Forex Weekly Trading Forecast - 04.26.10

US Dollar’s Advance Threatened by Greek Bailout Relief

Fundamental Outlook for US Dollar: Bullish

- Dollar enjoys safe haven status, loses interest rate potential
- Has the dollar’s late-week correction altered the bullish revival?

Dollar bulls seem to enjoy a bit of schadenfreude. While the financial markets are under strain and the risk of a full blown crisis is at its peak, the benchmark currency shines for its safe haven properties. Without this background preoccupation, the greenback seems relatively lackluster compared to its primary counterparts. With a benchmark lending rate just above zero, a growth forecast that calls for a significant cooling of pace in the second half of this year, an overwhelming debt load and the nagging concern that the world may one day trade out their dollars for some other reserve currency; the currency will struggle to compete on an even playing field. However, markets are dynamic and speculative interest is an indelible component of its normal functioning. For this reason, the basic assumptions of relative growth and yield are only impressive or disappointing so far as investors are excessively greedy or risk adverse. Considering the fundamental waves that are seen over the coming week, this particular angle promises to define the dollar’s next move.

At the very forefront of the fundamental trader’s mind is what will happen over the weekend. Concerns over Greece contributed to the greenbacks’ gains last week and it also set the benchmark to its sharp correction. Therefore, it is reasonable to believe the same source of activity will maintain its continue to define volatility – at least through the near-term future. This event is at the brink of another critical stage. No longer is there doubt that the nation is in trouble. Now, they are holding out their hats and asking for assistance. What does this mean to the dollar trader? If confidence or the EU fails Greece, this country will very likely default, exit the monetary union or find some other unique and painful solution. This will almost certainly hurt the euro in the eyes of investors; which will send capital fleeing to its primary counterpart (the US dollar). Wading deeper into this scenario, if Greece falters; it would likely send credit and financial market ripples across the world. Considering the current, over-extended level of most growth-related assets, such a catalyst could have dramatic consequences. That being the case, the traditional harbor for rough seas – the greenback – will open to all.

Another interesting event over the off-market days is the summit in Washington DC. The G-7, G-20, IMF and World Bank are scheduled to meet and discuss the economy, financial health and the conversation is likely to shift to Greece at one point or another. Given the highly dynamic nature of the markets at this point, it would not be unusual to see a promise relating to international policy. However, domestically, dollar traders will be looking for confirmation to speculation that the Federal Reserve is planning on selling off the assets on its bloated balance sheet. Such a move would be a big step in the hawkish direction and pass another milestone to the inevitable rate hike.

And, to round the risky week out, we have a round of major scheduled event risk. The FOMC rate decision won’t offer any changed to the Fed Funds rate; but we will be kept busy watching the discount rate, possible changes to non-standard policy and closely interpreting the language of the statement for timing cues. Offering far better opportunity for clear price action is the advanced reading of the 1Q GDP figure. Due Friday, this reading is actually expected to downgrade the economy’s robust pace of recovery as the stimulus fuel runs thin and the market starts to take over. Though expected, such a downshift could significantly cool interest rate speculation. - JK

Euro Outlook Depends on Greece Bailout, Euro Zone Stability

- Euro surprisingly resilient despite heightened risk surrounding Greece
- Formal Greece request for IMF/EMU bailout nonetheless forces declines
- Inaccurate accounting only heightens stress on Greek bonds

The Euro fell to fresh 11-month lows against the US Dollar on continued fiscal crises in Greece and implications for the broader Euro Zone, but a late-week bounce left it scarcely changed against the US currency. Greece shook European markets as it formally requested the financial aid package offered by other Euro Zone members and the International Monetary Fund, temporarily pushing the Euro significantly lower against major counterparts.

Exorbitant market yields on Greek sovereign debt made it plainly clear that bond investors had little interest in extending further credit. Indeed, the spread between the Greek 10-year treasury yield and the benchmark German equivalent continued to set fresh record-highs in the days leading up to the announcement. The European Monetary Union and IMF’s next moves will take on great significance as the single currency zone suffers its worst crisis since its inception. Euro traders will undoubtedly react to any and all developments surrounding the sovereign debt crisis, and any further uncertainty could push the downtrodden EUR to fresh depths against the US Dollar.

The most important questions surrounding Greece are simple. First, will the EMU and IMF comply with Greece’s requests and provide financial aid in a timely matter? The second: will the proposed package be enough to solve Greece’s fiscal crisis? The third and perhaps the most significant: will the Greek fiscal crisis spread contagion to other at-risk EMU members such as Spain and Portugal? Greece comprises a fairly small percentage of Euro Zone GDP, but its influence on the Euro has been substantial. We would argue that this is due to fears that fiscal issues could spread beyond its borders and harm EMU stability. The currency union has thus far held strong with one of its members at legitimate risk of default and in need of financial assistance. One has to wonder whether a second country would prove too much to handle and cause legitimate fears of EMU instability. All these questions will likely need to be answered before the Euro can sustainably recover against major world counterparts.

Fundamental news events will likely take a back seat to Greece-related issues in the week ahead, but it may be nonetheless important to watch price action surrounding several key data releases. Significant surprises in the German Unemployment Change report may particularly force sharp short-term moves in the EURUSD, while broader Euro Zone Unemployment data has a modest chance of moving markets. Nothing stands out as far as consensus forecasts are concerned, and it is difficult to handicap markets’ reaction to said data releases. It nonetheless remains more important to monitor any and all developments with Greece, the IMF, and the broader EMU. - DR

Japanese Yen to Rise as Earnings, Greece Weigh on Risky Assets

Fundamental Forecast for Japanese Yen: Bullish

- Japanese Trade Surplus Widens on Exports but Outlook Vulnerable

- Speculative Sentiment Points to Clouded Japanese Yen Outlook

The Japanese Yen is likely to continue tracking stock performance, looking past scheduled event risk despite a busy economic calendar in the week ahead. This puts the onus on another set of earnings releases as well as the continued evolution of the Greek debt fiasco.

The Yen remains acutely sensitive to risk appetite, with the short-term percent-change correlation between the Japanese unit’s average value and the VIX Index – a measure of stock volatility and investors’ go-to “fear” gauge – now reading at a hefty 0.92. Further, the inverse percent-chance correlation between the Yen and the MSCI World Stock Index has advanced to -0.60, the highest in a month. This hints the currency is likely to continue tracking the ups and downs on global equity exchanges.

On balance, the outlook seems to favor risk aversion, and thereby promises gains for the Japanese currency. So far, the first-quarter round of earnings announcements has looked robust on profits but conspicuously less so on sales and revenues. This bodes ill for risk sentiment, hinting that firms will find it hard to sustain generate growth as cost-cutting reaches its natural limit while governments and central banks increasingly pull back stimulus.

Meanwhile, the situation in Greece is heading toward a finale after the government in Athens announced early Friday that it will seek to activate the 45 billion euro EU/IMF aid package promised earlier this month. Markets will watch closely to size up the conditions that policymakers will demand of the southern European nation, but generally speaking, the implications of a bailout seem negative in and of themselves. Indeed, the action sets a precedent for what markets will expect in the event of a sovereign flare-up in larger EU member states like Spain or even Italy (11% and 17% of EZ GDP respectively, as compared to just 2.6% for Greece). This means large debt accumulation in rich EU members (especially Germany), compounding the region’s already-precarious fiscal position and threatening to weigh down economic growth as debt issuance boosts borrowing costs, crowding out private demand.- IS

Source/Read more: DailyFX - Japanese Yen to Rise as Earnings, Greece Weigh on Risky Assets http://www.dailyfx.com/forex/fundamental/forecast/weekly/jpy/2010-04-23-2048-Japanese_Yen_to_Rise_as.html#ixzz0m8ByQ7gk