Forex Trading Weekly Forecast - 01.05.09

 US Dollar's Lean Towards Bullish Break Comes Up Against NFPs

Written by John Kicklighter, Currency Strategist

The dollar finished the week and year on a relatively quiet note; but the currency’s potential energy is extremely high as the greenback stands at the brink of significant breakouts ahead of a week full of scheduled event risk. This could very well be a very volatile return to action for traders coming back from their long holidays. Looking at the momentum built up behind the dollar’s push on resistance (it may have already made its move against the Japanese yen), it looks like speculators are vying for a relief rally on the dollar’s account that will undo the sharp drop measured against its primary counterpart – the euro. However, heading into 2009, the factors that made the dollar appealing last year seem to be fading, replaced by sound reasons to believe the dollar may once again find itself on the chopping block.

US Dollar’s Lean Towards Bullish Break Comes Up Against NFPs

Fundamental Outlook for US Dollar: Bearish

- Consumer confidence plunges to a record low through the end of the year
- ICSC reports suggest 2008’s holiday shopping season was the worst in four decades
- US factory activity hits a 28-year low as production and new orders hit record lows

The dollar finished the week and year on a relatively quiet note; but the currency’s potential energy is extremely high as the greenback stands at the brink of significant breakouts ahead of a week full of scheduled event risk. This could very well be a very volatile return to action for traders coming back from their long holidays. Looking at the momentum built up behind the dollar’s push on resistance (it may have already made its move against the Japanese yen), it looks like speculators are vying for a relief rally on the dollar’s account that will undo the sharp drop measured against its primary counterpart – the euro. However, heading into 2009, the factors that made the dollar appealing last year seem to be fading, replaced by sound reasons to believe the dollar may once again find itself on the chopping block.

Casting the scheduled event risk aside for a momentum, we need to consider the biggest themes for the currency market going forward. Three months ago, the primary concern of traders from all asset classes was risk aversion fed by a liquidity crunch, a global recession and tumbling interest rates. Such concerns are not likely to fade into the first quarter to half of the new year; but the dollar’s ability to capitalize on them will. Looking back to the wave of panic that drove investors to the dollar initially, there was abnormally high correlation between most of the major asset classes. With risk seen as a global force and investors scrambling to protect their capital base (rather than search for returns), flows turned to the deep liquidity and safe harbor of US treasuries. Looking forward, such a deep-seated plunge in investor confidence is not likely to swell up again considering the cumulative efforts made by global policy makers to stabilize the markets and guarantee liquidity. However, what will continue is the drop in yields and slump in economic growth. Without a unifying quality – like a safe haven status – the dollar will be left to signs that the US dollar is leading the global recession and yields are practically at zero.

Casting an eye towards the economic docket, fundamental traders will receive another potent round of data to refocus speculation over the severity of the United States’ recession. Without doubt the most market-moving piece of data scheduled is Friday’s non-farm payrolls (NFPs) report. An easy to read barometer of growth, the indicator revealed that more than half a million Americans lost their jobs through November. Another contraction on this scale would suggest the economy is in far more dire straights than many suspect. For a more critical look at the health of the economy, the wages component of this labor report will also be critical as it is just as much a gauge of spending potential as employment. Speaking of spending, consumer credit will gauge Americans’ ability to use credit to make necessary purchases – a measure of both consumption and availability of credit. Outside of the consumers’ influence, the ISM services report and FOMC minutes will give a more encompassing reading of activity – though it all comes back to speculating on the severity of the now pervasive recession. – JK

Written by Terri Belkas, Currency Strategist

The euro ended last week consolidating versus the US dollar within a falling wedge formation, which is typically a bullish reversal pattern, but this can only be confirmed by a break above trendline resistance at 1.3978.

Euro Could Break Higher Early in the Week, Data May Eventually Weigh

 
Fundamental Outlook for Euro This Week: Bearish
-    Euro-zone retail PMI edged higher, but held below 50 - signaling contracting business activity – for the 7th straight month
-    The ECB reported that loan growth to the private sector slowed, highlighting the extent of the credit crunch in Europe

The euro ended last week consolidating versus the US dollar within a falling wedge formation, which is typically a bullish reversal pattern, but this can only be confirmed by a break above trendline resistance at 1.3978. On the other hand, a decline below trendline and Fibonacci support at 1.3848 would signal potential for a drop toward the next region of support at 1.3575 - 1.3635. How this price action resolves may hinge upon a key indicator due to be released on January 6: CPI. At 5:00 ET, Eurostat estimates for Euro-zone CPI are projected to show that inflation growth eased to a 1.8 percent pace in December from 2.1 percent. Given European Central Bank President Jean-Claude Trichet’s more bearish stance on economic growth and the bank’s total of 175 basis points worth of rate cuts since October, a weaker-than-expected CPI reading could exacerbate the market’s speculation that the central bank will cut rates again on January 15, and weigh on the euro. On the other hand, if CPI manages to hold at or above the ECB’s 2 percent target, the currency could gain as the markets assume the central bank will not be as quick to reduce rates. It will be important to watch EUR/GBP as well as EUR/USD, as the former continues to trade near record highs. Near-term resistance for EUR/GBP looms at the December 30 high of 0.9805, but a break above there would suggest that momentum is strong enough to take the pair to parity.

Japanese Yen To Gain As Seasonal Capital Flows Reverse

Written by Ilya Spivak, Currency Analyst

The economic calendar offers little by way of tangible event risk in the coming week, with the Japanese Yen likely to be driven higher as forex volumes regain pre-holiday levels and year-end capital flows reverse direction.

Fundamental Outlook for Japanese Yen: Bullish

- Rebound in liquidity promises to redefine direction for risk sentiment
- Japanese Yen was top performing major currency last year

We suggested some weeks ago that seasonal forces would push the Yen lower in December, reckoning that a counter-trend retracement in stock markets would put downward pressure on the currency through its strong inverse correlation to risk appetite. We reckoned the uptick in stocks would materialize as short traders purposely closed out some exposure to offset some of their capital gains burden (creating the inverse of what is commonly called the “January effect” in rising stock markets). Indeed, the MSCI World Stock Index registered the first net monthly gain after six consecutive declines in December, adding 3%, while the Yen lost -3.25% against an average of the world’s top currencies. If the up move in risky assets represented a temporary seasonal reversal, we should see begin to see a return to broader, long-term trends in January, sending stocks lower and the Japanese Yen higher.

The economic calendar offers little that has not already been priced into the exchange rate and is unlikely to usurp dominance from risk trends over Yen price action. Vehicle Sales are likely to continue falling in December as Japan’s deepening recession brings higher unemployment and shrinking consumer spending. Indeed, expectations call an index of Japan’s leading economic indicators to print at 81.4 in November, the lowest in over a decade. Outstanding corporate loans may rise again in November after the Bank of Japan agreed to accept commercial paper as collateral to boost credit access.

British Pound Forecasts Bearish on Bank of England Rate Predictions

 Written by David Rodriguez, Quantitative Analyst

The British Pound saw an especially volatile week of currency trading, as illiquid market conditions fueled truly shocking moves in the British Pound/US Dollar pair. Yet the GBP/USD finished the week roughly flat, and traders now turn their eyes to a highly-anticipated Bank of England Rate Decision in the week ahead. Traders fully expect that the central bank will take UK interest rates down to their lowest levels in their 300+ year history, but uncertainty surrounding the result is likely to cause significant volatility in British Pound exchange rates.

Fundamental Outlook for British Pound: Bearish

- View our British Pound/US Dollar Exchange Rate Forecast for January
- Euro/British Pound Continues Strong on Bank of England Rate Outlook
- Bank of England Rate Decision one of the top five forex market events of the week

A steady stream of disappointing British economic data leaves overall GBP fundamentals in a depressed state, and further economic releases due in the week ahead are expected to exacerbate the woes. First on the ledger is a forward-looking Purchasing Managers Index for the UK Services industry. Analysts widely predict that the key Services sector contracted at its fastest pace in the PMI survey’s 12-year record—prompting many to call for aggressive Bank of England interest rate cuts through the foreseeable future. A particularly dismal PMI Services result could potentially have an effect on BoE rate expectations, but analyst and trader expectations have already priced in aggressive monetary policy easing from the British central bank.

The Bank of England rate decision will be important in setting yield expectations for the British Pound. The worst economic recession in at least two decades warrants a substantial monetary policy response, but traders are unsure whether the BoE will truly follow the US Federal Reserve’s footsteps in taking short-term rates near zero percent. It will be subsequently be important to watch both the interest rate decision and the attached statement. Surprises in either could easily lead to pronounced British Pound exchange rate volatility.  – DR

Canadian Dollar Outlook Against US Dollar Muted on Crude Oil Tumbles

Written by John Rivera, Currency Analyst

The Canadian Dollar ended the week virtually unchanged but saw significant volatility due to thin holiday trading and fluctuating oil prices. Global growth concerns an OPEC planned production cut and an unexpected rise in inventories led to seesaw price action in crude. A New Year’s Eve rally was saw as overdone and led to prices falling back by week’s end. The 20-Day and 50-Day SMA’s have provided resistance for the pair and have limited its upside potential.


Fundamental Outlook for Canadian Dollar: Bearish
-   Canadian Dollar January Forecasts Points To Further Weakness

The Canadian Dollar ended the week virtually unchanged but saw significant volatility due to thin holiday trading and fluctuating oil prices. Global growth concerns an OPEC planned production cut and an unexpected rise in inventories led to seesaw price action in crude. A New Year’s Eve rally was saw as overdone and led to prices falling back by week’s end. The 20-Day and 50-Day SMA’s have provided resistance for the pair and have limited its upside potential.

The upcoming week’s economic docket will be loaded with event risk for the “loonie’ with business activity, employment and housing data on tap. However, all of the fundamental data will cross the wires on Thursday and Friday leaving early week price up to broader fundamental data such as oil prices. The IVEY PMI is expected to fall to 37.5 from the record low it set last month of 40.2. Slowing global growth and its main trading partner the U.S. in a recession have led companies to retrench as expectations for future growth dwindle. Last month saw a sharp fall in inventory levels to 35.8 from 52.4 and employment to 42.2 from 48.5 as companies try and get lean. Further weakness in activity will continue to weigh on the labor market and growth to start 2009. Indeed, the Canadian economy is expected to have given back another 20,000 jobs in December following a loss of 70,600 the month prior, which was the most since 1982. A loss of 38,300 manufacturing jobs led the way and with activity in the country expected to drop we could see more than expected job losses. The unemployment rate is expected to rise to 6.5% from 6.3% which would be the highest since August, 2006.
Weakening business activity and mounting job losses may be enough to push the USD/CAD above technical resistance which could see it look to test psychological resistance at 1.2500. The January technical forecast is calling for an ultimate test of 1.300 before an extended move lower. However, the dollar may be facing a week of worse fundamental data and a broad based dollar sell of could offset the bearish Canadian dollar sentiment. - JR

Source : Dailyfx.com