Euro Forecast Remains Bearish Ahead of Key GDP Releases
Written by David Rodriguez, Quantitative Analyst
The Euro finished the week broadly lower against the world’s major currencies, as increased stresses on Euro Zone stability and the prospects of a pronounced recession clearly cut into the currency’s fundamentals. A clear (if temporary) improvement in global risk sentiment left the Euro marginally higher against the Japanese Yen and US Dollar, but its losses against other key counterparts underline the case for further declines.
Fundamental Outlook for Euro This Week: Bearish- European Central Bank leaves rates unchanged, has it fallen behind the curve?
- German Retail Sales and Producer Prices hurt Euro fundamentals
- Russian debt downgrade sparks flight to safety, euro drops against US Dollar
The Euro finished the week broadly lower against the world’s major currencies, as increased stresses on Euro Zone stability and the prospects of a pronounced recession clearly cut into the currency’s fundamentals. A clear (if temporary) improvement in global risk sentiment left the Euro marginally higher against the Japanese Yen and US Dollar, but its losses against other key counterparts underline the case for further declines. Unexpectedly neutral rhetoric from ECB President Jean Claude Trichet left many doubting whether the bank was doing enough to forestall the worst economic crisis in recent times. The prospect of higher interest rates has normally been enough to boost a currency against lower-yielding counterparts, but it is clear that current times are far from normal. An especially bearish outlook for European economic growth may continue to hurt the Euro through the foreseeable future.
Euro Zone economic growth will continue to dominate headlines in the week ahead, with highly-anticipated Gross Domestic Product figures due Friday the 13th. Jokes about the ominous release date aside, the GDP figure is expected to show truly dismal European growth numbers for the final quarter of 2008. The Bloomberg News consensus forecast calls for the biggest economic contraction in the survey’s 23-year history—underlining the malaise across the continent. Forecasts may nonetheless shift with several Euro Zone member countries reporting their fourth quarter GDP results in the days leading up to the broader EZ figure. Of course, many analysts peg risks for aggregate economic expansion figures to the downside; a near-constant stream of disappointing economic reports give little reason to believe that GDP figures will be better than currently expected. Disappointing numbers will only add further pressure on the ECB to cut interest rates aggressively in order to stimulate economic growth.
It will otherwise be important to watch overall risk trends—especially as they relate to the Euro/US Dollar and Euro/Japanese Yen exchange rates. The short-term correlation between the Euro and the S&P 500 has recently been trading near its highest levels on record, and it remains clear that risk aversion continues to move the European currency. Financial risk appetite generally improved through the past week of trade. Said rallies should have been enough to force bigger gains out of the EUR/JPY and EUR/USD. Yet it remains clear that there are other important factors driving sentiment, and the Euro remains in a broader downtrend. We will have to watch for key shifts in Euro fundamentals—especially as it relates to European growth outlook and Euro Zone stability. - DR
US Dollar Could Gain If Bernanke, US Retail Sales Ignite Risk Aversion
Written by Terri Belkas, Currency Strategist
The US dollar ended the past week down versus most of the major currencies as a surge in risk appetite weighed on low-yielders, including the Swiss franc and Japanese yen. For what it’s worth though, the dollar index hasn’t done much but consolidate below its January highs, and it will take a large shift in risk trends to get the greenback to break higher or lower. With event risk due to be fairly high this week, such a break seems possible.Fundamental Outlook for US Dollar: Bearish
- ISM non-manufacturing held below 50 for the 4th straight month, signaling a contraction in activity
- US personal spending fell for the 6th straight month amidst slipping incomes
- US non-farm payrolls fell by 598,000 in January, the most since 1971
The US dollar ended the past week down versus most of the major currencies as a surge in risk appetite weighed on low-yielders, including the Swiss franc and Japanese yen. For what it’s worth though, the dollar index hasn’t done much but consolidate below its January highs, and it will take a large shift in risk trends to get the greenback to break higher or lower. With event risk due to be fairly high this week, such a break seems possible.
On Tuesday, Federal Reserve Chairman Ben Bernanke is scheduled to testify in front of the House Financial Services Committee on the central bank’s lending programs at 13:00 ET, and this could prove to be one of the biggest market-movers of the week due to its potential impact on risk sentiment. Part of this will probably include explanations as to why the Federal Reserve announced on Friday that they would delay plans to start lending under a $200 billion program called the Term Asset-Backed Securities Lending Facility (TALF). TALF will allow the central bank to lend to holders of AAA rated debt backed by newly and recently originated loans, including education, car, credit-card loans, and loans guaranteed by the Small Business Administration. Overall, though, if Chairman Bernanke is bearish on prospects for the financial markets and global economy, his comments could have very negative repercussions for the stock markets, and we could see flight-to-quality spark demand for Treasuries, the US dollar, and Japanese yen. On the other hand, if he manages to inspire confidence that conditions will not get significantly worse, risky assets could rally.
On Thursday, the Commerce Department is forecasted to report that US retail sales fell negative for the seventh straight month in January, as even the most aggressive discounting wasn’t able to offset the impact of a deteriorating labor market, tighter credit conditions, and a year-long recession. More specifically, advance retail sales are anticipated to have contracted 0.8 percent during the month, and excluding auto sales are expected to have slumped 0.4 percent, initiating what may end up being a consistent trend through the first half of 2009 as well. As we saw with US non-farm payrolls, the impact of a disappointing result may be limited, as the Federal Reserve has already cut the fed funds target to a record low range of 0.0 percent - 0.25 percent and has no room to cut further. – TB
Japanese Yen Falters on S&P Rebound, But Forecasts Remain Bullish
Written by David Rodriguez, Quantitative Analyst
The Japanese Yen was the worst-performing G10 currency through the past week’s trade, as a clear (if temporary) improvement in financial risk appetite led the currency substantially lower against higher-yielding counterparts. The JPY nonetheless benefited from intra-week flare-ups in financial market tensions—including a Russian sovereign debt rating downgrade and various disappointments in major economic data. Such positive reactions to bearish financial market developments leave the Yen in an ideal position to benefit from deterioration in risk appetite.
- Japanese Yen tumbles on a post-NFP’s surge in stocks – what gives?
- Russian credit rating downgrade nonetheless boosts Japanese Yen through earlier trade
- View our monthly US Dollar/Japanese Yen Exchange Rate Forecast
The Japanese Yen was the worst-performing G10 currency through the past week’s trade, as a clear (if temporary) improvement in financial risk appetite led the currency substantially lower against higher-yielding counterparts. The JPY nonetheless benefited from intra-week flare-ups in financial market tensions—including a Russian sovereign debt rating downgrade and various disappointments in major economic data. Such positive reactions to bearish financial market developments leave the Yen in an ideal position to benefit from deterioration in risk appetite. Given a near-constant stream of bearish global economic developments and clear downtrends in global risky asset classes, it is perhaps unsurprising to note that our overall trading bias remains bullish for the JPY. Of course, short-term developments could just as easily force further retracements in the previously high-flying Japanese currency.
Trends in the foreign exchange market and broader asset classes favor ‘short-risk’ trades, and the Japanese Yen continues to be a prime recipient of such fear-related money flows. JPY price action in the week ahead will subsequently depend on the trajectory of the US S&P 500 and other key risk barometers. That being said, predicting short-term price action in extraordinarily volatile assets remains nearly impossible. We would otherwise look to key economic event risk out of any given economy to dictate price action in the domestic currency, but FX traders have proven almost completely indifferent to Japanese economic fundamentals. Such dynamics admittedly make it difficult to provide a weekly trading outlook with relative conviction.
We will continue to defer to broader price trends as far as the Japanese Yen is concerned, and its incredible ascent against all major global currencies leaves our medium-term trading bias firmly to the topside. Watch for major market moves surrounding the 5 key Forex Market Events in the week ahead—especially as it relates to broader risk trends. A resumption of the global bear market in major equity indices would almost definitely leave the Japanese Yen higher against major counterparts. - DR
British Pound Looks To Capitalize On BoE's Shift Towards Neutral Policy
Written by John Kicklighter, Currency Strategist
The British pound exhibited extraordinary strength this past week; and GBPUSD was even able to break through significant resistance in a trendline that can be traced all the way back to October. This is a substantial shift for the battered sterling; but fundamentals will need to feed a sustainable rally or the currency may face a collapse that could spur the needed momentum to finally pulls the pound through to new lows. And, looking at the frail sentiment that is currently driving the currency as well as the dour outlook for scheduled economic event risk, the odds are stacked against the beleaguered currency.
Fundamental Outlook for British Pound: Bullish
Looking ahead to fundamental trends heading into the new week; we first need to gauge the catalyst for this tentative, bullish breakout for the pound. There were some modest improvements in economic data; but overall, the indicators were just off their respective recent record lows. The real driver is a combination of a possible rebound in risk appetite and speculation that the Monetary Policy Committee (MPC) will curb its appetite for further rate cuts. Through the past 18 months, the British currency has been one of the hardest hit currencies as speculative and carry flows have been unwound. Pushing levels that even a bear would admit were probably oversold, it makes sense that the sterling would be one of the first to recover in a general improvement in sentiment. However, such a significant shift contradicts the negative trend in growth and yields; so caution will be an indelible aspect of this rebound. The weaker driver behind the pound’s advance is found in speculation that the central bank is ready to take a neutral stance on interest rates and thereby prevent the benchmark from reaching zero – a point at which the market truly recognizes the policy authority is running out of options (like the BoJ for the past decade). This bold assertion seems to be based on the comment that “past cuts…would in due course …have a significant impact.” These are certainly ambiguous comments that do not provide for a halt to rate hikes in any certain terms. As confirmation, traders will look for commentary from policy member, to the institution of their commercial asset purchasing facility scheduled to begin on Friday and Wednesday’s quarterly policy report.
Officially, the BoE’s broad assessment is called the Quarterly Inflation Report; but realistically it covers growth and financial market activity as much as it does price pressures. For the economy that the IMF expect to be suffer the worst recession among the major industrialized nation, growth and market health are far more essential that inflation at this point. Considering the statement that accompanied this past week’s rate decision, we would expect cautious optimism buffered heavily by the disappointing data that has crossed the wires recently. Language that suggests Europe’s second largest economy is set to rebound much more quickly and sharply than speculators and economist are expecting would go a long way towards restoring confidence – especially if this comes in conjunction with a general rebound in confidence. Aside from this lagging wrap up on the economy, we will also see a set of notable but more mundane market-movers. BRC retail sales and the RICS house price balance will gauge consumer sentiment; but it will be the labor data that truly benchmark optimism. Also, the visible trade numbers will measure not only the outflow of capital from the UK but also the global level of demand as a gauge of growth. – JK
Source : Dailyfx.com
Fundamental Outlook for British Pound: Bullish
- The Bank of England cuts its benchmark another 50 basis points and adds commentary that sparks speculation of a holdThe British pound exhibited extraordinary strength this past week; and GBPUSD was even able to break through significant resistance in a trendline that can be traced all the way back to October. This is a substantial shift for the battered sterling; but fundamentals will need to feed a sustainable rally or the currency may face a collapse that could spur the needed momentum to finally pulls the pound through to new lows. And, looking at the frail sentiment that is currently driving the currency as well as the dour outlook for scheduled economic event risk, the odds are stacked against the beleaguered currency.
- Service and manufacturing sector contractions ease, but still far from expansionary levels
- Confidence in credit conditions deteriorate after Barclays’ debt rating is lowered
Looking ahead to fundamental trends heading into the new week; we first need to gauge the catalyst for this tentative, bullish breakout for the pound. There were some modest improvements in economic data; but overall, the indicators were just off their respective recent record lows. The real driver is a combination of a possible rebound in risk appetite and speculation that the Monetary Policy Committee (MPC) will curb its appetite for further rate cuts. Through the past 18 months, the British currency has been one of the hardest hit currencies as speculative and carry flows have been unwound. Pushing levels that even a bear would admit were probably oversold, it makes sense that the sterling would be one of the first to recover in a general improvement in sentiment. However, such a significant shift contradicts the negative trend in growth and yields; so caution will be an indelible aspect of this rebound. The weaker driver behind the pound’s advance is found in speculation that the central bank is ready to take a neutral stance on interest rates and thereby prevent the benchmark from reaching zero – a point at which the market truly recognizes the policy authority is running out of options (like the BoJ for the past decade). This bold assertion seems to be based on the comment that “past cuts…would in due course …have a significant impact.” These are certainly ambiguous comments that do not provide for a halt to rate hikes in any certain terms. As confirmation, traders will look for commentary from policy member, to the institution of their commercial asset purchasing facility scheduled to begin on Friday and Wednesday’s quarterly policy report.
Officially, the BoE’s broad assessment is called the Quarterly Inflation Report; but realistically it covers growth and financial market activity as much as it does price pressures. For the economy that the IMF expect to be suffer the worst recession among the major industrialized nation, growth and market health are far more essential that inflation at this point. Considering the statement that accompanied this past week’s rate decision, we would expect cautious optimism buffered heavily by the disappointing data that has crossed the wires recently. Language that suggests Europe’s second largest economy is set to rebound much more quickly and sharply than speculators and economist are expecting would go a long way towards restoring confidence – especially if this comes in conjunction with a general rebound in confidence. Aside from this lagging wrap up on the economy, we will also see a set of notable but more mundane market-movers. BRC retail sales and the RICS house price balance will gauge consumer sentiment; but it will be the labor data that truly benchmark optimism. Also, the visible trade numbers will measure not only the outflow of capital from the UK but also the global level of demand as a gauge of growth. – JK
Source : Dailyfx.com
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