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Inside Your Head with Dr. Woody Johnson (based on fxstreet article)
For most, the biggest battle is not the market, but what goes on in their head. Dr. Woody Johnson joins Merlin via phone to talk about some of the major challenges traders face, and how to overcome those issues. Several listeners send in questions which Merlin and Dr. Johnson address live on air.
US Dollar Fundamentals (based on dailyfx article)
Fundamental Forecast for Dollar: Bullish
A tumultuous week for the currency market has found the Dollar closing its fifth consecutive week in the green and well on its way to a record-breaking seventh consecutive month climb. Yet, whether this benchmark is able to keep pace or tumbles into a reversal depends heavily on what happens over the next few weeks. Before the Fed feeds speculation for the timing of its first hike on the 28th, the ECB will decide this week whether it will lever the Dollar’s appeal by expanding its own stimulus effort. And, with volatility trending higher and market shocks (oil plunge, Russia, the SNB) increasing in frequency; traders’ appetite for havens is raising the Greenback’s profile once again.
In the Dollar’s climb these past quarters, much of the fundamental fuel that was siphoned for the move was sourced from the rate expectations. Yet, as persistent as the ‘mid-2015’ forecast for a first FOMC move has been, developments and data have offered a more neutral view of the liftoff. Adding to previous concerns of troubling international winds and tepid wage growth, this past week’s CPI reading showed headline inflation pressures were at a five-year low while the core level slipped to 1.6 percent.
Market speculation surrounding the timing and tempo of the central bank’s rate regime has also weighed expectation. Fed Fund futures are now only pricing in a 0.42 percent benchmark rate by the end of the year. However, as debatable as the timing of the first hike is, what is clear is that the US is already on a much more hawkish footing than its counterparts. The Bank of Japan and European Central Bank are pressing unconventional policy while many others have been anchored to a neutral bearing with a dovish bias. That represents relative appeal for the Greenback. And, we will assess just how much comparative strength the currency can sustain this week.
Preempting the Fed’s policy meeting towards the end of this month, both the BoJ and ECB are scheduled to deliberate on policy this week. After the surprise QQE upgrade in October, no new efforts are expected from the Japanese authority – but in such fractious financial circumstances, it is not impossible. Far more controversial is the ECB’s meeting on Thursday. As the Fed’s largest foil (and the dollar’s largest counterpart), the policy bearings from Europe are especially important. A full-blown quantitative easing program has been heavily suggested by President Draghi and other officials sometime in the first quarter. But, could actually come January 22?
With a Greek election just days after the forthcoming ECB meeting and given the complexity involved with a multi-national stimulus effort; a deferred adoption would seem prudent. However, after the Swiss National Bank (SNB) shocked the market by abandoning its own monetary policy center piece (a 1.2000 EURCHF floor) this past week; there is growing speculation that the move was to preempt an imminent wave of easing and Euro depreciation. As it happens, this could also play a role in catalyzing ‘risk’ trends.
Volatility has been building for months and currencies have been at the forefront of that development – the short-term FX reading is at its highest level in three years. With the SNB’s fireworks this past week, the appetite for safety has risen and its outlets have diminished. Dependency on a global pool of stimulus is driven by new bouts of economic hardship and its limitations are more discernable. If the ECB doesn’t fulfill expectations with the next infusion, it could potentially trigger a correction in European markets that quickly spreads through a susceptible global system.
USDCHF Fundamentals (based on dailyfx article)
Fundamental Forecast for Swiss Franc: Neutral
The most adept of wordsmiths might be forgiven for struggling to find an adjective strong enough to describe last week’s Swiss Franc price action. A quantitative description is perhaps most apt: realized weekly EURCHF volatility jumped to the highest level since at least 1975, swelling to nearly 2.5 times its previous peak.
The surge was triggered after the Swiss National Bank unexpectedly scrapped its three-year-old Swiss Franc cap of 1.20 against the Euro, saying the “exceptional and temporary measure…is no longer justified.” Appropriately enough, the previous historical peak in weekly EURCHF activity occurred in September 2011 when the Franc cap appeared as suddenly as it vanished. Then too, the SNB acted without warning and sent markets scrambling.
The announcement caught the collective FX space by surprise. Even the world’s top international economic bodies were apparently left in the dark. IMF Managing Director Christine Lagarde quipped that she found it “a bit surprising” that SNB President Thomas Jordan did not inform her of the impending move. “Talking about it would be good,” she added.St. Louis Fed President Jim Bullard hinted the US central bank was not notified either.
The go-toexplanation for the SNB’s actionscenters around bets that the ECB will unveil a “sovereign QE” program following its policy meeting on January 22. Mario Draghi and company finally secured a green light for large-scale purchases of government debt after the ECJ gave clearance to the similar OMT scheme devised (but never used) to battle the debt crisis in 2012. The SNB presumably scrapped the Franc cap to avoid having to keep pace with the ECB’s efforts.
Another wave of Franc volatility may be ahead next week. While markets seem all the more convinced that an ECB QE announcement is in the cards after the SNB’s about-face maneuver, a delay in the program’s implementation (if not its formulation) is entirely plausible. Securing the acquiescence of anti-QE advocates like Germany to having such an effort in the arsenal is not the same as launching it. The ECB may yet opt to wait through the end of the first quarter as it has hinted previously before pulling the trigger, sending the Euro sharply higher.
Measuring the fallout from the SNB’s actions is likely to be protracted however.The full breadth of the various ripple effects will probably emerge over weeks and months, not hours and days.The Franc now looks gravely overvalued against currencies whose central banks are set to tighten policy this year, with the US Dollar standing out as particularly notable. It seems prudent to let the dust settle before taking advantage of such opportunities however.
USDJPY Fundamentals (based on dailyfx article)
Fundamental Forecast for Japanese Yen: Neutral
USD/JPY may face a larger correction in the week ahead should the Bank of Japan (BoJ) remain confident in achieving the 2% inflation target and endorse a more neutral tone for monetary policy.
Falling energy prices may prompt the BoJ to curb its near-term forecast for inflation, but recent comments from Governor Haruhiko Kuroda suggests that the board will retain its current policy at the January 22 meeting as the central bank head continues to see a moderate recovery in the Japanese economy. After unexpectedly expanding its asset-purchase program at the October 31 meeting, the BoJ may preserve a wait-and-see approach for most of 2015 especially as Japan’s Cabinet approves the JPY 3.5T fiscal stimulus package to encourage a stronger recovery.
With that said, the fresh batch of developments coming out of the BoJ may fail to generate a more bullish outlook for USD/JPY, and the pair remains at risk of facing a larger pullback over the near-term as market participants scale back their appetite for risk. As a result, the dollar-yen correction may continue to take shape ahead of the next Federal Open Market Committee (FOMC) meeting on January 28, but the long-term outlook for USD/JPY remains bullish as Janet Yellen and Co. looks to normalize monetary policy later this year.
In turn, the December low (115.55) remains in focus for USD/JPY as the pair continues to carve a string lower highs & lows in January, and the technical outlook certainly highlights the risk for a further decline in the exchange rate as the Relative Strength Index (RSI) preserves the bearish momentum carried over from the previous month.
GOLD Fundamentals (based on dailyfx article)
Fundamental Forecast for Gold: Bullish
Gold prices are markedly higher this week with the precious metal rallying more than 4% to trade at $1272 ahead of the New York close on Friday. The advance marks the single largest weekly gain in ten months and took prices to the highest levels in four months. The rally comes amid broader declines in US equity markets with all three major indices ending the week off nearly 2%. A surprise move by the Swiss National Bank to end its three-year currency peg to the Euro dealt another blow to sentiment with gold the chief beneficiary this week.
Looking ahead to next week traders will be eyeing key US housing market data with housing starts, building permits & existing home sales on tap. Consensus estimates are calling for a stronger series next week and could keep the US dollar on firm footing. It’s important to note that the USDOLLAR to gold negative correlation has been weakening since late October and despite the recent strength in the greenback, gold prices may continue to push higher as the global growth concerns take root.
The main event next week will be the European Central Bank interest rate decision on Thursday where market participants are looking for a major announcement. On the back of this week’s shocking move from the SNB, speculation that the ECB will announce its quantitative easing program has kept European equity bourses afloat this week despite the losses seen state side. Should the program underwhelm market participants, look for gold to remain supported with the technical picture suggesting the medium-term outlook remains constructive.
Last week we noted that, “a breach above resistance targets objectives at $1230 and critical resistance at $1236/37. This region is defined by the 2013 low-week close, the 50% retracement of the July decline and November median-line parallel.” The level held as resistance into Thursday before giving way to an advance into objectives at $1248 and $1262/68. Friday saw prices stretch even higher into soft resistance at $1278. Look for a pullback early next week to offer favorable long-entries with the near-term outlook weighted to the topside while above $1248. A breach above resistance targets the 76.4% retracement of the July decline at $1294 and the upper median-line parallel of the November advance, currently just above the $1300-mark.
Nikkei forecast for the week of January 19, 2015, Technical Analysis
The Nikkei spent the better part of the week falling, but found a bit of support and the ¥16,500 level, which of course was the scene of the most recent break out to the upside. Because of this, we are not interested in selling this market, but are simply waiting to see some type of supportive candle in order to buy the Nikkei, and perhaps try to grind our way back to the ¥18,000 level. We believe that will probably happen on shorter-term charts such as the daily or for our chart. With that being said, we are bullish long-term of the Nikkei, but recognize it long-term traders may have to put up with a bit more volatility than they normally choose to deal with.
Ultimately, we think we are consolidating between the ¥16,500 level, and the ¥18,000 level above. That is a perfect rectangle essentially, and therefore we do like the idea of buying and not selling because of the fact that it comes after such a strong uptrend. On top of that, the Bank of Japan is working against the value of the Yen, and that ultimately helps strengthen the export market coming out of Japan. In theory, that should help bring the value of the Nikkei up due to exports and the fact that the Bank of Japan is also buying bonds and driving down yields in that market as well, essentially forcing money into the stock market by a domestic traders.
We still believe that the ¥20,000 level will be targeted given enough time, but it’s obviously going to take a bit of work. This is a market that has seen significant upside recently, so that’s not a huge surprise. Ultimately, we feel that this market probably even breaks out above the ¥20,000 level, but with that being such a large, round, psychologically significant number, it’s likely to be one that’s going to be difficult to climb over. Pullbacks going forward should end up being buying opportunities but only if you can handle what is almost undoubtedly going to be a very volatile move.
USD/JPY forecast for the week of January 19, 2014, Technical Analysis
The USD/JPY pair fell initially during the course of the week but found enough support below to turn things back around and form a hammer like candle. That being the case, it appears that we are ready to grind a bit higher, but we need to get a bit of momentum in order to do so. That being the case, it takes a bit of force to break out, and we think that the market is simply taking a breather after such a massive uptrend. With that, we are buyers but recognize is going to take a bit of time.
DAX forecast for the week of January 19, 2015, Technical Analysis
The DAX as you can see broke much higher during the course of the week, finally breaking out to a fresh, new high. The DAX now has cleared the €10,100 level, so it now looks as if it’s ready to continue higher and start the next leg up. With that being the case, we feel that pullbacks will continue to be buying opportunities, and that the market should continue to go to higher levels such as the €10,500 level. We have no interest whatsoever in selling, and as a result are essentially “buy only.”
Silver forecast for the week of January 19, 2015, Technical Analysis
The silver markets as you can see broke higher during the course of the week, breaking well above the $17.50 level. If we can get above the $18 level, we feel it silver will now breakout and head to the $19 level. Ultimately, we do believe that the silver market is trying to form a bit of a bomb, and we should now continue to buy on dips. Ultimately, we think that silver will probably head towards the $22 level. We have no interest in selling as there is so much in the way of support.
Gold forecast for the week of January 19, 2015, Technical Analysis
The gold markets broke higher during the course of the week, clearing the $1250 level as resistance. Because of this, we feel that the market should then head to the $1350 level given enough time, and we believe the gold is starting to try to break out. With this, we are buyers every time the market dips, but quite frankly would not be surprised at all to see this market test the $1400 level now. It does appear finally the gold is taking off to the upside. With that being said, we have no interest in selling.