US Dollar May Find Itself As The Top FX Safe Haven And Growth Leader
Written by John Kicklighter, Currency Strategist
While the dollar exhibited incredible volatility this past week; for the most part, the increase in price action would not come with any defined direction from the world’s most liquid currency. Instead, the majors would further carve prominent wedge formations that will ultimately demand breakouts and a decision for direction some time soon – and that resolution may come this week.
Fundamental Outlook for US Dollar: Bullish
It is well known that the Japanese yen is the go to currency for safety of funds concerns. This has been the case for more than a decade as Japan has kept its lending rates at or near zero (deriving an anti-carry interest) and the economy has floated large surpluses and savings. However, with global interest rates plunging towards zero and world-wide growth expected to hit its worst pace since WWII; investors are left to rethink where their capital is safest – and where it could also generate return when conditions do turn around. For the United States’ part, there little room for yields to deflate any further (they are also near zero). More importantly, though, they are far ahead of the curve on efforts to stabilize the domestic markets and economy. Constant liquidity injections, government guarantees, critical bailouts, proposals to draw out toxic debt that is clogging the credit system, the introduction of massive stimulus plans and endeavors to develop regulation for the long-term make for a strong foundation that few other economy’s can match. It is simply a matter of time before these cumulative stimulus catches up with the greenback.
The safe haven dynamic of the world’s most liquid currency (backed by the world’s most liquid ‘risk-free’ asset) has been a clear driver in all of the majors outside of the yen’s purview. However, as global policy makers attempt to put out the fires and interest rates near zero; we are slowly seeing a shift away from panic to growth. With global interest rates quickly approaching zero and more than three months of congestion under the market’s belt, fundamental speculation is focusing on gauging the world’s economies’ position on the recession curve. For those that are looking at relatively shallow and short contractions (and therefore expected to recover first), investors see the potential for return when risk has been fully exercised. The US is certainly a ways off from finding a true bottom in its own recession; but compared to Japan and the United Kingdom – its prospects look much better. Alternatively, when set against the Euro Zone, we are met with real debate. We will keep an eye on the round of second-tier data due this week, but the true shift in sentiment will likely be more closely linked to the efforts of the government to recharge the economy. - JK
Fundamental Outlook for Euro: Bearish
- Euro remains largely Rangebound despite ECB rate cut predictions
- EU officials aim for coordinated financial bailouts – Euro remains indifferent
- Euro Zone GDP falls by most since 1995
Fundamental Outlook for US Dollar: Bullish
- Treasury Secretary Geithner and Congress pour money into the market yet traders remain skepticalWhile the dollar exhibited incredible volatility this past week; for the most part, the increase in price action would not come with any defined direction from the world’s most liquid currency. Instead, the majors would further carve prominent wedge formations that will ultimately demand breakouts and a decision for direction some time soon – and that resolution may come this week. First, we need to take a look at price action to understand the building stress behind the markets. Both EURUSD and USDJPY have worked their way into terminal wedges that will force the market into a decision. However, from a fundamental standpoint, these two pairs highlight very different roles for the US dollar. When measured against the euro, direction will come from a bias in growth forecasts. Far more unique among the majors, USDJPY pits the market’s top two safe haven currencies against each other – and long-held rules may change.
- Retail sales rise for the first time in seven months through January, but does one month undo such a dour trend?
- A reminder of whose opinion truly matters to growth, consumer outlook plunges to a 28 year low
It is well known that the Japanese yen is the go to currency for safety of funds concerns. This has been the case for more than a decade as Japan has kept its lending rates at or near zero (deriving an anti-carry interest) and the economy has floated large surpluses and savings. However, with global interest rates plunging towards zero and world-wide growth expected to hit its worst pace since WWII; investors are left to rethink where their capital is safest – and where it could also generate return when conditions do turn around. For the United States’ part, there little room for yields to deflate any further (they are also near zero). More importantly, though, they are far ahead of the curve on efforts to stabilize the domestic markets and economy. Constant liquidity injections, government guarantees, critical bailouts, proposals to draw out toxic debt that is clogging the credit system, the introduction of massive stimulus plans and endeavors to develop regulation for the long-term make for a strong foundation that few other economy’s can match. It is simply a matter of time before these cumulative stimulus catches up with the greenback.
The safe haven dynamic of the world’s most liquid currency (backed by the world’s most liquid ‘risk-free’ asset) has been a clear driver in all of the majors outside of the yen’s purview. However, as global policy makers attempt to put out the fires and interest rates near zero; we are slowly seeing a shift away from panic to growth. With global interest rates quickly approaching zero and more than three months of congestion under the market’s belt, fundamental speculation is focusing on gauging the world’s economies’ position on the recession curve. For those that are looking at relatively shallow and short contractions (and therefore expected to recover first), investors see the potential for return when risk has been fully exercised. The US is certainly a ways off from finding a true bottom in its own recession; but compared to Japan and the United Kingdom – its prospects look much better. Alternatively, when set against the Euro Zone, we are met with real debate. We will keep an eye on the round of second-tier data due this week, but the true shift in sentiment will likely be more closely linked to the efforts of the government to recharge the economy. - JK
Euro Forecast Dims on Worst GDP Result in 13 Years
Written by David Rodriguez, Quantitative Analyst
The Euro finished marginally lower against the US Dollar to end the week’s trade, sticking to its fairly well-defined range despite continued tests of established lows.
Fundamental Outlook for Euro: Bearish
- Euro remains largely Rangebound despite ECB rate cut predictions
- EU officials aim for coordinated financial bailouts – Euro remains indifferent
- Euro Zone GDP falls by most since 1995
The Euro finished marginally lower against the US Dollar to end the week’s trade, sticking to its fairly well-defined range despite continued tests of established lows. It seems that traders are unwilling to push the Euro/US Dollar below last week’s trough near the 1.2700 mark despite clear downward pressure on risky asset classes. The Euro’s correlation to the US S&P 500 and other risk barometers has literally never been stronger, and we expect that the currency will continue to follow the trajectory of broader financial sentiment. The euro’s resilience to further drops gives us a marginally bullish short-term trading bias.
The upcoming week will bring an important string of forward-looking economic data and paint a much clearer picture on the relative health of Euro Zone economic fundamentals. A German ZEW Economic Sentiment report will be the first key event on the ledger—likely setting the tone for subsequent releases. Analysts predict that business sentiment remains dour, but forecasts nonetheless call for marginal improvement in the forward-looking economic survey. Many research desks claim that stabilization in the rate of economic deterioration may be enough to signal that risky asset classes will turn—implying that the euro could move higher as a result. Though we don’t necessarily subscribe to this line of thought, it will be important to watch for positive surprises in German ZEW data.
Friday’s Purchasing Manager Index results will likewise shed light on the rate of deterioration in the broader Euro Zone and could potentially force moves in euro pairs. The economic release has not been especially market moving, but we feel that any extra bit of information has become all that more significant during times of extreme uncertainty. Consensus forecasts currently call for modest improvements in Euro Zone Manufacturing and Services conditions. Yet both PMI indices are expected to remain below the neutral 50 mark—implying that both sectors remain mired in recession. It will take an especially large positive surprise to elicit a noteworthy improvement in European economic sentiment and—by extension—the euro itself. Otherwise, it remains critical to watch broader financial market risk sentiment. - DR
Japanese Yen Safe Haven Status In Jeopardy From 'Unimaginable' GDP
Written by John Kicklighter, Currency Strategist
How long will the market demand a safe haven? This is the question on most investors minds regardless of their asset class or trading method. Perhaps a more interesting question for the FX market, however, is how long can the Japanese yen retain its position as the favored safety of funds currency. These will be the key drivers for the yen over the coming week and beyond.
Fundamental Outlook for Japanese Yen: Bearish
There isn’t much room (or time for that matter) for traders to think critically about the more complex fundamental questions surrounding the Japanese yen this weekend as the first measure of fourth quarter GDP is scheduled for release first thing Monday morning in Tokyo. Rarely does a regular, scheduled economic indicator threaten to move market; but this reading certainly has the power. Economists are already aiming low by forecasting a 11.6 percent annualized contraction for the world’s second largest economy through the end of 2008. Such a slump dwarfs the 1.2 percent contraction in the Euro Zone, the 1.8 percent slump in the UK and even the 3.8 percent slide in the US. So, to put the data on a more even playing field, we can measure it up to its own historical performance. Should such a number be met, it would confirm the worst recession since the 1974 oil crisis.
It is not a stretch to come to the same conclusion when benchmarking the number ourselves. Foreign demand has vanished as global spending has disappeared; and domestic consumption was struggling even during the recent boom years. However, looking beyond the historical significance of this data, it is important to keep in mind the warnings issued by the Bank of Japan’s head researcher Kazuo Momma. He warned this past week that the contraction through December “may have been unimaginable,” but the more disturbing comment was that the market should be prepared for an even greater slump through the first quarter of this year. This leaves traders to wonder how long Japan’s recession will last. Even when global growth does start to turn, it will likely be a drawn out and cautious shift; and there is little to expect from domestic anemic domestic spending. If this is the case, investors will start to wonder why the yen would be considered during a flight to safety. Low interest rates aren’t unique and safety of funds is severely compromised if Japan heads into another crisis where its banks are labeled technically insolvent.
A fading correlation between the yen and risk appetite will likely take time; and it may not be prudent driver for price action through near-term. More pressing will be the overall level of sentiment among investors. Should, risk appetite improve, the debate over the best safe haven is irrelevant. Confidence has certainly not returned amongst speculators; but the groundwork has been laid. From the markets, the yen crosses and equities have been confined to congestion since November; money market rates have begun to improve and there has been a notable shift in capital towards those safe investments with some level of return. From a more tangible standpoint, governments have made drastic efforts to thaw credit and hold up their own markets. Conditions will truly turn when confidence among consumers and investors improves; and it may be only a matter of time before these economic participants yield to the loose but global effort being made to turn things around. - JK
Fundamental Outlook for Japanese Yen: Bearish
- Risk and carry trends coming to a crossroads as failing growth and government stimulus square offHow long will the market demand a safe haven? This is the question on most investors minds regardless of their asset class or trading method. Perhaps a more interesting question for the FX market, however, is how long can the Japanese yen retain its position as the favored safety of funds currency. These will be the key drivers for the yen over the coming week and beyond.
- A USDJPY breakout could redefine long-term direction between these two safe haven currencies
- The US steps up its bailout efforts yet confidence in growth and financial markets is little moved
There isn’t much room (or time for that matter) for traders to think critically about the more complex fundamental questions surrounding the Japanese yen this weekend as the first measure of fourth quarter GDP is scheduled for release first thing Monday morning in Tokyo. Rarely does a regular, scheduled economic indicator threaten to move market; but this reading certainly has the power. Economists are already aiming low by forecasting a 11.6 percent annualized contraction for the world’s second largest economy through the end of 2008. Such a slump dwarfs the 1.2 percent contraction in the Euro Zone, the 1.8 percent slump in the UK and even the 3.8 percent slide in the US. So, to put the data on a more even playing field, we can measure it up to its own historical performance. Should such a number be met, it would confirm the worst recession since the 1974 oil crisis.
It is not a stretch to come to the same conclusion when benchmarking the number ourselves. Foreign demand has vanished as global spending has disappeared; and domestic consumption was struggling even during the recent boom years. However, looking beyond the historical significance of this data, it is important to keep in mind the warnings issued by the Bank of Japan’s head researcher Kazuo Momma. He warned this past week that the contraction through December “may have been unimaginable,” but the more disturbing comment was that the market should be prepared for an even greater slump through the first quarter of this year. This leaves traders to wonder how long Japan’s recession will last. Even when global growth does start to turn, it will likely be a drawn out and cautious shift; and there is little to expect from domestic anemic domestic spending. If this is the case, investors will start to wonder why the yen would be considered during a flight to safety. Low interest rates aren’t unique and safety of funds is severely compromised if Japan heads into another crisis where its banks are labeled technically insolvent.
A fading correlation between the yen and risk appetite will likely take time; and it may not be prudent driver for price action through near-term. More pressing will be the overall level of sentiment among investors. Should, risk appetite improve, the debate over the best safe haven is irrelevant. Confidence has certainly not returned amongst speculators; but the groundwork has been laid. From the markets, the yen crosses and equities have been confined to congestion since November; money market rates have begun to improve and there has been a notable shift in capital towards those safe investments with some level of return. From a more tangible standpoint, governments have made drastic efforts to thaw credit and hold up their own markets. Conditions will truly turn when confidence among consumers and investors improves; and it may be only a matter of time before these economic participants yield to the loose but global effort being made to turn things around. - JK
British Pound Outlook Remains Volatile; CPI, BOE Minutes Could Weigh
Written by Terri Belkas, Currency Strategist
The British pound finished the week lower against the US dollar, as comments by Bank of England Governor Mervyn King and the minutes from the central bank’s last meeting added to evidence that another rate cut was on the way.
Fundamental Outlook for British Pound: Bearish
- UK jobless claims rose for the 12th straight month to a nearly 10-year high of 1.23 millon
- BOE Governor King says UK economy is in for “deep recession”
- BOE forecasts that CPI will drop “well below” 2 percent, GDP to contract sharply
Source : Dailyfx.com
Fundamental Outlook for British Pound: Bearish
- UK jobless claims rose for the 12th straight month to a nearly 10-year high of 1.23 millon
- BOE Governor King says UK economy is in for “deep recession”
- BOE forecasts that CPI will drop “well below” 2 percent, GDP to contract sharply
The British pound finished the week lower against the US dollar, as comments by Bank of England Governor Mervyn King and the minutes from the central bank’s last meeting added to evidence that another rate cut was on the way. Looking ahead to this coming week, the currency could remain under pressure unless a surge in investor confidence propels “risky” assets higher. In economic news, the release of UK CPI could weigh on the British pound as the annual rate of growth is anticipated to slow to 2.6 percent from 3.1 percent, putting inflation back within the Bank of England’s target range of 1 percent - 3 percent. However, with the BOE expecting that CPI could fall “well below” 2 percent in the first half of the year, such a decline may only be the first in a series.
Meanwhile, the Bank of England’s meeting minutes tend to be a huge market-mover for the British pound upon release at 4:30 ET, and the February 18 report is unlikely to be any different. During the February meeting, the BOE’s Monetary Policy Committee (MPC) slashed the Bank Rate by 50 basis points to yet another record low of 1.00 percent, as expected. However, the British pound subsequently rallied as the MPC suggested that they may not cut rates again on March 5. Since then, though, BOE Governor Mervyn King’s comments have signaled otherwise and if the MPC’s comments and outlooks signal that the central bank will reduce the Bank Rate further, the British pound could pull back.
Finally, Friday’s UK retail sales figures are forecasted to show another rise in spending during the month of January, and while this could initiate a reaction from the British pound - especially if the reading is significantly higher or lower than estimates - traders shouldn’t read too much into the actual figure. A few months ago, the BOE said that they would not put too much stock into these government statistics as they are often volatile, and instead they look toward private surveys like BRC retail sales.
From a technical perspective, there are essentially two clear “lines in the sand” that may dictate whether or not we will see a bearish or bullish break. Indeed, the 1000 point range of 1.4135 - 1.5000 has contained GBP/USD so far, and traders should keep an eye on those levels as a break above or below may signal sharper moves to come. – TB
Meanwhile, the Bank of England’s meeting minutes tend to be a huge market-mover for the British pound upon release at 4:30 ET, and the February 18 report is unlikely to be any different. During the February meeting, the BOE’s Monetary Policy Committee (MPC) slashed the Bank Rate by 50 basis points to yet another record low of 1.00 percent, as expected. However, the British pound subsequently rallied as the MPC suggested that they may not cut rates again on March 5. Since then, though, BOE Governor Mervyn King’s comments have signaled otherwise and if the MPC’s comments and outlooks signal that the central bank will reduce the Bank Rate further, the British pound could pull back.
Finally, Friday’s UK retail sales figures are forecasted to show another rise in spending during the month of January, and while this could initiate a reaction from the British pound - especially if the reading is significantly higher or lower than estimates - traders shouldn’t read too much into the actual figure. A few months ago, the BOE said that they would not put too much stock into these government statistics as they are often volatile, and instead they look toward private surveys like BRC retail sales.
From a technical perspective, there are essentially two clear “lines in the sand” that may dictate whether or not we will see a bearish or bullish break. Indeed, the 1000 point range of 1.4135 - 1.5000 has contained GBP/USD so far, and traders should keep an eye on those levels as a break above or below may signal sharper moves to come. – TB
Source : Dailyfx.com
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