Weekly forecast - page 10
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Week Ahead: Decoupling Trade, Nothing To Fear Ahead Of Yellen And The Lunar New Year? Fears about the outlook of the Chinese and global economy as well as the impact from further Fed tightening triggered a violent reaction in the FX markets at the start of the year. Since then, however, the Fed has turned more dovish and that has helped prop up market risk sentiment while sending USD tumbling.
Going into the semi-annual testimony of Fed Chair Yellen next week investors seem to expect an extension of the cautious rhetoric. In addition, the Lunar New Year festivities should keep Chinese markets quiet and the country’s data calendar fairly light. All that should, in theory, create a favourable backdrop for the risk-correlated G10 currencies while the USD should suffer more.
That said, we think that those betting on Yellen hinting at emerging downside risks to the economic outlook in light of the latest tightening of global financial conditions could be disappointed. In our view, the Fed Chair should highlight that past bouts of financial market volatility have only had a temporary impact on the real economy and reiterate that the FOMC remains data dependent and, at present, is in wait and see mode. With markets not expecting any Fed rate hikes this year, a less dovish than expected testimony could help USD.
Elsewhere, the Riksbank should keep its rates stable but may revise down its conditional rate path to strengthen the monetary policy headwinds in place for SEK. While the risk-correlated and commodity currencies may benefit from some further USD-underperformance preYellen, they could struggle in the wake of the testimony.
EUR and JPY could remain supported against USD for now but the prospect for further ECB and BoJ easing should mean that the longer-term risks should remain on the downside.
What we’re watching
USD – Next week’s Congressional testimony by Fed Chair Yellen will be key in driving the USD and risk sentiment further. We do not expect a case of further falling rate expectations to be made here.
SEK – Although the Riksbank is likely to hold off from further easing next week, a dovish rhetoric should keep easing expectations to the detriment of the SEK intact.
US Preview: Yellen to Touch Down on Capitol Hill The January jobs report, albeit hardly without a blemish, should make Federal Reserve (Fed) Chair Janet Yellen feel more comfortable when she faces lawmakers from the House and Senate financial and banking committees for a two-day testimony on Wednesday and Thursday next week.
The semi-annual monetary policy report, formerly known as Humphrey-Hawkins, will be the highlight of the post-Super Bowl week as investors will be eager to hear what the Fed chief has to say about market volatility, financial conditions and the economic and policy outlook in the new year.
The key development in the latest jobs data backing Yellen's forecasts is the uptick in the labor force participation to 62.7%, the highest level since last spring.
As is the case every year, the Bureau of Labor Statistics introduced new population controls to the household survey, resulting in an increase of 218,000 in the workforce in January, but that does not alter the overall picture.
What's key is that the stabilization in the labor force fits snugly into Yellen's economic models - who earlier said she would expect the participation rate to level off as the jobs market improves.
"I think a significant number of individuals still are not seeking work because they perceive a lack of good job opportunities, and that a stronger economy would draw some of them back into the labor force," Yellen told an audience in Cleveland last summer.
USD, EUR, GBP, JPY, AUD, CAD, NZD: Weekly Outlook - Morgan Stanley
USD: Tactical Pullback. Neutral.
We believe that the USD pullback may continue a little while longer. Indeed, over the last week economic data in the United States were soft, while NY Fed President Dudley highlighted tightening financial conditions having an impact on Fed decisionmaking. That said, while news out of the US can drive USD fluctuations around the long-term upward USD trend, it cannot reverse the trend itself, we think. Rather, repatriation flows away from a quickly slowing emerging world will continue to dominate the bigger dollar direction. Reflecting this view, we added limit orders to buy USD against EUR, CAD and NZD.
EUR: Temporary Strength. Neutral.
We are tactically bullish on EUR despite the ECB essentially preannouncing further easing measures in March. A lot is already priced into the curve, with the markets currently expecting a 10bp reduction in the deposit rate from Draghi. Moreover, as the dollar temporarily sits in the ‘gutter’ of the USD smile, EUR should benefit. But we do not expect this EUR strength to last long. Should USD move to either end of the smile environment, EUR is likely to trade on the back foot again.
JPY: Doubting Negative Rates. Bullish.
We are out of consensus in our view that negative rates will have a limited impact on JPY. Negative rates are unlikely, on a large scale, to push private investors outside of Japan on an FX-unhedged basis. Nor are negative rates likely to drive diversification away from JPY by reserve managers. Moreover, the BoJ is implementing negative rates at a time when costs are high, returns are diminishing and currency valuations are stretched. As such, we believe that USDJPY is more likely to be driven by the global risk environment than marginal changes by the BoJ on interest rates.
GBP: 9-0 BoE. Bearish.
The BoE was surprisingly fine with the recent market volatility, despite it potentially weakening inflows into the UK and causing issues for the financial services sector. We are a little more cautious on this front. In the short term GBP is going to be driven by equity and market volatility. The UK’s current account deficit makes the currency prone to weakness when inflows are reduced. We look to sell rebounds in GBP.
CAD: A Temporary Respite. Neutral.
We believe that CAD may see a temporary respite in an environment of stabilizing oil prices and a more cautious Fed. However, our medium-term narrative remains unchanged. The great rotation that the BoC has been hoping for isn’t happening; manufacturing and non-commodity trade finished 2015 on a soft note and have shown little signs of rebound. Moreover, the Business Outlook Survey showed the weakest hiring and investment intentions since the crisis. As such, we add a limit order to buy USDCAD in our strategic portfolio this week.
AUD: Picking Up Carry. Bullish.
The Chinese authorities have brought back a period of calm, keeping the USDCNY fix stable over the past week. Coupled with liquidity injections ahead of the Lunar New Year, this dampening of volatility is likely to temporarily support carry trades. From a fundamental perspective, Australian inflation and growth numbers both surprised to the topside too. And the RBA was less dovish than previously. Consequently, we believe that AUD can continue to outperform in the near term.
NZD: Sell on Rebounds. Bearish.
One of the largest shorts within G10 was for NZD, which is why the currency has seen a large retracement in recent days. Rather than participating in the rally, we are waiting for opportunities to sell because the economic outlook has not improved. In fact, milk prices fell another 10% at the latest auction, squeezing the dairy farmers even further. Inflation remains low yet the RBNZ doesn’t think it is an issue. Data will make them swing, we believe, so sell on rebounds."
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Setups For EUR/USD, USD/JPY, AUD/USD, NZD/USD, USD/CAD - Barclays The following are the latest technical setups for EUR/USD, USD/JPY, AUD/USD, NZD/USD, and USD/CAD as provided by the technical strategy team at Barclays Capital.
EUR/USD: Yesterday’s “doji” candle warns of a potential top. A low close today would encourage us to turn move bearish against resistance near the 1.1495 range highs. Below 1.1160 would point towards initial targets near 1.1060.
USD/JPY: Having reached our initial targets near 113.10, we now expect further weakness towards our greater targets in the 110.35 area. Beyond there we see room for a move towards 106.00. .
AUD/USD: Tuesday’s basing candle signals a pause in the recent down-move. We are bearish against the 0.7245 range highs and look for a move below initial targets near 0.7000 to signal lower towards our greater in the 0.6915 area.
NZD/USD: We are overall bearish against the 0.6900 range highs. Nearby resistance at 0.6755 is expected to provide selling interest for a move lower towards the 0.6415 area and then our greater targets near the 0.6345 lows.
USD/CAD: We are bullish against support near 1.3640 and look for a move towards initial targets near 1.4105 and then 1.4170.
Trade Ideas: EUR/USD, USD/JPY, GBP/USD, AUD/USD, NZD/USD, USD/CAD - UBS The following are UBS' latest short-term (mostly intraday) trading strategies for EUR/USD, EUR/JPY, GBP/USD, AUD/USD, NZD/USD, and USD/CAD.
EUR/USD:Intraday moves have been quite extreme, but there seems to be very little interest in the pair and liquidity is poor. We expect plenty of selling interest ahead of 1.1450/1.1500, while buyers will be lined up below 1.1000.
USD/JPY:The market is very jittery. Yesterday's USDJPY spike, which spooked a few shorts, was a good example of this. The pair also jumped earlier today in Asia on news that Abe and Kuroda were meeting. In the short term we think it is dangerous to be short, especially at current levels, so we prefer waiting for better levels to sell.
GBP/USD: After the last few day's choppy trading, we prefer to stay on the sideline and only get involved on the extremes with a bias to buy ahead of 1.4370 with a stop through 1.4330.
AUD/USD & NZD/USD:We think the US dollar is a sell on rallies, but the topside for AUDUSD and NZDUSD has been somewhat capped, so we prefer staying cautious and playing the extremes.
USD/CAD: price action continues to be volatile, tracking the sharp swings for oil prices. Plan to sell the pair on any spike towards 1.4000 and buy dips below 1.3850.
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Week Ahead: A Turning Point For Risk-Off Markets Or Not Yet? Risk aversion reigns supreme in the markets fuelled by two fears – that a global recession is looming large and that the central banks around the world are powerless to prevent it.Worse still, some clients now fear that, by perpetuating the global currency war and compressing credit spreads, negative policy rates (or FX interventions) will only aggravate global disinflation, and slow down global trade and growth. Policy divergence has given way to convergence, and USD has lost ground against JPY, EUR, CHF and gold. GBP, the risk-correlated and commodity G10 currencies remain close to lows with only liquidity and undervaluation considerations stopping investors from selling.
Risk aversion could persist next week with the Chinese data calendar filling up again after the holidays.While Fed and ECB speakers should try to allay the worst of the market fears, the prospects for more accommodation may fail to prop up risk sentiment. Indeed, at this stage, investors are likely to respond more positively to plans about (concerted) fiscal rather than monetary stimulus. Such plans could be announced at the G20 finance ministers gathering on 26 and 27 Feb. In the interim, however, markets will continue to fear the worst.
Gold and JPY should remain the preferred safe havens with the BoJ seemingly having run out of bullets in the midst of the ranging currency war.Elsewhere, the EU summit on 18 and 19 Feb is expected to agree on a reform package to avoid a Brexit. Some of the reforms remain quite controversial and uncertainty ahead of the summit should linger. That said, confirmation of the Tusk’s reform proposal could be seen as increasing the chance of a pro-EU vote and help GBP consolidate.
What we’re watching:
FX Focus –While the risk is for further rising risk aversion, CHF upside may be limited still against its safe haven peers.
GBP– Although it will be active in terms of data releases, the main focus should be on next week’s EU summit as a currency driver.
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USD, EUR, JPY, GBP, CAD, AUD, NZD: Weekly Outlook - Morgan Stanley USD: Buy vs. the Funders. Bullish.
We expect risk appetite to pick up this week, which should keep the USD supported against the funders – EUR, JPY and CHF. Of course, it is important to keep an eye on the tightening financial conditions that are having an impact on Fed decisionmaking. That said, while news out of the US can drive USD fluctuations around the long-term upward USD trend, it cannot reverse the trend itself, we think. Rather, repatriation flows away from a quickly slowing emerging world will continue to dominate the bigger dollar direction.
EUR: Selling EUR/USD. Bearish.
Should the tactical rally we foresee occur, it would put pressure on EURUSD once again. This would likely ease Eurozone inflation expectations slightly but probably won’t prevent noise about potential ECB action in March. Remember, the correlation between EURUSD and equity markets remains strong and we expect the correlation to continue while there are outstanding FX hedged equity positions in the markets.
JPY: Tactical bearishness. Bearish.
We think the BoJ may try to use verbal intervention to stop the appreciation of the JPY. Domestic fund managers have seen their foreign holdings depreciate due to a combination of a stronger JPY and weaker global equity markets. This deterioration has occurred when holdings of foreign assets are at record highs, which could mean that stops are triggered and repatriation of holdings is forced. The BoJ attempted to push back against this by introducing negative rates, but failed. We believe the BoJ will act as a circuit breaker, stopping the JPY appreciating this week.
GBP: Waiting for the Rebound to Sell. Neutral.
Any risk rally in equities or oil is likely to provide GBP with a boost. We don’t expect this to last long though, so continue to promote selling on rallies. The BoE remains dovish and the Brexit debate is in full swing in the press. The UK’s current account deficit makes the currency prone to weakness when inflows are reduced due to high market volatility. EURGBP this week broke previous highs, supporting the upside momentum in this pair.
CAD: A Temporary Respite. Neutral.
We believe that CAD may see a temporary respite in an environment of a more cautious Fed and preliminary signs of strength in the non-resources sector. However, our medium-term narrative remains unchanged. The great rotation that the BoC has been hoping for is still questionable. Moreover, the Business Outlook Survey showed the weakest hiring and investment intentions since the crisis. As such, short CAD against AUD this week.
AUD: Picking Up Carry. Bullish.
The Chinese authorities have brought back a period of calm, keeping the USDCNY fix stable over the past week. Coupled with liquidity injections ahead of the Lunar New Year, this dampening of volatility is likely to temporarily support carry trades. From a fundamental perspective, Australian inflation and growth numbers both surprised to the topside too. And the RBA was less dovish than previously. Consequently, we believe that AUD can continue to outperform in the near term.
NZD: Watching Volatility. Neutral.
We think that volatility is going to remain the theme in global markets. As part of this, NZD being a less liquid G10 currency is likely to see many ups and downs in relation to position adjustment and risk appetite. The local economic story however has not changed. Milk prices are suppressed, reducing the incomes of farmers and low inflation may make the RBNZ shift to a more dovish tone. We would use rebounds to sell NZDUSD and watch the inflation survey this week.
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Quant FX Signals: The Biggest Long & The Biggest Short - SocGen The SG FX Enhanced Risk Premia has kept positions of reduced size during the week. The SG Sentiment indicator has slipped back in the risk-averse zone, and that has led to the closure of some pro-risk positions.
The biggest longs are in JPY, EUR and NOK. The most sizeable shorts are in GBP, NZD and INR. The short position in USD/JPY and the long position in EUR/USD are the USD crosses with the strongest combined momentum and IR-driven FX signals.
The static SG Sentiment indicator has moved back into the risk-averse zone. Based on the adaptive (tailored) version of the sentiment indicators and the relevant time-series signals, we keep a short exposure to both G10 and EM carry using 30% of the respective risk budgets. The Asian carry basket remains closed. The risk of the aggregate strategy remains limited and is close to 5% annualised volatility.
The strategy has been marginally profitable during the week, at +36bp.
Setups: EUR/USD, USD/JPY, EUR/JPY, AUD/USD, NZD/USD, USD/CAD - Barclays The following are the latest technical setups for EUR/USD, USD/JPY, EUR/JPY, AUD/USD, NZD/USD, and USD/CAD as provided by the technical strategy team at Barclays Capital.
EUR/USD: Friday’s “engulfing” candle has prompted us to turn bearish in the short term against resistance near the 1.1495 range highs. The move below 1.1160 would encourage our view and signal slower towards targets near 1.1090/60.
USD/JPY:We prefer to fade upticks towards 115.00. A move below our initial downside targets in the 110.35/05 area would encourage our bearish view towards greater targets near 106.00.
EUR/JPY:We are bearish and would use upticks as an opportunity to sell against 129.15 (near the 21-dma). A move below 125.75 would open our targets near 125.00 and then the 122.00 area.
AUD/USD:We are bearish and would look to sell against the 0.7245 range highs. A move below initial targets near 0.7000 would signal lower towards our greater targets in the 0.6915 area.
NZD/USD:We are overall bearish against the 0.6900 range highs. Nearby resistance at 0.6755 is expected to provide selling interest for a move lower towards the 0.6415 area and then our greater targets near the 0.6345 lows.
USD/CAD:Friday’s engulfing candle warns of a short-term dip within range. We prefer to buy against the 1.3640 area and look for a move higher towards initial targets near 1.4105 and then 1.417.
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Here Are The 3 Strongest Quant Signals This Week - SEB Short USD/CAD, long AUD/USD, and short USD/JPY are the strongest quant signals this week, data from SEB's FX-o-meters showed on Monday.
"Judging by the stretch the risk-on trades looks better but all three have higher than usual volatility, hitting that there are no nice and smooth trends out there," SEB notes.
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