Forecast for U.S. of America Dollar: Neutral
The lawsuit dollar traders – in addition to really investors inward all property classes – conduct hold long waited for is finally upon us. Speculation surrounding the FOMC’s Taper determination has run rampant, spurring expectations in addition to fearfulness of an explosive reaction to a large shift inward the market’s back upwardly structure. In fact, the word over this inevitable lawsuit has proven in addition to then prolific that nosotros conduct hold already seen forecasts amongst economists in addition to banks industrial plant life a clear consensus for a moderation of stimulus at the September encounter piece yield sensitive assets (like the benchmark U.S. of America Treasury) conduct hold suffered sudden adjustments. Much of the actual deport on an lawsuit similar this has comes through the ‘surprise’ factor, but is at that spot whatever surprise left inward this event? Could this live a ‘buy the rumor, sell the news’ lawsuit for the dollar?
To industrial plant life how the marketplace seat responds to the Federal Reserve’s policy decision, nosotros must industrial plant life what an ‘inline’ number would be. Over the past times weeks in addition to months, the members of the fundamental bank’s board – both voters in addition to non-voters – conduct hold repeatedly stated their back upwardly for Chairman Ben Bernanke’s timeline set out after the June coming together – 1 of the quarterly events that was accompanied past times updated forecasts in addition to the press conference. With that platform, Bernanke stated that it was probable that they would get reducing the $85 billion-per-month stimulus computer programme (QE3) ‘later’ inward 2013 in addition to halt sometime inward mid-2014. Considering this is the lastly policy coming together with a schedule press conference until December, the showtime motility this calendar month would best jibe the timeline.
Given the massive drib inward Treasuries, mortgage backed safety funds, emerging markets, gilt in addition to other yield-sensitive assets; it is clear that a tapering is existence priced in. Yet, it isn’t clear as to how sure the marketplace seat is of the size. The New York Federal Reserve’s survey of Primary Dealers (large financial institutions that must bargain inward Treasury auctions in addition to are considered past times the fundamental depository financial establishment a barometer for the market) showed expectations of a $15 billion reduction at the showtime coming together in addition to an aggressive stair after a similarly-sized motility inward December. However, a recent Bloomberg poll showed economists exclusively hold off a $10 billion cutting to Treasury purchases only. Clearly at that spot debate over this number in addition to some adjustment volition follow.
In the scale of scenarios, themost overwhelming surprise would come upwardly from a determination to conduct hold the computer programme at $85 billion per month. An lxxx per centum surge inward the benchmark 10-year Treasury yield inward the bridge of merely 4 months (not to raise the motility from other global sovereign debt) shows a pregnant shift inward expectations in addition to positioning. If this unlikely scenario were realized, risk-sensitive assets that are subject on the surroundings of artificially-low volatility would rally. However, such an number would live known to live a unproblematic delay in addition to non a permanent freeze on the necessary withdrawal. As such, risk benchmarks soundless hovering close tape highs are unlikely to observe much follow through. Carry trades that conduct hold seen an improved yield outlook (NZDUSD in addition to AUDUSD) volition progress further. Yet, maybe the most prolific short-term rebound would come upwardly on role of U.S. of America authorities bonds. Such a dramatic drib these past times months tin dismiss atomic number 82 to an every bit spectacular rally. In turn, a overflowing of working capital alphabetic lineament looking to purchase inexpensive Treasuries, could really elevator the dollar.
A Taper of some $10 billion along with increasingly dovish forwards guidance – an attempt to ‘reassure’ is guaranteed – would live the most hard number to concern human relationship for. There has been especial adjustment to this number inward some markets but relatively niggling inward others. The immediate volatility for the dollar with this scenario would live the most restrained. However, looking at the underlying changes this would atomic number 82 to, it is probable to eventually back upwardly the dollar. An initial unwinding of ‘Taper’ premium from the greenback volition live followed with counter-balances past times other fundamental banks, a rising inward presumed risks in addition to an outlook of competitive yield growth inward the US.
For the most decisive back upwardly for the U.S. of America dollar, a $15 billion or larger reduction amongst a condition quo tone would send the most weight. The mechanics inward supporting the currency through this number request nosotros tap into something far to a greater extent than elemental: market-wide investor sentiment. Influenza A virus subtype H5N1 glaring holdout to the Taper adjustment nosotros conduct hold seen these past times months, U.S. of America equities led past times the S&P 500 are maybe the poster-child of ‘moral hazard’ – taking on excessive risks as participants experience they are volition live absorbed past times soul else. This is where the dollar’s potential really lies. If tape leverage translates into disorderly unwinding the condom haven volition soar.
Forecast for Euro: Neutral
The Euro broke to fresh multi-week highs against the U.S. of America Dollar, but the Dow Jones FXCM Dollar Index (ticker: USDOLLAR) continues to conduct hold key multi-month lows. All eyes at nowadays plough a highly-anticipated U.S. of America Federal Reserve policy proclamation to drive FX moves.
The Federal Open Market Committee (FOMC) determination on September xviii volition live the major driver of currency volatility inward the coming days, in addition to European lawsuit risk is relatively limited. What could the Fed make to intermission the U.S. of America currency in addition to broader markets out of increasingly narrow trading ranges?
Fed Officials are widely expected to denote the start of the so-called “Taper” of the fundamental bank’s Quantitative Easing measures. According to a Bloomberg News survey, most economists polled believe that the FOMC volition cutting its monthly purchases of U.S. of America Treasury debt past times $10 billion. Yet it’s the broad gain of estimates that underlines how niggling nosotros know of the Fed’s adjacent steps. According to the same survey, 33% predict nix tapering piece some anticipate as much as $20 billion inward cuts.
We facial expression to involvement charge per unit of measurement markets to guide us. U.S. of America Dollar involvement charge per unit of measurement futures showed a sudden drib inward Fed involvement charge per unit of measurement forecasts next a disappointing U.S. of America Nonfarm Payrolls study for August. Yet the initially strong reaction to the undertaking information has since turned into consolidation; no 1 seems to live willing to brand large bets ahead of the Fed.
The fact that the Euro trades close its highs in addition to the USDOLLAR is merely barely belongings lows suggests that the EURUSD could intermission higher inward the days ahead. Currency volatility has dried upwardly inward a major way, in addition to it feels similar the adjacent large motility is merely about the corner.
Our retail FX sentiment-based strategies conduct hold bought into Euro strength in addition to stay positioned for a motility higher. Whether or non se consider the major intermission depends almost completely on the Fed’s adjacent steps. It’s hard to predict what the FOMC mightiness make in addition to much less how markets mightiness react.
In the meantime, we’ll brace ourselves for continued choppiness as currencies motility inward progressively smaller trading ranges.
Forecast for the British Pound: Bullish
The British Pound struggled to conduct hold its the world during the concluding days of August, with the GBPUSD tagging a weekly depression of 1.5426, but the Bank of England (BoE) involvement charge per unit of measurement determination may assist the sterling to save the bullish tendency dating dorsum to July should the fundamental depository financial establishment highlight an improved outlook for the Great Britain economy. Indeed, the BoE is widely expected to hold the benchmark involvement charge per unit of measurement at 0.50% piece maintaining its asset-purchase computer programme at GBP 375B, in addition to nosotros may consider the Monetary Policy Committee refrain from releasing a policy contention should the grouping vote unanimously to retain its electrical flow policy.
It seems as though Governor Mark Carney is becoming upbeat on the economic scheme as he sees a to a greater extent than broad-based recovery inward the U.K., in addition to the fundamental depository financial establishment caput may exhibit a greater willingness to retain the wait-and-see approach for an extended menstruum of fourth dimension as the MPC continues to operate nether its inflation-targeting framework. Another 9-0 vote should assist to shore upwardly the GBPUSD as it dampens the range of seeing a farther expansion inward the BoE’s residue sheet, in addition to nosotros may consider a growing number of fundamental depository financial establishment officials scale dorsum their dovish tone as growth in addition to inflation picks up.
Despite the forward-guidance for monetary policy, expectations for a farther rising inward economical activity may raise the outlook for inflation, in addition to it seems as though the fundamental depository financial establishment is slow moving away from its easing cycle as the economic scheme gets on a to a greater extent than sustainable path. In turn, the inflation ‘knock out’ may popular off a to a greater extent than probable scenario for the U.K., in addition to the BoE may convey steps to ensure its credibility as cost growth has held higher upwardly the 2% target since Dec 2009.
The GBPUSD surely appears to conduct hold carved a near-term overstep about the 1.5700 grip as it failed to seat inward a unopen higher upwardly the 38.2% Fibonacci retracement (1.5680-90), in addition to the relative strength index may highlight farther weakness inward the telephone commutation charge per unit of measurement as the oscillator fails to retain the bullish tendency carried over from July. Nevertheless, the upward trending channel inward the GBPUSD may proceed to convey shape should nosotros consider a textile shift inward the policy outlook, in addition to the duo may proceed to carve a serial of higher highs paired with higher lows as marketplace seat participants scale dorsum bets for additional monetary support.
Forecast for Japanese Yen: Neutral
The Japanese Yen was the worst performing currency this past times week, dropping past times -1.91% to the overstep New Zealand Dollar, some other -1.83% to the British Pound, piece exclusively a mere -0.27% to the U.S. of America Dollar. Last calendar week inward this forecast I said “with the domestic tone shifting for Japan, it volition live necessary for incoming growth in addition to inflation information to stay buoyant inward lodge for the Yen to savor farther reprieve.”
Clearly, this was non the case. Indeed, the misses on the 2Q’13 gross domestic product reading set the tone for a weaker Yen correct from the start of merchandise inward Asia on Monday, as signs of a weaker than expected economic scheme instruct out opened upwardly the door for speculation on additional easing past times the Bank of Japan. As noted lastly week, a considerable factor for whatever forecasted Yen strength hinged on these growth readings besting expectations.
With the economic scheme chugging along at an acceptable stair nevertheless (+3.8% annualized versus +3.9% expected), farther chatter emerged virtually the prescribed sales revenue enhancement hike due inward the 2Q’14, with BoJ officials purportedly endorsing the financial measures in addition to fifty-fifty offering monetary assistance should the economic scheme consider pressure. Additionally, to assist offset the drawdown inward consumption, the Japanese authorities is considering a corporate revenue enhancement cutting to assist residue out the sales revenue enhancement hike impact. In lite of the fact that overall consumption hither suffers – accounting for some 60% of Japanese gross domestic product – these financial adjustments are perceived to live net-negative for the Yen.
Compounding the shakier than expected domestic motion painting conduct hold been positive developments on the geopolitical stage, with Russian Federation in addition to the U.S. of America agreeing to peace talks inward Geneva, Switzerland, to figure out how to strip the Syrian regime of chemic weapons. As we’ve seen over the past times few weeks, whatever progress that reduces the threat of U.S. of America armed forces intervention has been perceived as “risk positive,” inward that stocks conduct hold rallied amongst the U.S. of America Dollar, piece the Japanese Yen, unsmooth oil, in addition to precious metals conduct hold fallen. Should these tensions stay inward their electrical flow province or ease further, they volition probable live some other negative influence for the Yen.
With niggling of import information on the Japanese economical calendar for the coming calendar week – exclusively the August Trade Balance figures in addition to the weekly domestic/foreign flow of stocks/bonds figures are of interest, in addition to they haven’t generated genuinely pregnant cost activeness – attending turns to the highly anticipated Federal Reserve September coming together this Wednesday.
According to consensus estimates compiled past times Bloomberg News, economists are calling for a $10B reduction inward the stair of QE3, with the cuts coming to Treasuries purchases, from $45B to $35B. The stair of mortgage-backed securities (MBS) purchases volition stay on conduct hold at $40B. We consider the risk of a cutting of $15B inward Treasury purchases, which mightiness spark a U.S. of America Dollar rebound (to the Yen’s detriment). But if the cutting is exclusively $10B, in addition to Fed Chairman Bernanke uses the press conference to reestablish forwards guidance – which has been weak considering U.S. of America yields are hovering close two-year highs (pre-US losing its ‘AAA’ rating) – at that spot is a gamble for a Yen rally.
The Fed is keenly aware of the risks of a 1994-esque bond marketplace seat meltdown, caused past times the successive, linear stair of Fed policy tightening. Accordingly, to avoid such stance from evolving, Chairman Bernanke in addition to the Fed are probable to emphasize that the reduction inward QE3 volition live inward sporadic increments, depending on incoming U.S. of America economical data. The most recent NFPs, Advance Retail Sales, in addition to Consumer Confidence reports propose that exclusively a small-scale reduction inward QE3 is appropriate.
Ultimately, the Yen is at risk for farther weakness, but a to a greater extent than dovish Fed – to residue out markets’ hawkish interpretation given bond marketplace seat dynamics across the global – leaves opened upwardly the door for a mid- to –late-week rally inward the Yen against the U.S. of America Dollar should U.S. of America yields convey a stair backwards this week.
Forecast for Australian Dollar: Bullish
We’ve argued inward favor of a pregnant Australian Dollar recovery since early on August. We noted that an improvement inward Chinese news-flow volition belike assist stabilize economical growth expectations for the East Asian giant. Communist People's Republic of China is Australia’s largest trading partner in addition to a critical rootage of need for the country’s pivotal mining sector. That meant that stabilization inward Communist People's Republic of China was probable to interpret into an improved the outlook for Australian exports in addition to the concern cycle overall. This inward plough would prompt a supportive shift inward RBA monetary policy expectations in addition to lay the groundwork for an Aussie recovery. The example for an upside scenario seemed all the to a greater extent than compelling given a backdrop of highly over-extended speculative net-short positioning in addition to nosotros proceeded to come inward long AUD/USD after an attractive technical setup presented itself.
A cautious recovery at nowadays seems to live underway as expected. However, the calendar week ahead volition consider the Aussie’s resilience severely tested as the currency takes on high-profile lawsuit risk on both the domestic in addition to the global front. Minutes from September’s RBA policy coming together are showtime to cross the wires. That sit-down produced what the markets interpreted as a shift away from an overtly dovish posture to a neutral one, sending the Australian unit of measurement sharply higher in addition to igniting pent-up bullish forces waiting for their cue to overtake momentum. With that inward mind, traders volition live keenly interested to parse the minutes for confirmation of the tone shift gleaned from the initial policy statement. It is rather rare for RBA coming together minutes to deviate materially from the Governor’s remarks released along with the charge per unit of measurement decision. The potential for volatility remains however, in addition to a stray comment that is perceived to amplify or undermine the latest improvement inward the Aussie’s policy profile tin dismiss send the currency higher or lower, respectively.
Thereafter, macro-level forces come upwardly into focus as all eyes plough to the Federal Reserve as the policy-setting FOMC commission convenes for its monthly meeting. The outing is expected to create the showtime “taper” of the QE3 stimulus program, with the baseline scenario calling for a $10-15 billion cutback inward monthly property purchases. The path forwards beyond that remains highly uncertain however. That agency the FOMC’s updated set of economical forecasts too as Chairman Ben Bernanke’s press conference next the policy determination volition live surrounded with enough of speculation in addition to offering ample provender for volatility. If investors are met with Fed rhetoric that (directly or indirectly) argues inward favor of a sustained QE reduction cycle into the halt of the year, market-wide risk stance is probable to deteriorate in addition to clit the Aussie Dollar downward. Influenza A virus subtype H5N1 to a greater extent than cautious approach that presents a Fed that soundless sees stimulus withdrawal as highly data-dependent in addition to injects doubt into the near-term policy outlook stands to create the reverse dynamic.
Source: Dailyfx