Major Currencies Forecasts - page 13
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AUD, NZD: Keep An Eye On Technicals
The soaring CRB RIND commodity index,up 2.3% this year, is an indication that there is still some real demand in commodity markets.
However for FX watchers of AUD and NZD, it has been the USD side driving these pairs through key technical levels.
AUDUSD broke out of the top end of a channel at 0.74 on Wednesday, providing further short-term support.
NZDUSD is now approaching its 100DMA at 0.7147, which if broken could open the way towards 0.7400.
Dairy prices are unchanged in the past week, further supporting the view that USD is driving the pair.
We still see the NZD outperforming the AUD over the medium term but as the USD correction continues and metals prices rally, we have decided to close our short AUDNZD position* and will wait for better entry points.
EUR/USD Weekly Forecast January 16-20
Wednesday’s press conference from President-elect Trump dominated the currency markets, setting a precedent for politically driven market fluctuations. While there were several Fed members speaking through the week, EUR/USD traded based on expectations and a subsequent disappointment from the Trump press conference. Price action in the past week reaffirmed that political drivers will continue to steer the Dollar and as a result the majors. In the upcoming week, there are several important releases scheduled on the economic calendar but Trump’s inauguration on Friday carries the potential for a sharp increase in volatility and market participants will tend to be cautious nearing the event following Wednesday’s press conference.
There was an expectation for Trump to discuss fiscal policy on Wednesday and the Dollar rose ahead of the event as a repercussion. The President-elect focused on his exit from the Trump organization while the media concentrated on recent unsubstantiated reports that Russia had been accumulating incriminating evidence on President-elect Trump. The rally inspired by the press conference served to break EUR/USD above resistance at 1.0609 established from the NFP release in the week prior.
Ahead of the press conference, there was some uncertainty in the markets as there wasn’t a clear outline of what Trump had planned to discuss. A similar sense of uncertainty is likely to resurface in the upcoming week as the Presidential Inauguration is scheduled for Friday at 09:30 EST. The markets will be focused on Trump’s speech and once again the subject of interest will be fiscal policy.
The ECB will present their latest rate decision followed by a press conference on Thursday. The interest rate is not expected to change. The focal point for the meeting will be on the division among the Governing council that was revealed in the latest meeting minutes release. The ECB announced at their prior meeting a nine-month extension of the bond-purchasing program at a smaller pace of 60 billion Euro per month. The minutes indicated that some members preffered a second presented option of extending for six months at 80 billion Euro. The meeting minutes also indicated that some members opposed both packages and argued for a much smaller stimulus extension.
The consumer price index will be released out of the United States on Wednesday and stands to move markets as inflation continues to carry an increasingly important role in monetary policy tightening. The risk will be to the upside in the figure as a strong CPI print would reinforce prior speculation that the central bank would need to tighten at a more rapid pace than previously expected. The markets are not seriously considering a rate hike in March with the futures markets indicating only a one in four chance of a rate increase, leaving plenty of room for a repricing in the event of a stronger reading.
Janet Yellen is scheduled to speak twice in the upcoming week. Her speech last week was focused on education but both upcoming speeches involve monetary policy but. As Thursday’s speech is scheduled after US market hours, the Wednesday speech is more likely to move the markets if the Fed chair decides to clarify monetary policy intentions. Fed member Brainard will discuss fiscal and monetary policy in a speech scheduled on Tuesday. Brainard is known to be a dove and has consistently called for a slow pace of tightening, the markets will look for consistency with the recent revision in the Fed forecast for three hikes in 2017.
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USD: In This Choppy Market, Long USD & Walk Away
The Eurozone has seen DBRS downgrade Italy’s rating, removing the last remaining single-A rating from the country. That will have implications for the haircut on Italian debt posted as collateral with the ECB. It’s only a marginal negative for the Euro but it definitely isn’t a positive factor. President-elect Trump continues to make disparaging comments about the durability of the EU, but markets seem content to ignore those.
We get the ECB bank lending survey tomorrow and a likely uneventful ECB meeting on Thursday, but it is still likely to be a combination of renewed widening in yield differentials and a ramping-up of nervousness ahead of the French elections which will be the catalyst for renewed Euro weakness when that happens.
The choppiness of the most heavily traded pairs, like EUR/USD, USD/JPY and GBP/USD, not to mention the recent moves in equities and bonds, is making life difficult for anyone who doesn’t just put positions in place and walk away.
Those who do just walk away are probably the ones still long dollars, short Treasuries and waiting for President Trump to begin his first hundred days in office.
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Reuters poll - most analysts think govmt. won't tolerate USD/JPY rate above 130
Reuters reporting on their latest poll of Japanese analysts
USD: Tail Risks In The Headlights; What's The Trade?
Today’s US presidential inauguration marks an important date for the FX market. In the period between the US election and today’s inauguration, the USD has rallied about 4% against the broad FX basket on hopes of a broad reflation trend, largely in line with the selloff in rates and the rally in risk assets. Inauguration will mark a shift in market focus from policy expectations to policy decisions and implementation. While the balance of expectations remains overall in favor of further USD strength, as detailed in the 2017 Global Outlook, we note that some of the tail risks we first highlighted in the Outlook have become more prominent in the past three weeks.
Specifically, last weekend’s comments by President Trump referencing dollar valuation are an important development. Although it was mostly aimed at the USDCNY rate, the idea of US political intervention in FX markets introduces a new (inasmuch as it's not been seen since the 1980s) and unpredictable element for the market to absorb. Similarly, US Treasury Secretary Mnuchin in his Senate confirmation talks stated that “there may be times when the dollar is too strong,” suggesting that the administration might not be completely averse to occasional verbal intervention.
Where does this leave our forecast profile? Since the December FOMC, we have had a kinked profile for the USDJPY forecast, targeting 122 in 3m and 112 in 12m. We wanted to express a view that while the current was in favor of USD strength continuing while there was limited adverse news flow, over a long-term horizon we saw enough risk of negatives like missed growth forecasts and trade protectionism arising to make USDJPY a sell on moves above 120. As it happens, USDJPY never quite made it to that level, and in response to some of these negatives materializing more quickly than the 3- to12-month horizon we had originally expected, the pair has already moved to around 113.
For now, we have decided to keep our 12-month target unchanged at 112. But we acknowledged the fact that the risks are more two-way near term too by lowering our 3m forecast to 115.
Our view now is that a renewed focus at some point in the next three months on Fed rate hikes will allow USDJPY to rally again, and we recommend buying on dips towards 110. But beyond that horizon, the likelihood rises that protectionism and related negatives keep the pair suppressed. To underline this, we note that over the weekend former MOF official Yamasaki said it is "amazing" that Trump so far has said nothing on the JPY. A more direct message would have material implications for USDJPY.
As a technical-based, CS is long USD/JPY from 113.13.
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USD: The Consensus Trade Is Questioned Amid 'Jerky' FX Moves
The first hundred days of the Trump Presidency has started. He is likely to adopt pro-growth and dollar-supportive policies, while he may repeat his resistance to a strong currency. Actions usually speak louder than words, but at the start of the presidency, policy intentions may speak loudest of all
My short trip to Asia over the past week and a half has confirmed that the euro has no friends, though it also shows that the bullish dollar consensus is easily questioned. I’m still more struck by the fact that we seemed ‘bearish’ on the dollar only a few weeks ago for believing the peak would come in 1H17, by the start of this week, we were questioned for believing that the peak isn’t already behind us.
FX market confidence levels are low; trading patterns, whether in GBP/USD or USD/JPY and EUR/USD (let alone anything more exotic), can best be described as ‘jerky’.
But the Trump presidency is about to start, and if his programme is progrowth, it will likely be pro-dollar for now, which would lead to a further 5-10% rise in USD during his first 100 days.
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As EUR/USD Looks Expensive Again, What Is The Trade?
The latest rebound in EUR/USD is driven by a positioning squeeze of USD longs on the back of policy uncertainty returning in the wake of Trump’s inauguration.
At the same time, there is little to suggest that the FX move has a more solid, fundamental underpinning.
Indeed, there is little indication that the market views on the policy divergence between the hawkish Fed and the dovish ECB have been affected by concerns about rampant US protectionism or delayed fiscal stimulus.
In addition, various metrics still suggest that the political risks in the Eurozone remain unabated ahead of the elections in the coming months. These are likely to keep investors fairly cautious on the outlook for the single currency.
Our valuation analysis suggests that EUR/USD is starting to look fairly overvalued compared to fundamental drivers like rate spreads and measures of EGB credit risks.
The results suggest that the room for further appreciation is now limited while a renewed test of the lows below 1.05 is a growing downside risk.
Short EUR positions are starting to look attractive. However, given that political risk in the US is, at least for now, weighing on the USD, shorts may be better expressed against JPY.
We recommend selling EUR/JPY via options buying a EUR/JPY 4M 1x1.5 ratio put spread with strikes at 118/115 for a cost of 0.1020% on notional of EUR30m.
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EUR/USD: Targeting 50% Fibo; GBP/USD: Targeting 38.2% Fibo
EURUSD’s recovery remains in place to test 1.0821/28. EURUSD has edged to a marginal new high this week to keep the immediate risks still bullish.
We continue to target a cluster of retracement levels at 1.0821/28 – the 50% retracement of the November 2016/January 2017 fall next
We would look for better selling to show here, but if overcome would then aim at 1.0851/74 – the October 2016 pivot low, the 38.2% retracement of the entire 2015/17 decline and the November 2016 spike high – which we would expect to provide a ceiling.
Support moves to 1.0695/86, with recovery trendline and 13-day average support at 1.0649/35 ideally holding to keep the immediate trend still higher
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EUR/USD: Sticking To Neutral Bias But Tentative Signs Of A Turn
EUR/USD – NEUTRAL BIAS – (1.0450-1.0850)
We are sticking with our neutral bias for the week ahead although there are tentative signs that the recent correction lower for the US dollar may soon start to reverse.
The US dollar has remained offered recently even as US yields and equities have been moving higher which is unlikely to prove sustainable. If US yields break above their recent highs from the middle of December it could trigger renewed US dollar strength in the week ahead.
US fundamentals remain supportive for a stronger US dollar.
Economic data releases in the week ahead should confirm that the US economy is both expanding more solidly and inflation pressures are building. The developments are increasing pressure on the Fed to deliver a more hawkish policy outlook. The euro is also deriving support from improving economic fundamentals in the euro-zone with both growth and inflation picking up. However, the scope for further euro upside is more limited given that the ECB remains strongly committed to maintaining loose monetary policy in the near-term.
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Sell EUR/CHF, Sell USD/CAD, Sell EUR/NZD
Sell EUR/CHF targeting 1.04. FX Reserves keep rising and we expect the SNB to gradually allow the franc to appreciate.
Sell USD/CAD, target 1.25. Although the Canadian economy has some way left (according to BoC) before reaching full capacity utilisation we think the undervalued currency has more room for appreciation. As an alternative we would look at short AUD/CAD.
Sell EUR/NZD. Our love/hate relationship with the kiwi continues. The currency is grossly overvalued but the economy is so strong that the RBNZ can/must overlook the low rate of inflation. FX markets are in a state of Carry and the euro will continue to suffer as a result.
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