US Dollar May Finally See Breakouts During Volatile, Holiday Week
The US dollar is at a crossroads this week. On the one hand, congestion has been the rule of thumb for much of the currency market. On the other, fundamentals and underlying volatility suggest stability is waning. With a concentrated shot of event risk, growing threats to the credit and financial markets, and the unusual trading conditions expected to come along with the holiday, the chances for a breakout are intensified.
US Dollar May Finally See Breakouts During Volatile, Holiday Week
Fundamental Outlook for US Dollar: Bullish
- A rebound in risk aversion shows the dollar is still the safe haven currency of choice
- Consumer-level inflation sees its biggest monthly drop on record
- US automakers’ bankruptcy may trigger another credit crunch, flight to safety
The US dollar is at a crossroads this week. On the one hand, congestion has been the rule of thumb for much of the currency market. On the other, fundamentals and underlying volatility suggest stability is waning. With a concentrated shot of event risk, growing threats to the credit and financial markets, and the unusual trading conditions expected to come along with the holiday, the chances for a breakout are intensified. First and foremost, it is important to consider what influence the US market holiday (Thanksgiving) will have on price action. One thing is for certain, liquidity will thin out as US banks and exchanges will be close on Thursday, and speculative interest from the country will be depressed through the entire week. Beyond this fact, we can have one of two reactions from the FX market. Either the drop in volume will maintain trends of congestion or its will leverage already extraordinary levels of volatility and potential incite breakouts.
Whichever outcome the market is destined for will likely depend on the influence of broad risk sentiment trends have over FX. We saw a temporary jump in risk aversion this past week, brought on by another series of indicators and reports that suggests the financial crisis could easily take a nasty turn for the worst in the very near futures. In fact, bond default risk hit a new record high, the benchmark Dow 30 tumbled to a new six-and-a-half year low and the dollar and Japanese yen found their way to new highs. And, while some of these moves have since retraced, the symbolic push has already been made. Looking ahead, the most immediate concern regarding the health of the markets is that the three major US auto manufacturers are on the brink of collapse. While we have already seen a few financial institutions go bankrupt, the failure of these American staples would signal the credit crisis has indeed made the jump from Wall Street to Main Street; and further that the second round effects of the crunch will be far more pervasive. Considering officials seem to already be reaching the limitations of the current TARP program (in addition to monetary policy and providing liquidity), a new intensity could spell disaster.
Aside from the constant ebb and flow of risk sentiment, the dollar may also take its cues from the economic calendar. While much of the data scheduled would be considered second tier at this point; the intensified scrutiny over the severity of the oncoming recession will refocus fundamental traders’ interests. The foreshortened trading week concentrates all the data into three days. The greatest threat of event risk lies with the first revision to third quarter GDP. While this is a second reading, there is the probability for a significant change to the headline gauge and component figures. Personal consumption will be particularly important as the failure of this vital sector could extend and intensify the economy’s slump. Further gauging the health of the consumer, personal income, spending and confidence readings will refine expectations of whether they will help or hinder the much-anticipated recovery. - JK
Euro Unchanged Against US Dollar Despite Dismal Data - What Gives?
The Euro finished nearly unchanged against the US Dollar on the week, as traders ignored news of an official Euro Zone recession and pushed the single currency higher through Friday’s close on a sharp rebound in risky asset classes. The Euro was on the verge of setting fresh 31-month lows against the US dollar on a plunge in the Dow Jones Industrials Average and other key stock indices, but an amazingly quick recovery in risk sentiment pushed the US Dollar and Japanese Yen lower across the board. Forecasts for the Euro will continue to depend on developments in global markets; it seems trading markets have become increasingly desensitized to bearish economic news from the EMU.
Fundamental Forecast for Euro: Bearish
- Euro finishes higher despite concerns over worsening Euro Zone economic recession
- ECB President Trichet softens rhetoric, signalsfurther ECB rate cuts possible
- Forex Trading Signals take mixed view on Euro/US Dollar—outlook unclear
Given that the Euro/US Dollar pair ignored confirmation that the Euro Zone is officially in recession, there is little reason to believe that a negative string of economic data will do anything to alter the single currency’s short-term prospects. Instead we will look to key economic reports to gauge likely reactions out of domestic and global stock market indices. Before massive losses in global financial markets, currency traders would often buy currencies with the highest yields and with the best interest rate prospects. Yet we see that the direct opposite has been true of the Euro as of late; the single currency sold off sharply on signs that the European Central Bank would keep interest rates higher than many traders had expected. ECB President Jean Claude Trichet has since softened his rhetoric on inflation, however, and interest rate traders have priced in a virtual certainty that the European Central Bank will cut rates by a sizeable 50 basis points at its December 4 meeting.
With current market conditions in mind, we may have to keep a close watch on mid-week German and late-week Euro Zone CPI estimates for the month of November. Any indications that CPI inflation remains high will almost certainly dampen expectations for ECB rate cuts, and the Euro could by extension decline against the safe-haven US Dollar and Japanese Yen. Otherwise we will watch market reactions to US and other global economic event risk. A holiday-shortened week in North America may make for especially volatile trading on illiquid trading conditions. – DR
Japanese Yen Hints At Bigger Moves As Credit, Financial Fears Simmer
Volatility is extraordinarily high, not only in the currency market, but across all asset classes. However, for the past four weeks, price action has come without trend and in some cases it has consolidated into tight ranges. Something will have to give soon; and considering the fundamental environment, it will likely be congestion trends.
Japanese Yen Hints At Bigger Moves As Credit, Financial Fears Simmer
Fundamental Outlook for Japanese Yen: Bullish
- The outlook for risk appetite is failing as the financial crisis spreads from Wall Street to Main Street
- A temporary surge in risk aversion breaks support on yen crosses. Will continuation follow?
- BoJ officials leave rates unchanged following last month’s cut. Running short on options
Volatility is extraordinarily high, not only in the currency market, but across all asset classes. However, for the past four weeks, price action has come without trend and in some cases it has consolidated into tight ranges. Something will have to give soon; and considering the fundamental environment, it will likely be congestion trends. Last week, the yen crosses were spurred into a false breakout when multiple reports reminded investors of the full scope to the ongoing financial crisis. Over the past few days, Iceland reportedly received $4.6 billion from the IMF and Nordic countries to prevent on sovereign debt (perhaps one of many countries that may come this close before the end); the SNB decided to cut its benchmark lending target 100 bps to 1 percent (reflecting an anxiousness that has been seen among many monetary authorities); the EU announced it would produce a region-wide bailout plan by next week (suggesting national efforts are falling short); a report suggests 32 percent of savings & loans are seeking bailout aid from the US (recounting the crisis of the late 80’s); and the big three US auto makers petitioned the government for $25 billion in aid. None of these issues is truly resolved and their prevalence across the global economy suggests the financial crisis has evolved into something much more insidious. Perhaps leveraged volatility generated over the upcoming week (owing to the US holiday) could be the catalyst that finally sets the market back into trends. If this is the case, the fundamentals are certainly calling for an unwinding of carry interest and consequently a rally in the Japanese yen.
Through risk aversion is likely the principle concern for yen traders over the coming weeks, economic indicators will certainly have their place in the long-term direction of the Japanese currency as well. When credit markets stabilize, traders will likely jump immediately to gauging the relative strength of economic activity across the G10 as a barometer for strength. In fact, we have already seen this dynamic having its influence on the market. The best example is the strength in the US dollar; which, though it is does have much of its fundamental bearing in its status as a safe-haven currency, is further encouraged through confidence that US policy officials have made the quickest and most extensive effort to solve the problem. Japan will take its place in this comparison – though the response will be a little different from this perpetual carry trade funding source. Friday morning brings most of the important data. Inflation, employment, consumer spending, factory activity and housing sector trends will all be measured in some form. Such a broad reading of economic activity will certainly redefine growth forecasts for the year end and into 2009. - JK
British Pound: UK Data to Remain Weak, Forecast Depends on Risk Trends
The British pound spent much of last week consolidating above the November 13 lows of 1.4557, but left little indication of whether the next move would be a correction higher or a break down towards the nextBritish Pound: UK Data to Remain Weak, Forecast Depends on Risk Trends
Fundamental Outlook for British Pound: Bearish
- UK inflation pressures appear to be easing rapidly, as UK CPI fell by the most on record to an annual rate of 4.5%
- The minutes from the Bank of England’s November meeting suggest additional rate cuts are on the way
- UK retail sales fall less than expected, but Credit Suisse OIS still price in a 75bp reduction to the UK Bank Rate in December
The British pound spent much of last week consolidating above the November 13 lows of 1.4557, but left little indication of whether the next move would be a correction higher or a break down towards the next key level of support at 1.4050. One thing is obvious though: the long-term trend for the British pound remains bearish. As of Friday’s close, Credit Suisse overnight index swaps were fully pricing in a 75bp rate cut by the Bank of England in December. Such a move would bring interest rates down to their lowest level since 1932, and seems entirely feasible as CPI has finally started to show signs of falling while the economy has fallen into recession.
This will only be reiterated on Wednesday when the second reading of UK GDP for the third quarter will hit the wires. The initial reading of -0.5 percent is not expected to be revised, but would still be the worst result in nearly 18 years. Furthermore, there are downside risks for this particular report as nearly every sector of the UK economy has experienced a contraction in activity. Other economic indicators that could garner some attention this week include UK Nationwide House Prices, which are anticipated to fall negative for the 13th consecutive month, while GfK consumer confidence is likely to tip lower and could even target July’s record low of -39.
Overall, risk trends are ultimately in control of the forex markets at this juncture, and if equities find some sort of intermediate bottom in the near-term, relatively "risky" assets including the British pound could stage a rebound. Traders should be cautious though, as the trend remains overwhelmingly in favor of dollar bulls. – TB
Canadian Dollar Outlook Worsens as Crude Oil Breaks Below $50
The Canadian Dollar continued its dramatic descent against the US Dollar, as fast-falling oil prices sunk the Loonie while the US Dollar benefited from similarly sharp losses in the Dow Jones Industrials Average. The downtrodden Canadian currency now trades near four-year lows, and there is seemingly little to protect the CAD from further losses. Subsequent forecasts for the USD/CAD will obviously depend on the trajectory of the US Dollar itself, but it will also be important to watch for sharp moves in oil prices and other key commodity markets.Fundamental Outlook for Canadian Dollar: Bearish
- Canadian Dollar ignores CPI data – Why?
- US Dollar/Canadian Dollar Technical Outlook Points Towards 1.3025
- USD/CAD stays above key technical support – further gains seem likely
The Canadian Dollar has remained largely unscathed by recent domestic economic data, and we do not expect that the coming week’s event risk will force noteworthy moves in the USD/CAD. As a case in point, USD/CAD traders almost completely ignored an astounding surprise in Friday morning Consumer Price Index data—one of the most historically market moving events on the Canadian economic calendar. We saw far more volatility surrounding Tuesday’s US Crude Oil Inventories report, as corresponding moves in NYMEX Crude Oil prices forced similarly pronounced moves in the USD/CAD. As such, we will keep an eye on US Department of Energy Crude Oil and Distillate Inventories releases at 10:35 EST on November 26. Crude prices now trade below the psychologically significant $50 mark, and further losses would likely produce similarly disappointing performance in the Canadian currency.
It remains especially difficult to predict USD/CAD price action through shorter time frames, but overall momentum continues to support US Dollar Strength and Canadian Dollar weakness through longer-term trade. - DRSource : Dailyfx.com
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