranked in the top eight in the world. More then ten years later, China currently is still outside the top 100 teams, languishing at position 103, just behind Moldova and Equatorial Guinea. Even in Asia, China is ranked only on 12th place in the Asian Football Confederation list.
Four years ago, Forbes.com published a blog by Ray Tsuchiyama entitled “Why China Isn’t At The World Cup” which dismisses some myths about the reason for the failure to excel in this game:
a) China is too poor and too urban – look at Brazil!
b) Chinese are physically unable to compete – look at Yao Ming and look at the physique of players like Messi or Maradona!
c) Chinese football is too corrupt – nobody is denying the problem and many officials have been sentenced to imprisonment over game-fixing scandals, but other countries with similar problems regularly compete in the World Cup!
d) The Chinese Football Association is unable to organize sport on global quality level – look at the recent successes in almost all other global sports!
There is also certainly not a lack of interest in football in China. Many millions of fans follow the leagues in Spain, Italy, UK and Germany on TV every week. Queuing for a taxi at Beijing Capital Airport I found myself recently watching on the TV screens the live coverage of a Bundesliga game back home in my native Germany. For all major teams and for all major sportswear producer, China is one of the biggest markets. Nike is paying more than 40 million US$ to sponsor the World Cup on CCTV, more than 500 Chinese journalists report from Brazil. As the games are scheduled in the wee hours in China, productivity has been reported to be markedly down in offices across the country since the tournament started.
But this being China, politics decides everything. In 2011 Xi Jinping connected his “Chinese Dream” with a “Chinese Soccer Dream in three steps”: China, which claims to have invented the game anyway in the form of “Cuju” more than 2,000 years ago, should enter the World Cup finals, host the World Cup finals and win the World Cup championship. To realise this dream, Xi is reported to have agreed with Edwin van der Sar during their talk in Holland that the most important step is to start with a huge number of very young talents. Accordingly all over China football boarding schools have been erected and dozens of European trainers have been employed to make the president’s dream come true. The smart money is following: Three of the ten richest men in China have invested in the game: Xu Jiayin, boss of the Evergrande Real Estate Group, bought a Guangzhou team in 2010, nurturing it under its new name of Evergrande Guangzhou to win the Asian Champions League title in 2013. Jack Ma, the founder of Alibaba, invested almost 200 million US$ this month to buy 50% of the team. The richest man of China, Wang Jianlin, owner of a retail and hospitality imperium as well as the U.S. movie chain AMC, uses part of the money which currently puts him on position 77 in the Forbes billionaires list, to support football in China. His Wanda group sponsors the education of young Chinese football players in China and abroad to the tune of more than 30 million US$ per year.
Only a few thousand Chinese fans have been travelling to witness the FIFA World Cup in Brazil. President Xi found a creative way to connect his love for the game with his job as one of the most important – and busy – global leaders: The 6th BRICS summit, which was due to be held in Brazil during spring this year, was moved, ostensibly according to Chinese demands, to the 15th of July, two days after the final match is played out in Rio de Janeiro. President Putin, Prime Minister Modi and President Zuma will join their host President Rousseff and President Xi to watch the game, even though only Putin and Rousseff have any chance to see their own national team on the pitch.
However, with the 2022 finals maybe not taking place in Qatar after all, China could use the opportunity to fulfill the first two of the three steps of the Chinese Soccer Dream (as the host is automatically qualified) by snatching up the finals. With all the money from the billionaires club and the attention from the highest political level, don’t be surprised if the global football champion 2022 instead of the Weltmeister or campeao mundial turns out to be the shijie guanjun.
PS.: FIFA stands for Fédération Internationale de Football Association, so the game played in Brazil in the FIFA World Cup is called Football, not Soccer, sorry!
Forum on trading, automated trading systems and testing trading strategies
Something Interesting to Read June 2014
newdigital, 2014.06.21 18:12
10 Weekend ReadsGood Saturday, here are some longer form reads for your weekend reading pleasure:
• Bubble, Bubble, Toil and Trouble: The Costs and Benefits of Market Timing (Musings on Markets)
• The Zen of Gen X: How We Went From Jaded to Sated (The Weeklings)
• Only Apple (Daring Fireball) see also Tim Cook, Making Apple His Own (NY Times)
• The House of Mondavi: How an American Wine Empire Was Born (LongReads)
• A Rare Peek Inside Amazon’s Massive Wish-Fulfilling Machine (Wired)
• How a Lawsuit Over Hot Coffee Helped Erode the 7th Amendment (Priceonomics)
• Artificial Intelligence Raises New Hope for Cancer Patients (Re/Code) see also Killing a Patient to Save His Life (NY Times)
• Life Without Sleep (Aeon)
• WTF? How a Science Experiment Led to Sexual Encounters Between a Woman and Dolphin (The Wire) see also The dolphin who loved me (The Guardian)
• World Cup’s World’s Ball (NY Times)
Weekly Review and Outlook: Fed Sent Stocks to Records and Weighed Down Dollar, Canadian Dollar Shone
Fed Sent Stocks to Records and Weighed Down Dollar, Canadian Dollar ShoneDollar ended the week generally lower except versus the Japanese yen and Aussie even though Fed continued with tapering of the asset purchases. Markets seemed to have ignored the slight upward revision on FOMC member's rate forecasts, but were more focus on Yellen's message of keeping rates low for extended time. The sentiments also sent stocks higher with DOW and S&P 500 hitting new record highs while keeping long term treasury yields in range. In the currency markets, Canadian dollar was the strongest one as the upside surprise in inflation data prompted speculation that BoC would shift away from its neutral stance. The Swiss franc was the second strongest one after SNB kept policies unchanged. Sterling extended recent rally against dollar and Euro but ended the week mixed overall. Aussie was the weakest, just followed by yen.
To recap some of the major events, FOMC announced to continue tapering by lowering the monthly asset purchases from USD 45b by USD 10b to USD 35b. After the reduction, the monthly purchases consist of USD 20b of treasuries and USD 15b of MBS. Fed also released updated economic projection. 2014 growth forecast was slashed to 2.1% - 2.3%, substantially down from prior estimate of 2.8% - 3.0%. 2015 and 2016 growth forecast was left unchanged at 3.0% - 3.2% and 2.5% - 3.0% respectively. Unemployment projection was revised lower to 6.0% - 6.1, down from March projection of 6.1% - 6.3%. 2015 and 2016 unemployment forecast was also lowered. Core inflation is projection to be 1.5% - 1.6% in 2014, slightly up from March projection of 1.4% - 1.6%. 2015 and 2016 projections were also revised higher. On average, policy makers are seeing the Benchmark federal funds rate at 1.2% by end of 2015 and 2.5% by end of 2016. That's an upward revision from March projection of 1.125% in 2015 and 2.4% in 2015. The long term average, however, is now forecast to be at 3.75%, down from prior forecast of 4.0%.
The IMF lowered growth forecast of US this year sharply to 2.0%, down from April's projection of 2.8%. 2015 growth projection was left unchanged at 3.0%. The cut in forecast was mainly due to contraction in Q1 on harsh winter weather. IMF also noted that "relatively high unemployment and a lot of slack in the labor market" to persist", and consumer inflation will remain well below the 2% target into 2017. Regarding monetary policy, IMF said Fed's policy rates could " afford to stay at zero for longer than the mid-2015 date currently foreseen by markets". Earlier this month, the World Bank lowered US 2014 growth forecast to 2.1%, down from prior projection of 2.8%.
Talking about IMF, it urged ECB to consider buying assets including sovereign bonds on a large scale to counter the stubbornly low inflation. IMF chief Lagarde said that "inflation is worryingly low across the euro-area countries." She welcomed recent stimulus measures announced by ECB, but she emphasized that "we are not at the end of the road."In a report, IMF note that new asset purchases would "boost confidence, improve corporate and household balance sheets, and stimulate bank lending." German ZEW economic sentiment dropped to 29.8 in June versus expectation of a rise to 35.0. Current situation gauge improved more than expected to 67.7. Eurozone ZEW economic sentiment rose less than expected to 58.4 versus consensus of 59.6. ZEW President Clemens Fuest noted that "the German economy is currently in a very good shape but further increases are becoming more difficult." And, he also said that “we had a strong first quarter in 2014 due to favorable weather conditions but signs are that the second quarter will be weaker."
In UK, BoE minutes for June meeting revealed that policy makers voted unanimously to keep rates unchanged at 0.50% and maintain the asset purchase size at GBP 375b. The minutes noted that "all members agreed that, in the absence of other inflationary pressures, it would be necessary to see more evidence of slack being absorbed before an increase in Bank Rate would be warranted." And, it warned that "a premature rise "could be associated with considerable costs in terms of lost output." However, some analysts noted that underneath the voting, the minutes showed a gradual chance in the tone of the MPC. In particular, the minutes noted that "the relatively low probability attached to a Bank Rate increase this year implied by some financial market prices was somewhat surprising". All in all, the minutes didn't provide enough "hawkishness" for markets to push Sterling further higher. Recent strength of Sterling was also dampened by lower than expected inflation data. CPI slowed to 1.5% yoy in May, down from April's 1.8%, versus consensus of 1.7% yoy. Core CPI slowed to 1.6% yoy versus expectation of 1.7% yoy.
SNB left the target range for the three-month Libor unchanged at 0-0.25%. Also, the EUR/CHF floor is held at 1.2. SNB president Jordan emphasized that the central bank will closely monitor the "impact of the recent interest rate reductions in the euro area on Switzerland. And he noted "we've said repeatedly that we don't exclude any measure and that the introduction of negative rates is a possible option." SNB lowered inflation projection for the next two years. CPI is expected to be at 0.3% in 20156 and 0.9% in 2016. 2014 inflation forecast was raised slightly to 0.1%. Swiss State Secretariat for Economics (SECO) lowered growth forecast of the economy. 2014 growth is projected to be 2.0% in 2014 versus prior forecast of 2.2%. 2015 growth is projected to be 2.6%, downgrade from prior forecast of 2.7%. SECO noted that "the economic picture is still split, with a good domestic economic trend on the one hand and muted exports on the other."
Canadian CPI rose 0.5% mom 2.3% yoy in May versus expectation of 0.2% mom, 2.1%. Core CPI rose 0.5% mom, 1.7% yoy versus expectation of 0 0.2% mom, 1.5% yoy. The headline CPI is back above 2% level for two consecutive months. That's also the highest figure in 27 months. And core CPI is heading back to 2% target. BoC left rates unchanged earlier this month, noting that "the timing and direction of the next change to the policy rate will depend on how new information influences the balance of risks." The set of inflation data could probably trigger a move away from such neutral stance in the coming policy statements.
RBA minutes showed that interest rates will likely be on hold in the foreseeable future. It note that "given this outlook for the economy and the significant degree of monetary stimulus already in place to support economic activity, the board judged that the current accommodative stance of policy was likely to be appropriate for some time yet." The central bank said that pace of growth will likely be "a little below trend" for the rest of the year. There will be "substantial falls in mining investment, "below-average growth of public demand" and subdued non-mining investment. Regarding the exchange change, RBA reiterated that it remained high by historical standards.
Technical Highlights
As noted in our USD/CAD weekly report, the pair has just resumed the medium term corrective fall from 1.1278 and should now be heading to 50% retracement of 1.0181 to 1.1278 at 1.0730 and below. However, as such decline is viewed as a correction only, we'd start to look for bottoming signal below 1.0730, and above 1.0608 cluster support (61.8% retracement of 1.0181 to 1.1278 at 1.0600). But before that, in near term, USD/CAD's outlook will stay bearish as long as 1.0960 resistance holds.
USD/CAD Weekly OutlookUSD/CAD's decline from 1.1278 finally resumed last week and dived to as low as 1.0751. Initial bias remains on the downside and deeper fall should be seen to 50% retracement of 1.0181 to 1.1278 at 1.0730. Such decline is still being viewed as a correction. Thus, we'd start to look for reversal signal below 1.0730 and above 1.0608 key support. On the upside, break of 1.0813 resistance will turn bias neutral first. Break of 1.0960 is needed to confirm near term reversal. Otherwise, outlook will stay bearish.
In the bigger picture, there is no clear sign that the whole up trend from 0.9633 and 0.9406 is reversing. We'll stay medium term bullish as long as 1.0608 support holds (61.8% retracement of 1.0181 to 1.1278 at 1.0600). Rise from 0.9406 is viewed as the third leg of the pattern from 0.9056 (2007 low) and is still expected to extend to 61.8% retracement of 1.3063 to 0.9406 at 1.1666 in medium term after completing the correction from 1.1278.
In the longer term picture, current development suggests that price actions from 0.9056 (2007 low) are developing into a long term sideway pattern. We'd expect range trading to continue in long term before seeing any further development.
The Nikkei initially fell during the course of the week, but found the ¥15,000 level to be supportive enough to push the market higher. We broke above the ¥15,200 level, an area that we had pointed out as resistance previously. Because of this, we feel that the Nikkei is going to continue to go higher given enough time, and the fact that the Bank of Japan is flooding the market with liquidity doesn’t exactly hurt that argument either. After all, there will be no real yields coming out of the Japanese Government Bonds, so it forces money into the Nikkei itself. On top of that, as long as the US numbers are starting to improve, that is good for the export market out of Japan.
One of the biggest problems is the value of the Yen though, and as long as it remains elevated it is somewhat of a lid on this marketplace. Nonetheless, we feel that the Bank of Japan will get its way, inflating the Nikkei for the time being. The Nikkei should continue to offer value, as we have been grinding sideways for some time now. Pullbacks will continue to be buying opportunities as far as we can tell, and it’s not really until we get below the ¥14,000 level that we become worried about selling pressure.
We believe that this market will ultimately go to the ¥16,000 level in the short term, followed by much higher levels in the longer term. 20,000 isn’t exactly a stretch of imagination, although it would take a bit of time to get there obviously. Selling is not something that we are comfortable with at the moment, therefore we are looking to buy and buy only. Because of this, we can even look for shorter-term charts as signals, such as the daily chart. We believe also that a move higher will provide plenty of pullbacks for short-term traders to continue to profit off of this market as well, giving us a steady bullish presence in the Nikkei going forward as we continue the positive momentum.
The DAX bounced off of the €9900 region in order to have a fairly positive looking week. However, it is obvious that the 10,000 level is still going to offer a bit of resistance, and as a result we need to see a weekly close above that level, as it would finally give us the confirmation that the market is going to take the next leg higher. There is massive support down at €9800, and we are most certainly in an uptrend. Because of this, we are “long only” of this particular market.
The NASDAQ rose during the course of the week, using the 4300 level as work. We closed at the very top of the range, and although you could make an argument for a “double top”, we feel that the market has enough momentum underneath to continue going higher. Is because of this that if we break the top of the range for the previous week, we are more than willing to start buying as we think this market really only can go in one direction at this point in time. 4000 will be the “floor.”