Written by John Kicklighter, Currency Strategist
The world’s most liquid currency ended the week in a precarious technical and fundamental position. For those watching the charts, the Dollar Index closed Friday just off a three-year high. And, making sure to keep market participants engaged until liquidity returns on Monday, fundamental traders are debating the appeal of a currency that represents a ballooning recession, a market-wide demand for safety and the dawn to a period of nationalization.
Looking ahead to next week and beyond, with so many major fundamental themes evolving throughout the markets; the dollar will have decide which driver will take precedence. The most pressing (and novel) concern for the greenback is the US government’s trend towards nationalization. The stakes were raised this past Friday when it was announced that the Treasury was taking a 36 percent stake in Citi – the world’s largest financial firm. This was a blatant move by officials after a series of questionable steps towards government stewardship that includes: seizing control of Freddie Mac and Fannie Mae; taking over insurance giant AIG after extending it a $150 billion credit line; and announcing that loans from the tax payers coffers will now come with the price of convertible preferred shares from those lending. In normal markets, such a move would spark fear that investor equity could vanish and returns could be dampened. However, it is obvious that we are not experiencing normal market conditions. Global growth is cooling, returns are shrinking, risk of financial seizures is high and many of the world’s largest economies are adopting a similar policy. At this point, the government likely sees this intervention as necessary to ensuring further financial time bombs don’t revive the financial crisis and send the nation into a tailspin that it cannot pull out of; and the markets may agree.
How long the dollar can hold out as the headwinds to free-market economics increase is debatable. One key determinant for the currency is its status as a safe haven. Since the plunge in Japanese GDP numbers led investors to rethink the viability of the yen as a reliable asylum for capital, we have seen investors head towards the US dollar to purchase Treasuries and other low-risk, American assets. Clearly, this dynamic depends upon the presence of risk. There are plenty of indicators and signs to support the proliferation of fear; but ultimately this market driver is a product of sentiment. Should the balance of risk/reward invert and the S&P 500 reverse course, there is little need for a safe haven whose economic recovery will be stifled by its government’s presence.
The final fundamental engine to vie for control of the dollar’s future could help shape long-term trends and short-term volatility. When the dust clears and fears that key market players aren’t on the verge of collapse, global traders will once again look at economic growth to gauge the potential for returns. As it stands, the United States is suffering one of the worst recessions in the industrialized world; but aggressive policy actions and a deep market has left the market feeling that the economy and its dollar is perhaps ahead of the curve. Timely data schedule for release this week will deny or confirm that unspoken claim. Readings of personal and spending, manufacturing and service activity, as well as consumer credit will be treated as second tier data in comparison to Friday’s NFPs. The American consumer will very likely decide the extent and length of this recession; and a confirmed 625,000 additional jobs lost will certainly undermine speculation that the world’s largest economy can recover before its global counterparts. - JK
US Dollar Testing 3-Year Highs as NFPs and Nationalization Loom
Fundamental Outlook for US Dollar: Bullish- The US government moves one step closer to nationalization with a 36% stake in CitiThe world’s most liquid currency ended the week in a precarious technical and fundamental position. For those watching the charts, the Dollar Index closed Friday just off a three-year high. And, making sure to keep market participants engaged until liquidity returns on Monday, fundamental traders are debating the appeal of a currency that represents a ballooning recession, a market-wide demand for safety and the dawn to a period of nationalization.
- With global rates falling to zero and recession spreading, is the dollar is taking the top safe haven spot from the yen?
- Growth contracted more than expected and the fastest pace in 26 years according to GDP revisions
Looking ahead to next week and beyond, with so many major fundamental themes evolving throughout the markets; the dollar will have decide which driver will take precedence. The most pressing (and novel) concern for the greenback is the US government’s trend towards nationalization. The stakes were raised this past Friday when it was announced that the Treasury was taking a 36 percent stake in Citi – the world’s largest financial firm. This was a blatant move by officials after a series of questionable steps towards government stewardship that includes: seizing control of Freddie Mac and Fannie Mae; taking over insurance giant AIG after extending it a $150 billion credit line; and announcing that loans from the tax payers coffers will now come with the price of convertible preferred shares from those lending. In normal markets, such a move would spark fear that investor equity could vanish and returns could be dampened. However, it is obvious that we are not experiencing normal market conditions. Global growth is cooling, returns are shrinking, risk of financial seizures is high and many of the world’s largest economies are adopting a similar policy. At this point, the government likely sees this intervention as necessary to ensuring further financial time bombs don’t revive the financial crisis and send the nation into a tailspin that it cannot pull out of; and the markets may agree.
How long the dollar can hold out as the headwinds to free-market economics increase is debatable. One key determinant for the currency is its status as a safe haven. Since the plunge in Japanese GDP numbers led investors to rethink the viability of the yen as a reliable asylum for capital, we have seen investors head towards the US dollar to purchase Treasuries and other low-risk, American assets. Clearly, this dynamic depends upon the presence of risk. There are plenty of indicators and signs to support the proliferation of fear; but ultimately this market driver is a product of sentiment. Should the balance of risk/reward invert and the S&P 500 reverse course, there is little need for a safe haven whose economic recovery will be stifled by its government’s presence.
The final fundamental engine to vie for control of the dollar’s future could help shape long-term trends and short-term volatility. When the dust clears and fears that key market players aren’t on the verge of collapse, global traders will once again look at economic growth to gauge the potential for returns. As it stands, the United States is suffering one of the worst recessions in the industrialized world; but aggressive policy actions and a deep market has left the market feeling that the economy and its dollar is perhaps ahead of the curve. Timely data schedule for release this week will deny or confirm that unspoken claim. Readings of personal and spending, manufacturing and service activity, as well as consumer credit will be treated as second tier data in comparison to Friday’s NFPs. The American consumer will very likely decide the extent and length of this recession; and a confirmed 625,000 additional jobs lost will certainly undermine speculation that the world’s largest economy can recover before its global counterparts. - JK
Written by David Rodriguez, Quantitative Analyst
- Dismal German GDP data sends euro to bottom of trading range
- German IFO economic sentiment falls to fresh record low
- Forex trading markets next look to European Central Bank rate decision
The Euro traded lower against the US dollar on an incredibly volatile week of trade, but the true fireworks are likely to come on a heavy string of economic event risk in the week ahead. Both the Euro Zone and the US economy have a key number of reports due within a short span, and markets are likely to force substantial moves in the Euro/US Dollar on any unexpected developments. Overall FX market momentum supports further euro losses and US dollar gains. Yet it will be important to watch any potential shifts in the week ahead.
Intense intraday volatility in the Euro/US Dollar could intensify on the coming week’s critical European Central Bank interest rate decision and several other second-tier releases. Consensus forecasts call for the ECB to cut its benchmark interest rate by 50 basis points to fresh record-lows of 1.50 percent, but uncertainty surrounding the event means that markets will force euro volatility regardless of the outcome. Overnight index swaps (OIS) currently price in a dead-certain 25 basis point cut and a 50 percent chance of a full 0.50 percentage point move. Regardless of the outcome, markets will pay very close attention to ECB President Jean Claude Trichet’s Question and Answer session following the announcement. The typically candid central banker already telegraphed a March rate cut in the same Q&A session following the January move, but questions remain as to whether the ECB will truly continue cutting rates to record lows. If there is any indication that the ECB will set an effective floor on its benchmark rate target, the euro would likely benefit vis a vis the low-yielding US dollar.
The euro will otherwise trade off of further financial market and macroeconomic developments—especially as they relate to Euro Zone stability. Wide European sovereign debt spreads underline the state of unease for many member countries, and ongoing fears of political fallout from the financial crisis bodes poorly for the euro itself. Recent rhetoric suggests that Germany and other major economies stand ready to bail out those countries at risk. Traders have nonetheless punished the euro for perceived instability, and any further deterioration in EMU affairs could send the EUR even lower against major counterparts.
Euro Forecast at Risk Ahead of European Central Bank Rate Decision
Fundamental Outlook for Euro This Week: Bearish- Dismal German GDP data sends euro to bottom of trading range
- German IFO economic sentiment falls to fresh record low
- Forex trading markets next look to European Central Bank rate decision
The Euro traded lower against the US dollar on an incredibly volatile week of trade, but the true fireworks are likely to come on a heavy string of economic event risk in the week ahead. Both the Euro Zone and the US economy have a key number of reports due within a short span, and markets are likely to force substantial moves in the Euro/US Dollar on any unexpected developments. Overall FX market momentum supports further euro losses and US dollar gains. Yet it will be important to watch any potential shifts in the week ahead.
Intense intraday volatility in the Euro/US Dollar could intensify on the coming week’s critical European Central Bank interest rate decision and several other second-tier releases. Consensus forecasts call for the ECB to cut its benchmark interest rate by 50 basis points to fresh record-lows of 1.50 percent, but uncertainty surrounding the event means that markets will force euro volatility regardless of the outcome. Overnight index swaps (OIS) currently price in a dead-certain 25 basis point cut and a 50 percent chance of a full 0.50 percentage point move. Regardless of the outcome, markets will pay very close attention to ECB President Jean Claude Trichet’s Question and Answer session following the announcement. The typically candid central banker already telegraphed a March rate cut in the same Q&A session following the January move, but questions remain as to whether the ECB will truly continue cutting rates to record lows. If there is any indication that the ECB will set an effective floor on its benchmark rate target, the euro would likely benefit vis a vis the low-yielding US dollar.
The euro will otherwise trade off of further financial market and macroeconomic developments—especially as they relate to Euro Zone stability. Wide European sovereign debt spreads underline the state of unease for many member countries, and ongoing fears of political fallout from the financial crisis bodes poorly for the euro itself. Recent rhetoric suggests that Germany and other major economies stand ready to bail out those countries at risk. Traders have nonetheless punished the euro for perceived instability, and any further deterioration in EMU affairs could send the EUR even lower against major counterparts.
Written by Terri Belkas, Currency Strategist
At the start of this past week, many were wondering if the Japanese yen had lost its safe-haven status, as the currency pulled back sharply despite broad declines in the stock markets.
Japanese Yen May Fall Further on Broken Risk Link, Disappointing Data
Fundamental Outlook for Japanese Yen: Bearish
- Japanese trade data shows that exports fell by a record 45.7 percent in January
- Japanese economy continues to deteriorate rapidly as industrial output, household spending fall sharply
- Japanese Yen - Losing Its Safe Haven Status?
At the start of this past week, many were wondering if the Japanese yen had lost its safe-haven status, as the currency pulled back sharply despite broad declines in the stock markets. While the tide turned on Thursday night as the Japanese yen started to recoup some of its losses, the currency still ended the week down quite a bit: -4.6 percent versus the US dollar, -3.77 percent against the British pound, and -3.5 percent against the euro and Swiss franc. This certainly leaves us with a cautious stance on the Japanese yen since its correlation with risk trends may still be falling apart, and as a result, those looking for a more reliable correlation should look toward the US dollar, as it was easily the biggest gainer in a week that saw steady declines in the S&P 500 to the lowest levels since December 1996.
Looking ahead, there will only be a few economic indicators released that will be worth noting. On March 1, Japanese labor cash earnings are forecasted to remain exceptionally low at -1.2 percent in January from a year earlier, marking the third straight month of negative results. Japanese consumption has been very low for a long time, as there was little to no wage growth to provide for an increase in discretionary income. When you consider that labor earnings have recently been steadily declining, it becomes clear that there is almost no impetus for households to spend and support the economy.
On March 4, Japanese capital spending (excluding software) is projected to fall for the seventh straight quarter in Q4, as the annual rate may plunge by the most in 11 years at a rate of 17.0 percent. Businesses, which depended heavily upon robust foreign demand, have had to come to terms with the impact of the appreciation of the Japanese yen and the global economic slowdown/recession, as the latest figures from January show that exports fell 45.7 percent from a year earlier. With the Japanese government and economists all of the world forecasting that global growth will time quite some time to recover, businesses have no reason to invest in their operations and if anything, they are looking to cut away any and all excess fat. Overall, readings in line with expectations will signal what many already anticipate: that the Japanese recession will only deepen during the first half of 2009. – TB
- Australian wages unexpectedly surge at fastest pace in 11 years
- Aussie Leading Economic Indicators nonetheless points to slowdown in growth
- Australian Dollar presents range trading opportunity versus Canadian counterpart
The Australian dollar finished the week marginally lower, but an unexpected string of bullish economic data boosted medium-term prospects for the previously fast-falling currency. Indeed, economic results for the fourth quarter of 2008 have thus far surprised to the topside. Recent information suggests that the domestic economy remains in better shape than previously assumed—boosting fundamental outlook for the Australian dollar itself.
The upcoming week will bring an important mix of Australian economic data, and the AU$ will likely see substantial volatility on any surprises in a key number of reports. The first noteworthy piece of event risk comes on the Reserve Bank of Australia’s contentious interest rate decision due at 03:30 GMT on Monday, March 2. Interest rate traders predict that the RBA will cut rates by a minimum of 25 basis points to 3.00 percent, but there is likewise a fairly strong possibility of an aggressive 50bp move. Any number of results could elicit strong reactions out of the Australian Dollar, and it will be important to watch the actual rate decision and attached commentary—especially as it relates to future rate expectations.
Aussie dollar traders will subsequently keep a close eye on subsequent Gross Domestic Product and Trade Balance reports. The GDP release is forecast to show that the domestic economy actually expanded through the final quarter of 2008—no small feat given massive global economic headwinds. Unexpectedly strong economic reports to date lend credence to bullish forecasts, but surprises to the downside could potentially deflate the recent spate of hope for domestic economic prospects. Much the same can be said for Wednesday’s Trade Balance result. Australian industry remains highly dependent on global demand, and fast-falling exports bode poorly for broader economic growth. It will be important to watch whether Australian economic data continues to surprise to the topside—the AUD could once again destabilize on deterioration in fundamental sentiment.
Japanese Yen May Fall Further on Broken Risk Link, Disappointing Data
Fundamental Outlook for Japanese Yen: Bearish
- Japanese trade data shows that exports fell by a record 45.7 percent in January
- Japanese economy continues to deteriorate rapidly as industrial output, household spending fall sharply
- Japanese Yen - Losing Its Safe Haven Status?
At the start of this past week, many were wondering if the Japanese yen had lost its safe-haven status, as the currency pulled back sharply despite broad declines in the stock markets. While the tide turned on Thursday night as the Japanese yen started to recoup some of its losses, the currency still ended the week down quite a bit: -4.6 percent versus the US dollar, -3.77 percent against the British pound, and -3.5 percent against the euro and Swiss franc. This certainly leaves us with a cautious stance on the Japanese yen since its correlation with risk trends may still be falling apart, and as a result, those looking for a more reliable correlation should look toward the US dollar, as it was easily the biggest gainer in a week that saw steady declines in the S&P 500 to the lowest levels since December 1996.
Looking ahead, there will only be a few economic indicators released that will be worth noting. On March 1, Japanese labor cash earnings are forecasted to remain exceptionally low at -1.2 percent in January from a year earlier, marking the third straight month of negative results. Japanese consumption has been very low for a long time, as there was little to no wage growth to provide for an increase in discretionary income. When you consider that labor earnings have recently been steadily declining, it becomes clear that there is almost no impetus for households to spend and support the economy.
On March 4, Japanese capital spending (excluding software) is projected to fall for the seventh straight quarter in Q4, as the annual rate may plunge by the most in 11 years at a rate of 17.0 percent. Businesses, which depended heavily upon robust foreign demand, have had to come to terms with the impact of the appreciation of the Japanese yen and the global economic slowdown/recession, as the latest figures from January show that exports fell 45.7 percent from a year earlier. With the Japanese government and economists all of the world forecasting that global growth will time quite some time to recover, businesses have no reason to invest in their operations and if anything, they are looking to cut away any and all excess fat. Overall, readings in line with expectations will signal what many already anticipate: that the Japanese recession will only deepen during the first half of 2009. – TB
Written by Ilya Spivak, Currency Analyst
The British Pound is nearly assured a volatile week ahead as a multitude of conflicting leads ahead of the interest rate announcement from the Bank of England is sure to catch at least some market participants off-guard.
Fundamental Outlook for British Pound: Bearish
This backdrop has culminated in economists’ expectations of a 50 basis point reduction borrowing costs to bring rates to a new historic low of 0.50%. Importantly, the market looks unconvinced for now as overnight index swaps show traders pricing in a neutral outlook for the next 12 months. This is not without reason: minutes from the last policy meeting revealed a reluctance to take rates lower for fear that this would hurt bank profitability. Rather, the MPC voted unanimously to seek government approval for quantitative easing. On the other hand, a pair of statements from BOE officials this week bolstered a dovish bias: Andrew Sentance warned of deflation and said there is “a strong case for providing additional stimulus” while David Blanchflower called monetary policy "overly restrictive". All told, British Pound volatility is the one thing that can be reasonably expected in the coming week as the multitude of conflicting leads ahead of the BOE announcement is sure to catch at least some market participants off-guard.
As has been typical in recent weeks, risk sentiment will be the wild card in shaping price action as GBPUSD remains 93% correlated with the Dow Jones Industrial Average and 96% correlated with the MSCI World Stock Index. Global equities shed another 3.4% last week to close below the previous swing low registered in the week ending 11/21/08. Should risky assets retain downward momentum, the British Pound may well follow suit. - IS
British Pound to See Volatility on Conflicting BOE Expectations
Fundamental Outlook for British Pound: Bearish
- Annual Economic Growth Falls -1.9% in Q4, Most in 17 YearsThe interest rate announcement from the Bank of England clearly takes top billing on next week’s economic calendar. In theory, the stagnant economy and a dropping inflation rate give policymakers ample reason to continue easing. Indeed, Producer Prices are set to slip to an 18-month low at 3.1% in the year to February, foreshadowing that the slide in consumer price growth (the headline inflation gauge) will continue as firms pass on lower manufacturing costs through cheaper finished products. Meanwhile, a likely drop in business sentiment across February’s PMI readings points to more job cuts, weaker spending, and a deeper slump in economic growth. GDP fell -1.9% in the fourth quarter, the largest drop in over 17 years, while the International Monetary Fund has said that the UK faces the worst recession among the G7 nations.
- Consumer Confidence Holds Near Record Low in February
This backdrop has culminated in economists’ expectations of a 50 basis point reduction borrowing costs to bring rates to a new historic low of 0.50%. Importantly, the market looks unconvinced for now as overnight index swaps show traders pricing in a neutral outlook for the next 12 months. This is not without reason: minutes from the last policy meeting revealed a reluctance to take rates lower for fear that this would hurt bank profitability. Rather, the MPC voted unanimously to seek government approval for quantitative easing. On the other hand, a pair of statements from BOE officials this week bolstered a dovish bias: Andrew Sentance warned of deflation and said there is “a strong case for providing additional stimulus” while David Blanchflower called monetary policy "overly restrictive". All told, British Pound volatility is the one thing that can be reasonably expected in the coming week as the multitude of conflicting leads ahead of the BOE announcement is sure to catch at least some market participants off-guard.
As has been typical in recent weeks, risk sentiment will be the wild card in shaping price action as GBPUSD remains 93% correlated with the Dow Jones Industrial Average and 96% correlated with the MSCI World Stock Index. Global equities shed another 3.4% last week to close below the previous swing low registered in the week ending 11/21/08. Should risky assets retain downward momentum, the British Pound may well follow suit. - IS
Written by John Kicklighter, Currency Strategist
Will the Canadian economy weather the global recession better than its G10 counterparts? Will the central bank holds the nation’s benchmark lending rate up to provide a yield advantage to the loonie when the risk appetite returns? These are the questions that speculators will be asking and that event risk may help to answer in the week ahead. With an otherwise limited number of scheduled releases due, the Canadian dollar is looking at a significant threat to volatility and perhaps the catalyst for the next major trend.
Fundamental Outlook for Canadian Dollar: Bearish
- Growth may be weaker than speculators may expect after retail sales reportedly plunged the most since 1991
- The broadest measure of trade plunges to its worst deficit in 15 years through the fourth quarter
Will the Canadian economy weather the global recession better than its G10 counterparts? Will the central bank holds the nation’s benchmark lending rate up to provide a yield advantage to the loonie when the risk appetite returns? These are the questions that speculators will be asking and that event risk may help to answer in the week ahead. With an otherwise limited number of scheduled releases due, the Canadian dollar is looking at a significant threat to volatility and perhaps the catalyst for the next major trend.
For a global market place that is plagued with economic and financial crisis, the primary concern in trading any currency is the potential for growth. Since the global recession and market crisis really started to accelerate last fall, there has been an aura of optimism around the Canadian economy. Despite the economy’s heavy fundamental ties the battered the United States, growth would hold up relatively well – imbuing Canada with a sense of strength and stability that was severely lacking everywhere else in the world. If its economy could indeed hold up better (not necessarily having to produce positive results) than say the US, UK, Euro Zone and other industrialized powerhouses; then Canada and its currency would be considered a market leader. However, this impression of fundamental strength is slipping away quickly. Back in January, the Bank of Canada said its quarterly monetary policy report that Canada was already in recession and the economy would contract 1.2 percent through 2009. Data will look to confirm this dour assessment on Monday with the release of the fourth quarter, annualized GDP numbers. Even before the turn of the year, economists suspect the world’s eighth largest economy shrunk 3.6 percent – what would be the worst plunge in nearly 18 years and a pace to rival any of the other global leaders.
Eventually, growth will stabilize. This will likely come as an extended period of uneven decelerating contractions and slow recoveries among the world’s industrialized nations. And, when expansion is a viable forecast, investors will once again seek return on their capital (rather than merely hunkering down in a safe haven). Which economy can recovery quickest and most aggressively will no doubt attractive the world’s capital flows. However, the starting point for yields will be just as important as how quickly they can rise. As such, a kiwi dollar that is has a benchmark rate around say 2.50-3.00 percent will experience an aggressive rally against a currency that sees rates near zero like the yen. Currently the loonie falls right in the middle of this spectrum at 1.00 percent; but that may change quickly with the Bank of Canada rate decision on Tuesday. The economist consensus from Bloomberg is projecting a 50 basis point cut that puts the policy group well within range for matching the Fed with a symbolic zero target rate when before the recovery ever starts. Historically, the BoC is comparatively slow to adjust rates (especially around economic cycle turns); so this move could severely handicap the currency in the weeks and months ahead. - JK
Canadian Dollar Finally Taken to Task for Interest Rates and Growth
Fundamental Outlook for Canadian Dollar: Bearish
- Growth may be weaker than speculators may expect after retail sales reportedly plunged the most since 1991
- The broadest measure of trade plunges to its worst deficit in 15 years through the fourth quarter
Will the Canadian economy weather the global recession better than its G10 counterparts? Will the central bank holds the nation’s benchmark lending rate up to provide a yield advantage to the loonie when the risk appetite returns? These are the questions that speculators will be asking and that event risk may help to answer in the week ahead. With an otherwise limited number of scheduled releases due, the Canadian dollar is looking at a significant threat to volatility and perhaps the catalyst for the next major trend.
For a global market place that is plagued with economic and financial crisis, the primary concern in trading any currency is the potential for growth. Since the global recession and market crisis really started to accelerate last fall, there has been an aura of optimism around the Canadian economy. Despite the economy’s heavy fundamental ties the battered the United States, growth would hold up relatively well – imbuing Canada with a sense of strength and stability that was severely lacking everywhere else in the world. If its economy could indeed hold up better (not necessarily having to produce positive results) than say the US, UK, Euro Zone and other industrialized powerhouses; then Canada and its currency would be considered a market leader. However, this impression of fundamental strength is slipping away quickly. Back in January, the Bank of Canada said its quarterly monetary policy report that Canada was already in recession and the economy would contract 1.2 percent through 2009. Data will look to confirm this dour assessment on Monday with the release of the fourth quarter, annualized GDP numbers. Even before the turn of the year, economists suspect the world’s eighth largest economy shrunk 3.6 percent – what would be the worst plunge in nearly 18 years and a pace to rival any of the other global leaders.
Eventually, growth will stabilize. This will likely come as an extended period of uneven decelerating contractions and slow recoveries among the world’s industrialized nations. And, when expansion is a viable forecast, investors will once again seek return on their capital (rather than merely hunkering down in a safe haven). Which economy can recovery quickest and most aggressively will no doubt attractive the world’s capital flows. However, the starting point for yields will be just as important as how quickly they can rise. As such, a kiwi dollar that is has a benchmark rate around say 2.50-3.00 percent will experience an aggressive rally against a currency that sees rates near zero like the yen. Currently the loonie falls right in the middle of this spectrum at 1.00 percent; but that may change quickly with the Bank of Canada rate decision on Tuesday. The economist consensus from Bloomberg is projecting a 50 basis point cut that puts the policy group well within range for matching the Fed with a symbolic zero target rate when before the recovery ever starts. Historically, the BoC is comparatively slow to adjust rates (especially around economic cycle turns); so this move could severely handicap the currency in the weeks and months ahead. - JK
Written by David Song, Currency Analyst
The Swiss franc is likely to face increased selling pressures over the following week as the economic docket is expected to show a deteriorating outlook for growth and inflation, and as the low-yielding currency’s safe-haven status comes under question, the USD/CHF should hold its bullish trend over the near-term as the flight to quality continues.
Nevertheless, as the GDP reading is expected to show a 0.7% contraction in the fourth quarter, which would be the biggest economic contraction since 1994, the economic outlook for the region remains bleak. In addition, SNB Governing Board member Thomas Jordan said that the economy may contract by more than 1.0% in 2009 as the global economy faces its first recession since World War II, and the comments by Mr. Jordan suggests that the economy is weakening at an even faster pace than the central bank had initially expected as the Euro-Zone, Switzerland’s biggest trading partner, faces a deepening recession. As trade conditions deteriorate, firms are likely to cut production and employment going forward in an effort to reduce costs, which could lead the government to step up their efforts in order to keep the export-driven economy afloat. Moreover, falling commodity prices paired with the economic downturn has certainly tapered the upside risks for inflation, and as price growth is expected to stall in February, policy makers may adopt unconventional measures to maintain their 2% target for price growth as the Swiss National Bank projects the annual rate of inflation to reach 0.9% this year. - DS
Swiss Franc To Hold Bearish Trend as Growth and Inflation Falter
Fundamental Outlook for Swiss Franc: Bearish- UBS Consumption Indicator Falls Further as Households Face Weakening Labor MarketThe Swiss franc is likely to face increased selling pressures over the following week as the economic docket is expected to show a deteriorating outlook for growth and inflation, and as the low-yielding currency’s safe-haven status comes under question, the USD/CHF should hold its bullish trend over the near-term as the flight to quality continues. As a result, we should see the exchange rate push higher in the week ahead to retrace the sharp sell-off from December, and the dollar-franc may test the 2/20 high of 1.1890 in March as risk trends continue to drive price action in the currency market. Meanwhile, mounting turmoil in the banking industry paired with the instability in the global credit market has stoked pressures for Swiss regulators to increase transparency, which could also weigh on the appeal of the low-yielding currency as the nation’s policy for banking secrecy comes under scrutiny.
- Swiss Leading Indicator Drops to Record Low, Reinforcing Fears of a Deepening Downturn
Nevertheless, as the GDP reading is expected to show a 0.7% contraction in the fourth quarter, which would be the biggest economic contraction since 1994, the economic outlook for the region remains bleak. In addition, SNB Governing Board member Thomas Jordan said that the economy may contract by more than 1.0% in 2009 as the global economy faces its first recession since World War II, and the comments by Mr. Jordan suggests that the economy is weakening at an even faster pace than the central bank had initially expected as the Euro-Zone, Switzerland’s biggest trading partner, faces a deepening recession. As trade conditions deteriorate, firms are likely to cut production and employment going forward in an effort to reduce costs, which could lead the government to step up their efforts in order to keep the export-driven economy afloat. Moreover, falling commodity prices paired with the economic downturn has certainly tapered the upside risks for inflation, and as price growth is expected to stall in February, policy makers may adopt unconventional measures to maintain their 2% target for price growth as the Swiss National Bank projects the annual rate of inflation to reach 0.9% this year. - DS
Written by David Rodriguez, Quantitative Analyst
Australian Dollar Sentiment May Shift on Key GDP, RBA Results
Fundamental Outlook for Australian Dollar: Bearish- Australian wages unexpectedly surge at fastest pace in 11 years
- Aussie Leading Economic Indicators nonetheless points to slowdown in growth
- Australian Dollar presents range trading opportunity versus Canadian counterpart
The Australian dollar finished the week marginally lower, but an unexpected string of bullish economic data boosted medium-term prospects for the previously fast-falling currency. Indeed, economic results for the fourth quarter of 2008 have thus far surprised to the topside. Recent information suggests that the domestic economy remains in better shape than previously assumed—boosting fundamental outlook for the Australian dollar itself.
The upcoming week will bring an important mix of Australian economic data, and the AU$ will likely see substantial volatility on any surprises in a key number of reports. The first noteworthy piece of event risk comes on the Reserve Bank of Australia’s contentious interest rate decision due at 03:30 GMT on Monday, March 2. Interest rate traders predict that the RBA will cut rates by a minimum of 25 basis points to 3.00 percent, but there is likewise a fairly strong possibility of an aggressive 50bp move. Any number of results could elicit strong reactions out of the Australian Dollar, and it will be important to watch the actual rate decision and attached commentary—especially as it relates to future rate expectations.
Aussie dollar traders will subsequently keep a close eye on subsequent Gross Domestic Product and Trade Balance reports. The GDP release is forecast to show that the domestic economy actually expanded through the final quarter of 2008—no small feat given massive global economic headwinds. Unexpectedly strong economic reports to date lend credence to bullish forecasts, but surprises to the downside could potentially deflate the recent spate of hope for domestic economic prospects. Much the same can be said for Wednesday’s Trade Balance result. Australian industry remains highly dependent on global demand, and fast-falling exports bode poorly for broader economic growth. It will be important to watch whether Australian economic data continues to surprise to the topside—the AUD could once again destabilize on deterioration in fundamental sentiment.
Written by John Rivera, Currency Analyst
A week of bearish fundamental data and a bout of risk aversion would end up leading the New Zealand dollar to break below the 0.500 price level. The RBNZ lowered its inflation forecast to 2.3% from 2. 5 as it expects growth and employment to deteriorate. The central bank lowered its GDP expectations for the year to 0.1% and predicts the unemployment rate will raise to 6%, the highest since June 2006.
Fundamental Outlook For New Zealand Dollar: Bearish
The central bank is expected to lower their official cash rate by 75 bps to 2.75% on March 11th and the lower interest rate expectations may continue to weigh on the “Kiwi”. The weak currency is actually welcomed by the RBNZ as Governor Bollard stated “the exchange rate is working for us”, “it is helping cushion the shocks, it’s helping make us more competitive.” The lower valuation as helped demand for the country’s exports including milk powder, meat and aluminum. The only fundamental economic release upcoming is the commodity price index which declined last month by 4.3%. The indicator isn’t market moving but another month of falling prices would add to the demand for New Zealand goods.
The New Zealand dollar nearly tested the 2/2 low of 0.4961 which is also being reinforced by Bollinger band support. We could see the NZD/USD bounce from this level after its recent decline, but any bullish momentum may be capped by the 20-Day SMA at 0.5149 which has served as staunch resistance. However, given the expectations of a lower interest rates a break below support leaves the pair susceptible to a drop to the August 2002 low of 0.4484.-JR
Source : DailyFx
New Zealand Dollar At Critical Support Level, More Losses Ahead?
Fundamental Outlook For New Zealand Dollar: Bearish
- New Zealand’s Annual Trade Deficit Unexpectedly Narrowed In January to NZ$5.48 billion on Lower Imports.A week of bearish fundamental data and a bout of risk aversion would end up leading the New Zealand dollar to break below the 0.500 price level. The RBNZ lowered its inflation forecast to 2.3% from 2. 5 as it expects growth and employment to deteriorate. The central bank lowered its GDP expectations for the year to 0.1% and predicts the unemployment rate will raise to 6%, the highest since June 2006. Reserve Bank of New Zealand Governor Alan Bollard said the economy would not escape unscathed in the current financial crisis, when addressing the 2009 Job Summit in Auckland. Bollard said, "The economy does have a number of imbalances that cannot go on forever and as a result, there are challenges ahead." He would further describe the global financial crisis as the "biggest destruction of global wealth the world has ever seen". Indeed, the banking troubles brought on by the crisis in the U.S. and Europe sent traders to the sidelines as fears grow that the frozen credit markets will lead to a deeper global recession.
- RBNZ Lowered 2-Year Inflation Forecast To 2.3% From 2.7% Due To Falling Energy Costs And Slowing Growth.
- NAB Business Confidence Fell From -35.0 To -41.2 in February, Which was The Second Worst On Record.
The central bank is expected to lower their official cash rate by 75 bps to 2.75% on March 11th and the lower interest rate expectations may continue to weigh on the “Kiwi”. The weak currency is actually welcomed by the RBNZ as Governor Bollard stated “the exchange rate is working for us”, “it is helping cushion the shocks, it’s helping make us more competitive.” The lower valuation as helped demand for the country’s exports including milk powder, meat and aluminum. The only fundamental economic release upcoming is the commodity price index which declined last month by 4.3%. The indicator isn’t market moving but another month of falling prices would add to the demand for New Zealand goods.
The New Zealand dollar nearly tested the 2/2 low of 0.4961 which is also being reinforced by Bollinger band support. We could see the NZD/USD bounce from this level after its recent decline, but any bullish momentum may be capped by the 20-Day SMA at 0.5149 which has served as staunch resistance. However, given the expectations of a lower interest rates a break below support leaves the pair susceptible to a drop to the August 2002 low of 0.4484.-JR
Source : DailyFx
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