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US Federal Budget Balance, retail sales, inflation and employment data, Philly Fed Manufacturing Index and Prelim UoM Consumer Sentiment are the main events on Forex calendar. Here is an outlook on the highlights of this week.
Last week, Fed Chair Janet Yellen testified before the US Congress repeating her speech made earlier before the Joint Economic Committee. Yellen noted the economy is on track for solid growth and that accommodative policy will continue as long as required. The Fed will normalize interest rates when the economy improves. Yellen believes US balance sheet will return to normal in 5 to 8 years. However, despite the positive tone, there were some troubled spots such as the Russia-Ukraine conflict and the recent setback in the housing market imposing on the ongoing economic recovery. Will the positive note continue in the coming weeks?
Let’s start,
Speculators' interest in overwrought risk trends is intensifying as talk of bubbles is even infecting the bullish camp. Given the exceptional impact a change in risk appetite can have given the underlying circumstances of our current bearing, we cannot afford to look away. However, active trades on the theme should wait for the change in tide. In the meantime, EURUSD and GBPUSD are forging progress on another front: monetary policy expectations. From rate hikes to stimulus programs, we are widely divergent programs and a docket loaded with important data next week. We take our current bearings and discuss what lies ahead in the weekend Strategy Video.
It has been a rough few months in the stock market especially after the steady rise of stock prices in 2013. At the end of last year, it was my view that 2014 would be a more difficult market, but so far, it has been even choppier than I thought it would be.
The investment pros, as measured by hedge fund performance, have also had a tough time, with negative returns in both March and April. Global hedge fund assets rose to a new record in the 1st quarter, but I would imagine some of those investors are having second thoughts.
The decline in interest rates in 2014 has also been a surprise to many especially in the past few weeks as the economic data, including the sharply higher employment numbers, would typically cause rates to move higher.
The yield on the 30-year T-bond has fallen from the December 31 close of 3.964% to 3.415% early Friday. The yield on the 10-year T-note closed 2013 at 3.026% and is now at 2.618%. So is this the start of a new bond bull market as some are predicting?
USDJPY Fundamentals (based on dailyfx article)
Fundamental Forecast for Japanese Yen: BearishThe Japanese Yen trades at critical resistance versus the US Dollar (USDJPY trades at support). Given extremely low volatility expectations it seems unlikely we see a major USDJPY breakdown, but any major surprises out of upcoming Japanese data could force sharp currency swings.
FX traders sent 1-month volatility prices on USDJPY derivatives to their lowest levels on record, and it’s obvious that very few expect to see big things through the foreseeable future. Our forex technical forecasts as well as sentiment-based outlook subsequently favor a USDJPY bounce off of the lows. Yet expectations often beget disappointment; what could force a major Japanese Yen breakout?
Top economic event risk comes from Japan’s Q1 GDP Growth numbers due Wednesday night/Thursday morning, and any surprises could shake the currency from its tight trading range. Consensus forecasts call for a substantial 4.2 percent annualized rate of economic growth in the first quarter. Such lofty expectations arguably leave risks to the downside for the data itself and the Japanese currency. But why is the JPY stuck in such miniscule trading ranges across the board?
Put simply, forex volatility is near record-lows as risky asset classes continue to outperform. Yen volatility may trade to further lows if the US S&P 500 and Japanese Nikkei 225 continue to trade onto fresh peaks.
In that sense it will be important to watch how Japanese equities respond to key economic data; any Nikkei 225 losses might actually result in Yen strength (USDJPY weakness) regardless of the economic implications of the news results.
The absence of any major surprises in upcoming event risk would likely leave the status quo intact. It’s important to note that the Yen has historically fallen in times of low volatility, and indeed we would argue that a further compression in vols should keep the USDJPY above key support. The risk is that material disappointments in data could force equity market tumbles and, by extension, a USDJPY breakdown.
GOLD (XAUUSD) Fundamentals (based on dailyfx article)
Fundamental Forecast for Gold: NeutralGold prices are softer for the second consecutive week with the precious metal off by nearly 1% to trade at $1287 ahead of the New York close on Friday. The losses come on the back of a broad-based USD rally that saw the Dow Jones FXCM USDOLLAR index reverse off fresh 6-month lows, paring the entire April decline by the end of the week. The index is now virtually unchanged since the monthly open and traders will be looking ahead to next week’s docket as the US data front picks back up.
The calendar was light for the US this week with gold prices giving up early gains after Fed Chair Janet Yellen noted in her testimony before congress that the central bank’s accommodative stance was warranted given the relative strength of the labor markets and subdued inflation metrics. The greenback regained its footing with a rather dovish ECB President Mario Draghi on Thursday further supporting the dollar rebound. The subsequent rally has continued to weigh on gold prices which look to close the week just off the low.
Looking ahead to next week, US data will be back in focus on the heels of this week’s Yellen testimony with Retail Sales, the Consumer Price Index (CPI) and Industrial Production on tap. Inflation figures on Thursday may prove pivotal for bullion with consensus estimates calling for a slight increase in the y/y and m/m prints with core CPI expected to fall to 0.1% from 0.2% m/m and hold at 1.7% y/y. Should the data show a faster-than-expected pace of price growth, look for gold prices to come under pressure as expectations for a 2015 Fed rate-hike take root.
From a technical standpoint, gold completed a 100% Fibonacci extension off the April lows with this week’s push into the $1310 barrier. The subsequent reversal has continued to be supported by the 100-day moving average, currently around $1287 and a break below this level puts back into focus key support at $1260/70 (bullish invalidation). That said, we cannot discount another assault on the highs as we continue to hold within the initial May opening range with a breach above $1310 suggesting that a more significant low may have been put in last month. Such a scenario looks back to a region defined by last month’s high and the 50% retracement of the March sell-off at $1327/34. With the current positioning and key US inflation data on tap next week, we will maintain a neutral stance into the open with the Sunday/Monday opening range likely to offer further clarity on a near-term directional bias.
The Nikkei as you can see fell during most of the week, but the ¥14,000 level offered enough support to turn things background inform a hammer. We believe that this area should offer quite a bit of support, so a break above the top of the hammer which is at the ¥14,500 level, that would in fact be a signal to start buying as we should head to ¥15,250 level. Above there, we would more than likely head to the recent highs again. Going forward, we fully expect this market to have buyers.
The DAX initially fell during the week, but found enough support at the €9400 level to turn things back around and form a nice-looking hammer. This hammer sits below the €9700 level, which is an area we need to see cleared in order to start going long again. We believe that a breakout above the €9800 level does all but completely guarantee a move to €10,000, and we do ultimately believe that this breakout will happen. Because of this, we have no interest in selling this market as we see a significant amount of support all the way down to the €9000 handle.
NASDAQ as you can see had a back-and-forth week, but continues to respect the 4000 level as support. Because of this, we believe that ultimately this market will probably go higher, but recognize that there is a significant amount of resistance just above as well, with that being the theme of the last month. Because of this, we think that this market will continue to sideways, but ultimately will breakout to the upside in a move above the 4200 level should begin the next leg higher, which could be much higher.
The Parisian index went back and forth during the course of the week, testing the €4400 level for support, while testing the €4500 level as resistance. With that, it appears that the market is trying to breakout above the top of the two shooting stars from the previous weeks. That being the case, and the fact that the market ended up forming a bit of a hammer, we believe that will see a massive breakout above the €4500 level, and as a result the market will then head to the €5000 level. Selling is not an option.
The S&P 500 as you can see initially fell during the week, and then bounced off of the 1860 level. That being the case, it appears that the market has formed a hammer for the week, but now it is obvious more than ever that the 1900 level needs to be overcome in order to start going long on a longer-term basis. We believe that will ultimately happen, so therefore on a move above that level we would not hesitate to get involved. Pullbacks all the way to the 1820 level should be supportive as well, as we see plenty of support between here and there.