US Dollar Set for Further Gains Against Euro, Australian Dollar
Fundamental Outlook for US Dollar: Bullish
- US Dollar forecast bullish on FX Options market sentiment
- Greenback rallies sharply as financial markets set into panic
The US Dollar finished the week sharply higher against all major counterparts except the Japanese Yen, rallying on similarly dramatic declines in the US S&P 500 and other key financial risk barometers. Forex traders were especially aggressive in pushing the Greenback to fresh 14-month highs against the downtrodden Euro. Continued Euro Zone fiscal crises led to incredible single currency losses against the safe haven US Dollar and similarly risk-friendly Japanese Yen. Noteworthy surprises in US economic data likewise supported the case for Greenback strength, and short-term momentum plainly remains in the US Dollar’s favor.
Limited US economic event risk suggests that financial market risk dynamics will continue to dominate US Dollar trading, and downward momentum in the S&P 500 and other key asset classes support the case for USD strength. Noteworthy fundamental data releases will be limited to US Trade Balance, Advance Retail Sales, and University of Michigan Consumer Confidence reports. The first rarely forces substantive reactions out of US Dollar pairs, and it will arguably be more significant to watch for surprises in Advance Retail Sales and U Michigan numbers.
Recent US Nonfarm Payrolls data showed that employers added a net 290k jobs in the month of April. Combined with strong upward revisions to previously-released numbers, NFP results helped build the case for a sustainable recovery in hiring and relief for the US consumer. Whether that will translate into increased expenditures remains to be seen, however; consumer spending accounts for approximately 70 percent of US Gross Domestic Product and a recovery is critical for economic growth. We will subsequently watch upcoming Consumer Confidence and Advance Retail Sales data with special interest.
US Dollar traders should otherwise keep a close eye on any and all developments out of the Euro Zone and recently-skittish financial markets. The Dow Jones Industrials Average lost nearly 1000 points through Thursday afternoon and finished the week sharply lower despite a noteworthy bounce. Market news sources blame the almost-inexplicably violent decline on a broad array of potential culprits—ranging from rioters in Greece to a mysterious botched order to sell S&P futures contracts. Whatever the root cause, we saw exactly how skittish markets can become at the first sign of trouble. If we see any similar flare-ups in the week ahead, the US Dollar could almost certainly set new highs against most except the Japanese Yen. - DR
Euro Future Bleak Regardless of ECB or EU Bailout Efforts
Fundamental Forecast for Euro: Bearish
- A market panic reveals the contagiousness of Euro-area financial troubles
- The ECB holds interest rates, rebuffs speculation that it will begin purchasing bonds
- EURUSD cannot extend a bear trend without at least a temporary correction
- The ECB holds interest rates, rebuffs speculation that it will begin purchasing bonds
- EURUSD cannot extend a bear trend without at least a temporary correction
While an objective view of the situation in Europe leaves us with the assessment that conditions cannot be easily fixed, speculative interests are highly sensitive to effort – especially when the currency can be considered temporarily oversold. The past weeks settlement left EURUSD at its lowest holding in 14 months. What’s more, the burst of activity that led the market to its current floor was extraordinarily volatile. Such a setup leaves the euro prone to a quick recovery on even a questionable perk (general risk trends willing). The outcome of this weekend’s meetings could offer just such a boost. After the Friday meeting of leaders from those 16 countries that share the euro, there was an enigmatic promise to both protect the currency and help stall the spread of credit concerns across the region. After a follow meeting with the full regalia of the European Union, specific steps will be announced. But what can they commit to? Those with the check books know that a promise to provide funds will likely be called to task; and an ongoing bailout of the European community is much larger than the collective members can afford. Stretching themselves to a plan to safeguard the entire region would be considered preposterous. On the other hand, a redoubled focus on Greece could prevent one of the certain catalysts to a crisis from igniting (for how long is another question). Alternatively, if the approach taken is considered another wait-and-see effort mixed with a little cheerleading, it will only be a matter of time before market uncertainty naturally spreads and infects other members.
With such an intense focus on the financial stability of European economies, there may seem little need of economic data. However, the foundations of economic activity and interest rate forecasts are essential to both the near and long-term outlook for the currency. Should data deteriorate, confidence in the stability of the financial and monetary union will weaken far more quickly. What’s more, without a robust economic backdrop, a financial panic can turn into a general crisis. This is the pressure that saddles this week’s GDP numbers. With China, the United States and United Kingdom having already released their growth figures; it is now the European group’s turn. Spain has already reported its own recovery from a two-year recession with a meager 0.1 percent expansion through the first three months of the year. Over the coming days, Portugal, Italy, France and Germany are all expected to report growth through the same period. Should there be any wavering in growth before the impact of the recent market fear set in, confidence that stimulus can offer a meaningful boost will all but disappear. - JK
Japanese Yen Strength Could Renew Speculation For BoJ Intervention
Fundamental Forecast for Japanese Yen: Neutral
- Dollar and Japanese Rally as Market Panic Forces Carry Unwind, Safe Haven Flight
- G-7 Holds Conference Call, Finance Minister Naoto Kan Talks Down Speculation For Intervention
The Japanese Yen appreciated more than 5% against its major counterparts following the panic in the financial markets, while the USD/JPY tumbled to a low of 88.21 on Thursday to mark the biggest decline since October 2008. As a result, the low-yielding currency may continue to strengthen over the near-term as investors scale back their appetite for risk, but the corrective retracement in the Japanese Yen cross rates may carry into the following week as the relative strength index bounces back across the board.
Meanwhile, the Bank of Japan is scheduled to release its April meeting minutes on Monday, and the central bank is likely to maintain a cautious outlook for the region as the appreciation in the exchange rate continues to weigh on the prospects for future growth. BoJ Governor Masaaki Shirakawa said that deflation remains a “critical challenge” after holding the benchmark interest rate at 0.10% last month, but went onto say that export-led recovery remains intact, driven by the “high growth in emerging economies.” At the same time, the central bank head said policy makers should explore additional ways to encourage lending “with a view to strengthening the foundations for economic growth,” and went onto say that the BoJ “hopes to give a boost to such efforts with new policy measures.” As a result, market participants see scope for the governing board to expand policy further over the coming months as the government struggles to balance the risks for the economy, but Mr. Shirakawa warned that “downward pressures on the economy might arise through adverse effects on financial markets” as the government implements “large-scale fiscal policies.”
As the BoJ is widely expected to maintain a loose policy stance throughout the second-half of the year, the Japanese Yen is likely to retain its strong correlation with risk trends as it remains the most popular funding-currency amongst the majors. Nevertheless, a rise in risk aversion should drive the low-yielding currency higher over the following week, and the USD/JPY may continue to retrace the advance from the 2009 low (84.82) as market participants unwind their high risk/reward investments. However, the central bank may look to intervene in the curre
British Pound Vulnerable If BoE Remains Directionless
Fundamental Forecast for British Pound: Neutral
The British Pound may remain under pressure if the BoE continues to sit on the sidelines following a political election that produced a hung parliament. Concerns are that the lack of a majority from any political party will prevent measures from getting passed in order to help cut the budget deficit. Therefore, we could see markets look to the central bank to take a leadership position regarding future monetary and fiscal policy. However, the MPC will most likely leave their benchmark rate unchanged at 0.50% and continue to keep their asset purchase program on hold with a new formed government and the prevailing issues in Europe. The potential for the sovereign credit troubles in the Euro-Zone spreading to the U.K. makes a case for additional quantitative easing from the central bank. However, factory gate prices jumping 1.4% in April weakens policy maker’s case that inflation will return to target levels.
Consumer prices are already above the central bank’s 3.4% threshold and may continue to accelerate if producers continue to try and pass through rising costs. Slight improvements in manufacturing -the highest level since 1994, construction and mortgage approvals showed that the U.K. recovery is sustaining. However, the mild improvements and an unexpected decline in the service sector PMI reading to 55.3 from 56.5 could be a sign that growth has started to slow. A non-eventful BoE rate decision would shift focus to the MPC’s quarterly inflation report, as it may provide the first statements from Governor King since the date for elections was set, as the central bank doesn’t customarily release a statement if no action is taken at their policy meeting.
Sterling was sunk during the past week as the troubles in Greece combined with the concerns over the hung parliament saw it lose nearly 800 pips against the dollar. The GBP/USD has retraced over 300 pips from its low of 1.4474 putting the pair back within its prior broader range of 1.4800-1.5500. If the pattern holds true then more upside potential could be realized with 1.5000 and the 50-Day SMA at 1.5179 as possible resistance levels. The upcoming economic calendar will be full of event risk for the Pound as industrial production, employment and trade balance releases are scheduled in addition to the rate decision and quarterly inflation report. Strong employment and production figures could raise the outlook for inflation ahead of the BoE’s report and generate sterling support. - JR
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