Forex Weekly Trading Forecast - April 05, 2010

US Dollar Still has NFP Volatility to Exercise, Will the Fed Hike?

Fundamental Outlook for US Dollar: Bullish

- March NFPs turns the US onto a strong pace of growth, but the market’s immediate reaction is tempered by liquidity
- The Federal Reserve schedules an impromptu meeting to “review” the discount rate
- EURUSD finds its way back within congestion. Has the dollar’s bull trend come to an end?

A tentative bullish breakout for the US dollar has been summarily reversed. It is still too early to deem the currency’s pullback a true bear trend as there is a precedence of congestion built up over the past few months for the currency to push through; but the lost potential has certainly undermined the favorable trend that began back in early December. However, the benchmark currency may not be immediately resigned to another extended period of sideways price action. The top event risk of this past week (the non-farm payrolls report) has yet to fully play itself out with the speculative ranks cleared by the market holiday. What’s more, the there was a renewed bearing on investor sentiment this past week that has produced meaningful developments for various benchmarks. What’s more, there is enough scheduled event risk to cause significant problem – especially at the beginning of the week.

When the market’s open back up Monday morning, the first thing that traders will respond to is this past Friday’s employment report. While speculative FX interest was present for the release and the bond market was online, US equities were closed for the Good Friday holiday. What’s more, most of the European markets were also closed, meaning there was virtually no liquidity in the normally active crossover between the New York and London sessions. That being the case, the 162,000-person increase in payrolls (only the second positive number in 27 months and the biggest in three years) would be interpreted as a boost to the relative growth and interest outlook for the United States and thereby assist the dollar. However, this is a warped response to this data. Absent was the presence of the market’s more ‘simple’ asset classes. Had the equities, commodities and futures markets been open for this report, it could have encouraged a surge in risk appetite that relegated the greenback to its status as a safe haven (a weight when sentiment is on the rise). This may still be a viable scenario come Monday given Treasury Secretary Timothy Geithner’s remarks that this data pointed to a “self-sustaining” recovery and the NBER’s (the group responsible for defining the end of the recession) head Robert Hall stating it was a “pretty clear” sign that the recession was over.

If indeed, the risk appetite regains its footing next week, it would extend the progress of a few very notable developments this past week. With a general recovery in investor optimism, the Dow has marched on to 18-month highs, crude oil just recently broke to a 17-month high and the ever-sensitive carry trade has started to revive its bullish bearing. Yet, this employment report and the round of manufacturing data that bolstered expectations this past week do not exist in a vacuum. There are still credible threats to the market’s tranquility including Greece’s steady descent towards default, the UK’s upcoming election, sovereign credit ratings and stimulus withdrawal. Another concern brought up by the Chinese central bank is the threat of asset bubbles all over the world.

Should a swell in risk appetite be averted (or merely hold off for Monday), the dollar could actually make considerable headway on Monday. Just this past Friday, the Federal Reserve surprised the diluted market when it was announced an emergency meeting to review the discount lending rate was scheduled for April 6th. This heads up is likely an effort to take some of the shock out of a hike to this essential lending rate. And, though it would not represent the same thing as a tightening of the Fed Funds rate, a 25 basis point hike at the discount window would be a strong and definable step for the policy authority to towards the inevitable. - JK

Euro May Resume Decline After ECB Interest Rate Decision

Read more: DailyFX - Euro May Resume Decline After ECB Interest Rate Decision http://www.dailyfx.com/forex/fundamental/forecast/weekly/eur/2010-04-03-0106-Euro_May_Resume_Decline_After.html#ixzz0k8RDbTug

Fundamental Forecast for Euro: Bearish

- Euro Zone Economic Confidence Hits Two-Year High
- German Labor Market Unexpectedly Improved in March

The Euro may resume its four-month down trend after the European Central Bank delivers their monetary policy announcement as the Greek debt crisis returns to the forefront against a backdrop of a still lackluster interest rate outlook.


The markets were apparently unconvinced by the European Union’s IMF-assisted scheme to bail out Greece should the debt-ridden southern European economy fail to finance its gaping fiscal shortfall in the markets. Indeed, last week’s auction of 12-year Greek bonds raised just 390 million euro, falling short of the 1 billion on offer. Other signs of instability were plentiful: the spread on Greek credit default swaps rose while the spread between the yields on Greece’s benchmark 10-year bonds and those of Germany (considered the euro region’s safest) widened, both to the highest in over a month. The market seems intent to test the EU’s resolve by forcing it to actually go through with a bailout, making the Euro’s performance contingent on how quickly policymakers step in. The sloppy approach to the situation so far also bodes ill for the single currency. Indeed, if the Euro Zone can’t muster a response to troubles in a small member state like Greece – just 2.6 percent of the currency bloc’s economy – this surely invites unfavorable expectations about the kind of havoc that could be caused if a country like Spain (11.8% of EZ GDP) or even Italy (17% of EZ GDP) meet a similar fate.

Meanwhile, the inflation outlook remains lackluster despite last week’s unexpectedly large increase in flash consumer price estimates that hinted prices rose at an annual pace of 1.5 percent in March, the fastest in 15 months. Indeed, the reading remains comfortably below the ECB’s target 2 percent level with much of the recent increase owing to the rebound in oil prices filtering through into the headline figure, hinting that underlying core inflation is even more subdued. On balance, this means the ECB is likely in no rush to be raise interest rates, with the bank president Jean-Claude Trichet’s post-announcement press conference likely to stay firmly focused on Greece-related issues.

Japanese Yen Poised For Correction on Oversold Signals

Fundamental Forecast for Japanese Yen: Neutral

- Japan Retail Sales Expand the Most in Four Years
- Japanese Jobless Rate Holds Steady in February
- Tankan Survey Shows Firms Expect to Cut Spending for Third Year

The Japanese yen weakened across the board, with the USD/JPY advancing to a fresh yearly high of 94.68, but the low-yielding currency looks due for a corrective retracement as it remains oversold against its major counterparts. However, as risk trends continue to dictate price action in the currency market, a rise in risk appetite is likely to push the yen lower as it remains the most popular funding-currency, next to the greenback.
Meanwhile, a Bloomberg News survey shows all of the 21 economists polled forecast the Bank of Japan to hold the benchmark interest rate at 0.10% next Wednesday as policy makers aim to balance the risks for the economy, while market rumors emerged earlier this week that the board may drop its highly dovish outlook for future policy, given the rebound in global trade. Market participants expect the BoJ to raise its growth forecast in April as the recent developments encourage prospects for an export-led recovery, and the central bank may adopt a wait-and-see approach going into the second-half of the year as the rebound in economic activity gathers momentum. However, board member Hidetoshi Kamezaki said that the “central bank will implement policy proactively if necessary” and vowed to keep an “extremely accommodative” stance during a speech in the city of Kochi, but went onto say that “the economy is performing somewhat better than expected” even as he anticipates it to take some time for Japan to “return to a self-sustaining recovery path.”

Nevertheless, Japan’s leading index is anticipated to improve for the twelfth month in February, with economists forecasting the gauge to rise to 97.8 from, 96.7 in the previous month, which would be the highest reading since July 2007, while machine orders are projected to increase 3.7% in February following the 3.7% contraction in the month prior. Moreover, the trade surplus is expected to widen to JPY 762.8B during the same period from JPY 197.2B in January as trade conditions improve, and the data is likely to stoke an enhanced outlook for the region as the expansion in monetary and fiscal policy continues to feed through the real economy. - DS

British Pound Could See Gains Reversed by Dovish BoE

Fundamental Forecast for British Pound: Bearish

- Mortgage approvals fell to 47.1 from 48.1,lowest in nine months

- Manufacturing PMI Rose to 57.2 from 56.5, Highest in 15 Years

- Final 4Q GDP figures revised higher to 0.4% from 0.3%

The British Pound saw its week-long rally come to an end which could set the sterling up for a retrace in the upcoming week if the pair continues to remain its current medium-term range. Cable has seen support on the back of an improving fundamental picture as the expansion in the manufacturing sector reached the highest level in over 15 years. Additionally, the final GDP figures for the fourth quarter of 2009 were revised higher to 0.4% as the economy saw stronger growth than initial expected. However, not all data was warm and fuzzy as mortgage approvals slipped to a nine month low of 47,100. Tight lending standards have been a concern for the BoE which has led them to keep the door open for future quantitative easing.

The central bank put out its quarterly credit conditions survey which reported that the availability of credit for households was broadly unchanged. Mortgage availability is expected to remain broadly stable over the next period which will mostly likely lead to the central bank pausing their asset purchase program unless conditions deteriorate. The survey also showed that lending terms for smaller firms tightened further despite a rise in demand for credit from small and medium sized firms. Yet, a surprising fall in default rates for medium and large nonfinancial companies was encouraging. Overall the report didn’t bring anything to light that would dramatically alter policy maker’s views.

The economic calendar presents major event risks with the BoE rate decision and PMI services on tap. The MPC has lagged its counterparts in the Fed and ECB in bringing an end to their liquidity providing efforts. Expectations are that the central bank will keep its benchmark lending rate at 0.50% and continue to pause its asset purchase program at £200 billion. It is difficult to gauge the potential market reaction to such a move as their last pause was non-eventful as it was forecasted but the month prior sparked an extended bearish rally as many expected an official end to QE. The improving outlook for the economy could start to see similar hopes this time around and disappointment could bring about the same reaction. Conversely, closing the curtain on the asset purchase program would be a vote of confidence in the economy and could lead to an extension of the recent rally. Service, construction and housing equity withdrawal data also bear watching as they will give insights into the strength of the recovery. -JR

Source/Read more: DailyFX - British Pound Could See Gains Reversed by Dovish BoE http://www.dailyfx.com/forex/fundamental/forecast/weekly/gbp/2010-04-02-2136-British_Pound_Could_See_Gains.html#ixzz0k8RnOt58