US Dollar Recovery Depends on Nonfarm Payrolls, Dow Jones
By David Rodriguez, Quantitative Strategist ; Ilya Spivak, Currency Strategist ; John Kicklighter, Currency Strategist ; Michael Wright, Currency Analyst and Christopher VecchioFundamental Forecast for the US Dollar: Neutral- US Dollar stands to gain on turmoil in Libya, broader Middle East
- Top economic event risk virtually guarantees forex market volatility
- US Dollar Index threatens break of key technical trendline on stock market gains
The US Dollar finished the week lower against almost all G10 counterparts, continuing its multi-month downtrend ahead of a critical week of economic event risk. A fairly disappointing revision to Q4 GDP capped a week of mixed data, and all eyes now turn to the coming week’s critical US Nonfarm Payrolls report. The NFPs release needs little introduction as one of the most market-moving reports across global financial markets, and February’s result will be particularly significant given January’s sharply below-forecast jobs figure.A busy week of economic event risk will shape expectations and likely force sharp short-term moves ahead of the NFP release, and it will be critical to monitor financial market moves as the US Dollar nears significant lows against major counterparts. Consensus forecasts currently call for a respectable 190k jobs gain through the month of February—consistent with expectations of substantial improvements on January’s clear disappointment. We will watch earlier-week ISM Manufacturing, ADP Employment Change, Initial Jobless Claims, and ISM Services results to gauge the likelihood that February payrolls meet lofty forecasts. Uncertainty surrounding the future of US Federal Reserve monetary policy puts all eyes on whether a broader economic recovery will be enough to produce similar improvements in the domestic labor market.The US Federal Reserve shows little urgency in withdrawing extraordinary monetary policy stimulus amidst generally weak inflation and lackluster jobs growth. Controversial Quantitative Easing measures have been a major driving force behind US Dollar weakness, and it could arguably take a substantial shift in the Fed’s stance and rhetoric to force a sustained Greenback recovery. In the absence of such a change, the US Dollar may need a broader shift in financial markets to drive a major reversal.The S&P 500 saw a sharp pullback on a broader flight to safety on geopolitical turmoil in the Middle East, and the USD rallied as one of the world’s foremost safe-haven currencies. Yet a later bounce in stock markets suggests bulls have yet to give up the fight, and we may need to see a more sustained shift to make any serious argument for a market top (and US Dollar bottom). CFTC Commitment of Traders data shows that Non-Commercial traders (typically large speculators) remain heavily net-short the US currency on a steady downtrend. And though such one-sided sentiment typically occurs near major market turns, sentiment extremes are only clear in hindsight and extremely difficult to time.Trend traders will likely favor continued US Dollar weakness into the week ahead, and it is difficult to make the case for a substantive turnaround absent a material improvement in USD sentiment. FX Options market risk reversals likewise suggest that many traders have continued to bet on and hedge against Greenback weakness. It would likely take a material improvement in US economic data or a similarly large turn lower in ‘risk’ to force a substantive USD bounce. Given that the first week of the month quite often sets the pace for subsequent trading, we will pay special attention to whether the US currency shows any real signs of recovery through March.
Euro Immunity to Risk Trends May Fade as ECB Decision Approaches
By John Kicklighter, Currency Strategist
Fundamental Forecast for Euro: Neutral- Euro-regions financial future still unclear as Germany forms a hard line against further supportThe euro is in an exceptionally interesting situation. Over the coming month, we are jumping from one major fundamental event to another week after week. And, these particular affairs are far more influential than just a mere economic indicator – they play to the very core of the currency’s fundamental appeal. Over the past few months, the euro has marked a notable departure from the financial concerns that plagued the region’s outlook on and off since the Greek bailout catalyzed fears that the monetary union itself was at risk. Yet, just in the past week, we have actually seen the neutral shift turn bullish with interest rate expectations leveraging the potential for capital and yield returns from this shared currency to a level that is well beyond many of its peers.Heading into the new trading week, we know that the preoccupation with rate expectations is so extensive that it has overridden a tentative but meaningful risk aversion move. With the market pricing in 95 basis points (bps) of hikes over the coming 12 months, the bar has been set high. This projection is at a considerable premium to even the Bank of England forecast which is colored by inflation that is currently at 4.0 percent. With that in mind, there will be greater interest in Thursday’s ECB rate decision than we have growth accustomed to considering the policy authority has held its hand on changing rates for nearly two years now. There seems little doubt that the central bank will hold rates steady for yet another meeting; but all of the recent hawkish speculation will require some level of confirmation to maintain the currency’s bullish bearings. A boost to growth or inflation expectations, rhetoric that suggests a withdrawal of atypical stimulus measures or even a subtle change in key terminology could reaffirm bulls’ convictions. On the other hand, a failure to support the speculative crowd could pull the rug out from under the euro.Supporting interest rate expectations is particularly important for the euro’s performance; because without the promise of higher returns down the line, the market will once again have to price in the uncertainties related to the region’s financial troubles. Fear of another financial crisis overtaking another EU member has cooled considerably these past weeks thanks largely to officials’ open-ended vows to expand their support of the region’s laggards. However, this merely bought policymakers time. Eventually, they will have to deliver on this promise of stability. With the summit that is supposed to hold the vote on proposals like increasing the size of the bailout program, lowering the rate charged to those that need to tap the emergency funds and allowing bond buyback only a few weeks beyond the ECB rate decision; we could be making a sharp transition from the reward side of the trading equation to the risk side. And, with the German parliament looking to vote on a hard line to prevent further concessions to the bailout regime a week before the EU summit; the picture isn’t as rosy as the markets seem to be accounting for.Considering the main fundamental catalyst for the coming week is due Thursday; we have downtime before the next big decision is made. In the meantime, the market will have enough fodder on hand to stir volatility and perhaps offer final adjustment to rate forecasts. The German unemployment change figures will steer the economic side of policy expectations. More pertinent though will be the Euro-Zone CPI estimate due Tuesday. Forecasts for an unchanged 2.4 percent annual clip of growth will keep the hawkish outlook in place without further accelerating rate watchers’ time frames. Alternatively, a meaningful deviation could pitch the euro into a meaningful drive. - JKJapanese Yen: Directional Outlook Clouded, Volatility Likely
By Ilya Spivak, Currency Strategist
Fundamental Forecast for Japanese Yen: Neutral- Japanese Yen Soars as Crude Oil Surge Cripples Risk Appetite
- Trade Balance Unexpectedly Falls into Deficit as Exports Flounder
- USDJPY: Prices Threaten Major Trend Line Support Level
The Japanese Yen outperformed last week, rising against all of its major counterparts on the coattails of a sharp drop in risk appetite amid fears that turmoil in the Middle East will push up oil prices such as to derail the global recovery. Interestingly, short-term correlation studies suggest the transmission of risk trends into the exchange rate seems to have followed a different channel usual.Typically, the Yen rises at times of stress as risk aversion spurs an unwinding of carry trades funded cheaply in the perennially low-yielding currency. This time around however, the story had more to do with US Treasury yields: rising jitters sent capital out of stocks (as well as other risk-geared assets) and into the safety of – among several favorite havens – US government debt. This drove up bond prices, sending yields sharply lower. A firm inverse correlation between a trade-weighted index of the Yen’s average value and the long end of the US yield curve meant that it also translated into an impressive for the Japanese unit.With this in mind, the coming week promises to be anything but quiet. While worries about the oil price may have calmed a bit after Saudi Arabia pledged to boost production to offset any Libyan-linked shortages, a packed docket of scheduled event risk promises to keep sentiment trends in flux. The US economic calendar alone is reason enough to expect dramatic price movement, with the ISM Manufacturing Survey, the Fed’s Beige Book and the all-important Nonfarm Payrolls report along with a hefty dollop of second-tier releases all due to cross the wires. A long list of Federal Reserve speakers – headlined by Chairman Bernanke’s semiannual congressional testimony – as well as with the possibility of renewed sovereign jitters in the Euro Zone as Portugal rolls over a tranche of debt while Spain and Belgium tap the markets threaten to compound. Taken together, this makes for a complicated landscape, with the likelihood of volatility seemingly the only firm conclusion to be made about the Yen’s trajectory of the next five days.British Pound to Face Headwinds as Interest Rate Expectations Falter
By Michael Wright, Currency Analyst
Fundamental Forecast for British Pound: BearishThe British pound lost ground against the greenback this past week, falling some 1.08 percent amid uncertainty surrounding the region’s economic outlook, while risk aversion regains its footing due to tensions in the Middle East and debt concerns in Europe. Indeed, next week’s calendar in the U.K. will be fairly muted with regards to event risks; however, as technical indicators begin to paint a bearish picture, currency traders should not rule out additional looses in the pound.The GBPUSD witnessed whipsaw price action over the past 5 days as fundamental developments failed to provide market participants with a clear bearing towards the chance of a rate hike by the Bank of England in the near term. As of late, consumer prices remain stubbornly above the central bank’s target and are expected to push higher due to the increase in value added taxes. Moreover, BoE Governor Mervyn King warned that inflation could push somewhere in the area between 4 and 5 percent over the next few months. As a result, the Bank of England Minutes showed that Spencer Dale joined Andrew Sentance and Martin Weale in pushing for a rate hike. Outside of price concerns, recent developments in the U.K. heave lead traders to discount an increase in borrowing costs in the near term. Fourth quarter economic activity posted a 0.6 percent contraction amid expectations of a 0.5 percent decline, while total business investment slumped 2.5 percent in the same period. Also worrying this past week was the fact that CBI reported sales posted its lowest reading since June 2010.Next week, GBP traders will be faced with Nationwide house prices, PMI manufacturing, and the M4 money supply. As economic outlook already comes into question, dismal releases will not only send the pound lower against most of its counterparts, but may also lead the central bank to take a wait and see approach before tightening monetary policy. Taking a look at price action, the GBPUSD recently broke below its rising daily trend line, while the parabolic SAR flipped to the downside, signaling for additional losses. At the same time, the MACD has yet to reverse course after crossing over to the downside earlier this month. All in all, downside risks towards the 1.59 area. –MWSource : www.dailyfx.com
Euro Immunity to Risk Trends May Fade as ECB Decision Approaches
By John Kicklighter, Currency StrategistFundamental Forecast for Euro: Neutral
- Euro-regions financial future still unclear as Germany forms a hard line against further support
The euro is in an exceptionally interesting situation. Over the coming month, we are jumping from one major fundamental event to another week after week. And, these particular affairs are far more influential than just a mere economic indicator – they play to the very core of the currency’s fundamental appeal. Over the past few months, the euro has marked a notable departure from the financial concerns that plagued the region’s outlook on and off since the Greek bailout catalyzed fears that the monetary union itself was at risk. Yet, just in the past week, we have actually seen the neutral shift turn bullish with interest rate expectations leveraging the potential for capital and yield returns from this shared currency to a level that is well beyond many of its peers.
Heading into the new trading week, we know that the preoccupation with rate expectations is so extensive that it has overridden a tentative but meaningful risk aversion move. With the market pricing in 95 basis points (bps) of hikes over the coming 12 months, the bar has been set high. This projection is at a considerable premium to even the Bank of England forecast which is colored by inflation that is currently at 4.0 percent. With that in mind, there will be greater interest in Thursday’s ECB rate decision than we have growth accustomed to considering the policy authority has held its hand on changing rates for nearly two years now. There seems little doubt that the central bank will hold rates steady for yet another meeting; but all of the recent hawkish speculation will require some level of confirmation to maintain the currency’s bullish bearings. A boost to growth or inflation expectations, rhetoric that suggests a withdrawal of atypical stimulus measures or even a subtle change in key terminology could reaffirm bulls’ convictions. On the other hand, a failure to support the speculative crowd could pull the rug out from under the euro.
Supporting interest rate expectations is particularly important for the euro’s performance; because without the promise of higher returns down the line, the market will once again have to price in the uncertainties related to the region’s financial troubles. Fear of another financial crisis overtaking another EU member has cooled considerably these past weeks thanks largely to officials’ open-ended vows to expand their support of the region’s laggards. However, this merely bought policymakers time. Eventually, they will have to deliver on this promise of stability. With the summit that is supposed to hold the vote on proposals like increasing the size of the bailout program, lowering the rate charged to those that need to tap the emergency funds and allowing bond buyback only a few weeks beyond the ECB rate decision; we could be making a sharp transition from the reward side of the trading equation to the risk side. And, with the German parliament looking to vote on a hard line to prevent further concessions to the bailout regime a week before the EU summit; the picture isn’t as rosy as the markets seem to be accounting for.
Considering the main fundamental catalyst for the coming week is due Thursday; we have downtime before the next big decision is made. In the meantime, the market will have enough fodder on hand to stir volatility and perhaps offer final adjustment to rate forecasts. The German unemployment change figures will steer the economic side of policy expectations. More pertinent though will be the Euro-Zone CPI estimate due Tuesday. Forecasts for an unchanged 2.4 percent annual clip of growth will keep the hawkish outlook in place without further accelerating rate watchers’ time frames. Alternatively, a meaningful deviation could pitch the euro into a meaningful drive. - JK
Japanese Yen: Directional Outlook Clouded, Volatility Likely
By Ilya Spivak, Currency StrategistFundamental Forecast for Japanese Yen: Neutral
- Japanese Yen Soars as Crude Oil Surge Cripples Risk Appetite
- Trade Balance Unexpectedly Falls into Deficit as Exports Flounder
- USDJPY: Prices Threaten Major Trend Line Support Level
The Japanese Yen outperformed last week, rising against all of its major counterparts on the coattails of a sharp drop in risk appetite amid fears that turmoil in the Middle East will push up oil prices such as to derail the global recovery. Interestingly, short-term correlation studies suggest the transmission of risk trends into the exchange rate seems to have followed a different channel usual.
Typically, the Yen rises at times of stress as risk aversion spurs an unwinding of carry trades funded cheaply in the perennially low-yielding currency. This time around however, the story had more to do with US Treasury yields: rising jitters sent capital out of stocks (as well as other risk-geared assets) and into the safety of – among several favorite havens – US government debt. This drove up bond prices, sending yields sharply lower. A firm inverse correlation between a trade-weighted index of the Yen’s average value and the long end of the US yield curve meant that it also translated into an impressive for the Japanese unit.
With this in mind, the coming week promises to be anything but quiet. While worries about the oil price may have calmed a bit after Saudi Arabia pledged to boost production to offset any Libyan-linked shortages, a packed docket of scheduled event risk promises to keep sentiment trends in flux. The US economic calendar alone is reason enough to expect dramatic price movement, with the ISM Manufacturing Survey, the Fed’s Beige Book and the all-important Nonfarm Payrolls report along with a hefty dollop of second-tier releases all due to cross the wires. A long list of Federal Reserve speakers – headlined by Chairman Bernanke’s semiannual congressional testimony – as well as with the possibility of renewed sovereign jitters in the Euro Zone as Portugal rolls over a tranche of debt while Spain and Belgium tap the markets threaten to compound. Taken together, this makes for a complicated landscape, with the likelihood of volatility seemingly the only firm conclusion to be made about the Yen’s trajectory of the next five days.
British Pound to Face Headwinds as Interest Rate Expectations Falter
By Michael Wright, Currency AnalystFundamental Forecast for British Pound: Bearish
The British pound lost ground against the greenback this past week, falling some 1.08 percent amid uncertainty surrounding the region’s economic outlook, while risk aversion regains its footing due to tensions in the Middle East and debt concerns in Europe. Indeed, next week’s calendar in the U.K. will be fairly muted with regards to event risks; however, as technical indicators begin to paint a bearish picture, currency traders should not rule out additional looses in the pound.
The GBPUSD witnessed whipsaw price action over the past 5 days as fundamental developments failed to provide market participants with a clear bearing towards the chance of a rate hike by the Bank of England in the near term. As of late, consumer prices remain stubbornly above the central bank’s target and are expected to push higher due to the increase in value added taxes. Moreover, BoE Governor Mervyn King warned that inflation could push somewhere in the area between 4 and 5 percent over the next few months. As a result, the Bank of England Minutes showed that Spencer Dale joined Andrew Sentance and Martin Weale in pushing for a rate hike. Outside of price concerns, recent developments in the U.K. heave lead traders to discount an increase in borrowing costs in the near term. Fourth quarter economic activity posted a 0.6 percent contraction amid expectations of a 0.5 percent decline, while total business investment slumped 2.5 percent in the same period. Also worrying this past week was the fact that CBI reported sales posted its lowest reading since June 2010.
Next week, GBP traders will be faced with Nationwide house prices, PMI manufacturing, and the M4 money supply. As economic outlook already comes into question, dismal releases will not only send the pound lower against most of its counterparts, but may also lead the central bank to take a wait and see approach before tightening monetary policy. Taking a look at price action, the GBPUSD recently broke below its rising daily trend line, while the parabolic SAR flipped to the downside, signaling for additional losses. At the same time, the MACD has yet to reverse course after crossing over to the downside earlier this month. All in all, downside risks towards the 1.59 area. –MW
Source : www.dailyfx.com
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