Forecast for US Dollar: Neutral
The US Dollar plummeted against the Euro too other major FX counterparts equally the US Federal Reserve disappointed those looking for it to “Taper” its Quantitative Easing policies, but is it plenty to drive the Greenback to farther lows?
Traders reacted to the “NO TAPER” headline inwards straightforward fashion: selling US Dollars, buying stocks, too buying bonds. All of these markets had done the exact contrary inwards May when Bernanke showtime spoke of tapering QE; inwards that sense, recent cost activity seems perfectly reasonable. But how could everyone acquire it so wrong, too why does the Fed’s inaction pose existent risk to the US Dollar?
The Fed made it fairly clear that it targeted specific US unemployment rates to trigger the “Taper” of QE, too it’s straightaway obvious that nosotros should conduct hold those targets at confront value. Most traders were on the incorrect side of the “Taper” merchandise because it was widely believed that recent improvements inwards task information would live plenty for the Fed to move; they clearly weren’t. The electrical flow jobless charge per unit of measurement of 7.3 per centum is inwards a higher house official targets of 7.0 percent, piece inflation has genuinely fallen.
The US Dollar too broader fiscal markets volition straightaway bear witness to a greater extent than sensitive to time to come US work too inflation numbers than e'er before. If whatever upcoming US Nonfarm Payrolls reports or Consumer Price Index inflation figures disappoint, await USD weakness.
It volition live ii weeks before nosotros acquire our side past times side reading of the domestic unemployment rate, too inwards the meantime an outright collapse inwards volatility prices suggests that few are betting on or hedging against large currency moves until then. Can the Greenback autumn further?
We’re watching the Dow Jones FXCM Dollar Index concur onto back upwardly at its key 200-day Simple Moving Average, which likewise coincides with key swing lows. Unless nosotros regard a noun interruption lower, there’s argue to believe that markets could exactly consolidate too merchandise inwards broad ranges until the Fed begins to act. Inaction would indeed favor the over-arching themes inwards markets. Indeed, our Senior Technical Strategist believes that this Dollar pullback may stand upwardly for an attractive chance to acquire long USDJPY too USDCAD.
But doesn’t the Fed’s inaction doom the Dollar to farther losses? Not necessarily—other markets clearly reacted inwards dramatic fashion, but fifty-fifty US Treasuries too the S&P 500 are giving dorsum around of their post-FOMC gains.
The Fed’s determination (or lack thereof) was clearly significant, but it doesn’t ask to live a game-changer. Traders are straightaway speculating that the Fed’s taper may start inwards October—depending on economical information results. Given their fairly stiff definitions, we’ll know sooner or afterward when the FOMC volition trace dorsum monetary stimulus.
Forecast for Euro: Neutral
There is a considerable amount of trial risk for the Euro – but equally nosotros conduct hold learned over the past times months too years, it may non live peculiarly marketplace moving. That tin live both a boon too burden for EURUSD equally it hovers exactly inwards a higher house 1.3500. On the positive side, the risk of a German linguistic communication election that forces Chancellor Merkel to conduct hold to shape a grand coalition, disappointing growth updates from Eurozone PMI figures equally good equally other possible negative scenarios could live overlooked to the hold the euro buoyant. Alternatively, encouraging outcomes from this same circular of trial risk volition homecoming niggling – if whatever – back upwardly should the currency falter nether a broader ‘risk aversion’ topic that would otherwise produce goodness counterparts similar the US dollar or Japanese yen.
For sheer headline appeal, the attain trial risk this calendar week is the German linguistic communication Federal election. The headlines conduct hold been many too the to a greater extent than extreme scenarios offered upwardly tap into unusual investors’ concerns. According to i the latest polls from Emnid, Merkel’s Christrian Democratic Union (CDU) political party volition win 39 per centum of the vote, which with Free Democrats (FDP) half-dozen per centum maintains the Pb for the centre-right coalition. The chief opposition Social Democrats (SPD) are looking at 26 per centum which could live paired with the ix per centum for their Greens allies.
Given these comfortable numbers, it looks similar Merkel volition serve a tertiary term at Germany’s helm; which would reassure neighboring Eurozone members that conduct hold produce goodness from rescue programs equally good equally investors that wishing a stable Union. Therisk inwards this trial is that Merkel is forced into a ‘grand coalition’ with the SPD if plenty seats are non secured inwards the Bundestag – a possibility if the anti-euro Alternative for Federal Republic of Federal Republic of Germany (AfD) political party were to trace to a greater extent than than v per centum of the vote too thereby earn seats that would otherwise cash inwards one's chips to the CDU. This consequence would Pb to a few months of strategy wrangling too probable a cabinet shuffle that could regard Finance Minister Scheauble out; but it would non probable alter Germany’s back upwardly for the EMU.
Nevertheless, incertitude is discouraging; so clarity on this event’s consequence volition live of import for the euro. This is peculiarly truthful for Eurozone members that conduct hold late seen the ask for to a greater extent than back upwardly or accommodation. It has been said that Hellenic Republic volition probable ask around other programme side past times side yr to create total a funding gap, too Portugal was late turned downward for relaxing its deficit target. When Federal Republic of Federal Republic of Germany is dorsum firing on all cylinders, these considerations tin detect progress.
For the ease of the week, the euro’s docket carries notable trial risk – but no unmarried trial presents an imminent threat to the region’s perceived stability. Top billing volition live the September PMI data. The timely growth readings tin assist industrial plant life the outlook for the aggregate economic scheme against improved growth assessments for the UK, Nihon too steady reading for the US. The Eurozone Composite figure is expected to regard its highest reading since June 2011 too concur inwards a higher house the 50.0-expansionary mark.
Other potential volatility (versus trend) events to hold an oculus on include a dense circular of scheduled speeches past times diverse ECB too political officials; the Castilian too Portugal budget reports; France’s too Spain’s 2014 budgets moving to their respective Cabinets for approval; the ECB’s written report on somebody sector loan information for August; too a smattering of secondary indicators.
If the euro is to generate existent momentum though, it volition ask to produce so through the likes of EURUSD and/or EURJPY. These pairs tap into something far to a greater extent than elemental too far to a greater extent than hard for global investors to play down: risk trends. Influenza A virus subtype H5N1 positive run inwards risk appetite volition detect the higher returns inwards the periphery a depict for investor working capital missive of the alphabet – especially after the breaks inwards a higher house 1.3500 too 133.50 (a to a greater extent than than three-and-a-half yr high). However, should meaningful risk aversion gear upwardly inwards – the sort that structurally lifts volatility measures too pulls downward US equities – the euros papered-over problems tin easily live labeled crisis sparks, sending the euro spiraling.
Forecast for Japanese Yen: Bearish
The Japanese Yen was a bottom performer over the past times week, losing the world rapidly from Midweek frontward after the Federal Reserve surprised investors past times keeping QE3 inwards house at its electrical flow $85B/month pace. Market participants were widely positioned for the Fed to taper QE3 past times $5B to $15B, which nosotros speculated could provoke a retrenchment inwards US yields, to the Yen’s benefit. While this proved truthful for the US session on Midweek after the Fed meeting, the non-taper proved to live a major catalyst for “risky” assets. This topic should rest prime number equally the Japanese economic
With the Fed maintaining QE3 at $85B/month, emerging marketplace too commodity currencies (high yielding/high beta FX) surged betwixt Midweek too Thursday, to the Yen’s detriment. Perhaps for skillful reason, too: Japanese yields plummeted to their lowest grade since early-May, transforming the Yen non equally a vehicle to produce goodness equally a rubber haven but equally a funding currency with a swell inwards fundamental bank-fueled exuberance. It is probable that the Yen suffers against higher yielding FX over the near-term.
The determination to non taper QE3 inwards September leaves the Yen inwards a precarious topographic point going forward. Foreign concerns rest hazy but aspect to live steadying. Geopolitically, international consensus is growing to avoid armed forces conflict inwards Syrian Arab Republic straightaway that the Assad regime has begun cooperating with weapons regulators. In Iran, a phase for to a greater extent than opened upwardly dialogue with the West has potentially emerged inwards novel President Hassan Rouhani. Regardless if these talks for broader cooperation amount to anything, there’s argue to believe the “war premium” built into commodity markets (particularly oil) too the USDJPY (via Treasuries) could thaw.
Out of the United States, ii potential catalysts be to knock the Yen around: the Fed, of course; too Congress. The Fed made it quite clear that rhetoric aside, incoming economical information would ask to improve for the Fed to taper QE3. This is the same line that was towed at the June FOMC coming together which boot started the ‘Septaper’ speculation. The instance for why the Fed chose non to taper was easily made with a glance towards inflation too task data, which hadn’t shown progress since June. It also way that at that topographic point is increased influence of US information on currencies too involvement rates; the USDJPY inwards detail should exhibit increased sensitivity to task too inflation data.
The US Congressional influence on the Yen should acquire increasingly profound over the side past times side few weeks equally it appears that around other debt trammel showdown is likely. As long equally Congress remains a veritable drag on the US economic scheme – Fed Chairman Bernanke aptly pointed this out on Midweek equally a argue that the Fed didn’t taper – at that topographic point is ambit for the Yen to at to the lowest degree rest buoyant against the US Dollar. The upcoming votes on the continuing resolution bills inwards the House too the Senate volition shape the debt debate; if they don’t cash inwards one's chips smooth, greater turbulence inwards Oct is likely. In such a case, the Yen’s misfortune against higher yielding FX would rapidly turn, exactly similar inwards August 2011.
At habitation inwards Japan, influences are neutral on the Yen equally the economic scheme is by too large ameliorate than previously expected. The sales revenue enhancement hike appears to live a go, with Prime Minister Shinzo Abe gear upwardly to create upwardly one's heed the affair on Oct 1, too the Bank of Nihon has thence far indicated that it would live willing to extend farther monetary easing to forestall a dip inwards economical activity (higher taxes Pb to lower consumption).
The authorities has pressed firms to heighten payoff to assist offset the affair equally good (which would residual out lost consumption), but so far niggling progress has been made on this front. Even if Nihon is successful inwards stoking inflation, without wage growth, consumption volition autumn (consumers volition conduct hold reduced purchasing power), too the economic scheme volition endure i time to a greater extent than – putting Abenomics itself at risk for total failure – too potentially ushering inwards greater concerns virtually Japan’s seemingly insurmountable debt burden.
Forecast for the British Pound: Bullish
The British Pound extended the advance from before this calendar month equally the Bank of England (BoE) struck a to a greater extent than hawkish note for monetary policy, but the GBPUSD may confront a near-term correction inwards the days ahead equally the duad remains overbought.
Indeed, the BoE Minutes showed no votes to farther embark on quantitative easing equally the fundamental banking company anticipates a stronger recovery inwards U.K., too there’s growing speculation that the Monetary Policy Committee volition implement its move out strategy ahead of schedule equally the commission turns increasing upbeat towards the economy.
With BoE members Ben Broadbent, David Miles, Paul Tucker, too Charles Bean scheduled to speak side past times side week, to a greater extent than comments signaling an terminate of the easing bicycle should assist to prop upwardly the British Pound, too nosotros may regard a growing pose out of MPC officials exhibit a greater willingness to switch gears inwards 2014 equally the fundamental banking company continues to operate nether its inflation-targeting framework. Influenza A virus subtype H5N1 farther aspect at the economical docket shows the lastly 2Q gross domestic product written report printing a 0.7% ascension inwards the growth rate, but an upward revision may farther the BoE’s instance to movement away from its easing bicycle equally the economic scheme gets on a to a greater extent than sustainable path.
Should the fundamental developments coming out of the U.K. cash inwards one's chips along to heighten the outlook for growth too inflation, the pullback from 1.6161 may live short-lived, too the GBPUSD may ultimately carve a higher depression going into the lastly days of September equally the upward trending channel dating dorsum to the July depression (1.4812) continues to conduct hold shape. However, equally the relative strength index falls dorsum from a high of 82, a interruption of the bullish tendency inwards the oscillator may foreshadow a larger pullback inwards the GBPUSD, too nosotros volition aspect for opportunities to purchase dips inwards the British Pound with the shift inwards the policy outlook.
Source: Dailyfx