Fundamental Outlook for US Dollar: Bullish
- Conference Board consumer confidence surprisingly surged to a 3-month high in August
- Despite revisions, the University of Michigan’s consumer confidence index fell slightly
- US durable goods orders jumped by the most in 2 years, but excluding autos, gains were muted
The US dollar ended the past week on a mixed note across the majors, losing against the New Zealand dollar, Australian dollar, and Japanese yen, but rising versus the Swiss franc, euro, Canadian dollar, and British pound. Ultimately, this amounted to little more than a continued period of consolidation, as the US dollar index remains above a rising trendline connecting the July 2008 and August 2009 lows. Nevertheless, trading conditions have been extremely difficult, even for those that thrive on range trading, as the low volumes so often associated with the “summer doldrums” create highly choppy price action, and this may remain the case throughout next week ahead of the US Labor Day holiday.
There are a number of indicators due out over the next week that could trigger breakouts for the US dollar. On Tuesday, the ISM manufacturing index is projected to rise above 50 – the point of neutrality – for the first time since January 2008, which would suggest that the sector is finally experiencing a legitimate recovery in business activity. Indeed, the US government’s “cash for clunkers” program has been a boon for the auto industry and for manufacturers in general, but since the program formally ended on August 24, there could be a noticeable drop in output in coming months. Regardless, a strong ISM manufacturing reading would bode well for the US dollar.
The main event risk for the US dollar on Wednesday will be the release of the minutes from the Federal Reserve’s last meeting on August 12. Following that meeting, the policy statement eventually led to a quick return to risk-taking that pushed the greenback lower, as the Federal Open Market Committee (FOMC) said that the current "policy actions…will contribute to a gradual resumption of sustainable economic growth" and that they had decided to gradually slow the pace of Treasury securities purchases. A reiteration of these statements has the potential to lift risk appetite further, but on the other hand, indications that FOMC members are feeling uneasy about the outlook for growth or the need to expand quantitative easing down the road could do quite the opposite.
On Thursday, ISM non-manufacturing is anticipated to rise to an 11-month high of 48.0 for the month of August from 46.4. While stronger readings are always a positive, anything below 50 will continue to signal a further contraction in activity and will ultimately highlight the lack of consumer spending growth in the US.
On Friday, the US non-farm payroll (NFP) report is forecasted to show job losses for the twentieth straight month in August, though the rate of decline is anticipated to slow further. Bloomberg News is currently calling for NFPs to decline by 227,000, which would be the smallest drop in a year. Meanwhile, the unemployment rate is projected to edge up to 9.5 percent from 9.4 percent, but ultimately, the NFP result will be the event to watch as it is extremely volatile and is one of the sole reports that impacts the US dollar from a pure fundamental point of view.
Euro Forecast Dims on S&P 500 September Effect
Fundamental Forecast for Euro: Neutral
- Euro fails to hold gains despite fourth straight German IFO improvement
- German Consumer Price Index report boosts fears of deflation
- Consumer confidence data nonetheless boosts fundamental forecasts
The Euro saw yet another week of incredibly choppy trade, finishing the week almost exactly unchanged despite surging near year-to-date highs against the US Dollar. The last week of summer trading produced brief moments of sharp price moves and uneventful price action at moments in between. Relatively wide bid/ask spreads on major currency pairs underlined that market conditions remained illiquid—making short-term currency forecasts all but impossible. We expect that market conditions will improve through the first week of September trading, and it will be important to watch whether the Euro and US Dollar embark on new trends to start the trading year.
The vaunted “September effect” typically stipulates that stock markets typically fare worst through September, and a fall in risky assets would likely benefit the safe-haven US Dollar. In the past 10 years, the US S&P 500 has lost an average of approximately 30 points through September—by far its worst tally in any month of the year. Past performance is hardly a guarantee of future results, but it will nonetheless be important to watch for a turnaround in recently high-flying risky asset classes. The very fact that the S&P 500 has set fresh year-to-date highs through end of week trade underlines the risks of noteworthy pullback, and this may be one of the most important FX market themes in the week ahead. A busy week of European economic event risk likewise promises eventful price action through the coming days.
The combination of European and US employment figures could finally provide clear impetus for sustained Euro/US Dollar moves. German and EU officials report on regional unemployment on Tuesday the 1st of September—setting the tone for the subsequent month of fundamental data. Both are expected to show continued deterioration in unemployment rates and underline downside risks to economic growth. Subsequent Euro Zone Gross Domestic Product revisions are expected to show a modest downgrade to second quarter expansion numbers, but the true fireworks will likely come on the following day’s European Central Bank interest rate decision.
The ECB is very widely expected to leave interest rates unchanged—ostensibly leaving little risk for major volatility. Yet recent price action has taught us to expect the unexpected, and markets will be paying close attention to any shifts in rhetoric from the regional central bank. Officials will likewise release their new economic outlooks for the Euro Zone, and any surprises could likewise produce reactions in the Euro itself.
Last but most certainly not least, traders should keep a lookout for US Nonfarm Payroll results on Friday. Continued improvements in US employment numbers leave economists expecting a slowdown in job losses. Yet any surprises could easily cause substantial Euro/US dollar moves.
Japanese Yen Crosses Ready for the Next Trend in Risk Appetite
Fundamental Forecast for Japanese Yen: Bullish
- How long will risk appetite run astray of fundamentals?
- Unemployment hits a record low through July, deferring the timing of an economic recovery
- Will the rest of the yen crosses follow GBPJPY’s plunge this past week?
While other majors’ economic calendars have been filled to the brim, there are comparatively few Japanese economic indicators due for release next week. However, that doesn’t mean the yen will be relegated to tight ranges. The light docket belies the heavy event risk that is looming for the single currency. This weekend, the nation will go to the polls to vote in the first general election since 2005. Such a political episode is always market moving; but the fundamental implications in this election run especially deep as the world’s second largest economy is struggles to recovery from its worst recession in history and opinion polls suggest a change in power (and therefore policy approach) may be in the cards. And, if this wasn’t enough for market participants to worry about, there is always the high correlation to market sentiment to worry about. Tight ranges and stalled rallies should concern rather than pacify the astute trader.
First and foremost on the table is the general election that is to take place on Sunday the 30th. All 480 seats of the House of Representatives are open to the ballot – and for those unfamiliar with the Japanese political system, the house designates the Prime Minister. Clearly, there is at lot at stake from the traders stand point in this event risk. Whomever has control over the government will set vital policies that will steer the economy’s recovery from its worst recession since WWII. The uncertainty surrounding the event alone is enough to shake what confidence is still inherent in the yen. Even before the recent financial and economic crisis, Japan was mired in what is popularly coined a ‘lost decade’ of feeble growth, deflation, high savings and weak domestic investment trends. This is a wily ship to helm. What makes it even more interesting is that early opinion polls suggest the ruling coalition of the Liberal Democratic Party (LDP) will be unseated for the first time in nearly half a century by the opposition Democratic Party of Japan (DPJ). Admittedly, both their economic policy outlines are similar and spotty; but the desire to make an immediate impression and take control of the recession would likely see more immediate reaction should the DPJ win.
Beyond the immediate volatility following the market open after the election is decided, the outcome of this political shuffle will have a lasting impact on the Japanese economy and currency. Yet much of its influence will be subtle. In contrast, general risk appetite trends could cause severe waves for the yen over the coming week. Over the past few weeks, bullish sentiment has stalled. The S&P 500 has stalled below 9,635; crude has failed to surmount $75/barrel; and carry trade has tested the same 10-month high through all of August. Either these markets will have to push through or retrace; and with the progress of these speculative markets, we will see sentiment unfold. Supporting an ongoing bull wave, there is still immense amounts of side-lined capital that can find its way into the market. However, even if there is another leg of the now five month advance, it will likely be short-lived. Sentiment is waging a heavy premium over what fundamentals suggest the recovery can support and the lack of investment turn over can produce in returns.
Finally, we should not ignore the data on Japan’s economic docket. There are few readings on hand; but they are potent in furthering growth forecasts. Housing starts and vehicle sales will offer a look into the availability of consumer credit and the willingness to purchase big ticket items given current market conditions. Further up the economic stream, industrial production will measure orders (domestic and foreign) by translating what it will mean for local growth and employment. The 2Q capital spending will benchmark this same sector.
British Pound Outlook Bearish on Technical Break Lower
Fundamental Forecast for British Pound: Bearish
- British Pound technical sell entry ahead
- UK Consumer Confidence points to pessimism on economic conditions
- FX Sentiment points to British Pound losses against Japanese Yen
A lackluster week of British fundamental data made the Pound the worst performer among all G10 currencies through recent trade, and a technical break below multi-month trendline support leaves risks to the downside for the UK currency. Disappointments in GfK consumer confidence survey numbers and late-week international trade figures underlined risks to domestic consumption. A modestly positive revision to second quarter Gross Domestic Product figures failed to elicit a reaction from the UK currency, and it seems that markets had little interest in holding long-GBP exposure through illiquid trading conditions. The week ahead should bring far more liquidity into the FX market, and it will be critical to watch the next GBPUSD moves as traders return to their desks for the first week of September.
Seasonality in global financial markets add further downside risks for the GBP, as stock markets often experience their worst month of the year through September. Indeed, the much-talked-about “September Effect” looms large on FX markets; a strong GBPUSD correlation to the US S&P 500 strongly suggests that the British Pound would lose on S&P declines. Past trends hardly guarantee future results, but we cannot ignore fairly clear seasonal tendencies. Second-tier UK economic event risk may provide some surprises, but we expect that broader financial market risk sentiment will provide the strongest influence on the risk-correlated British Pound.
Traders should keep an eye out for noteworthy results in upcoming Purchasing Managers Index (PMI) Manufacturing, Construction, and Services reports; the surveys are typically leading indicators for economic growth trends. All three surveys are expected to improve on the month of August. Lofty expectations certainly leave room for disappointment and, if anything, risks remain to the downside ahead of PMI data.
Finally, forex traders will keep a very close eye on end-of-week US Nonfarm Payrolls data. The infamous NFP’s report often sparks impressive, if unpredictable, moves in the US S&P 500 and US Dollar. Needless to say, any particularly sizeable surprises in the data could provide substantial GBPUSD volatility.
Written by Terri Belkas, David Rodriguez, John Kicklighter, John Rivera, Ilya Spivak and David Song, Currency Analysts
Article Source - Forex Weekly Trading Forecast - 08.31.09
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