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Australian Dollar at Risk on RBA, Rebuilding Fed Rate Hike Bets

Australian Dollar at Risk on RBA, Rebuilding Fed Rate Hike BetsAustralian Dollar at Risk on RBA, Rebuilding Fed Rate Hike Bets

Fundamental Forecast for the Australian Dollar: Neutral

  • Aussie Dollar at Risk on Rebuilding 2015 Fed Rate Hike Speculation
  • RBA to Hold Rates But Dovish Rhetoric May Signal Rate Cuts Ahead
  • Find Key Turning Points for the Australian Dollar with DailyFX SSI

Domestic and overseas monetary policy expectations will be firmly in focus for the Australian Dollar in the week ahead. News-flow from the central bank symposium at Jackson Hole, Wyoming over the weekend will set the tone before the weekly trading open. A much-anticipated speech from Federal Reserve Vice Chair Stanley Fischer will help shape speculation about the likelihood of an interest rate hike at next month’s meeting of the FOMC policy-setting committee.

Speaking in an interview with CNBC on Friday, Fischer pushed back against the notion that recent market volatility has conclusively taken a hike at next month’s sit-down off the table. While he acknowledged that the central bank is mindful of external developments, Fischer down-played spill-over risk from stress in China while talking up US employment and inflation trends. The Vice Chair added that while a final decision will depend on incoming data over the next two weeks – seemingly nodding to next week’s payrolls figures – the case for September liftoff had been “pretty strong” if not “conclusive” before the latest round of risk aversion.

The markets took notice, with priced-in bets on the timing of the first step toward tightening soaring into the week-end. Fed funds futures once again reflect expectations of an increase in October having shown investors abandoning faith in a hike at any point in 2015 as recently as Monday of last week. A hawkish speech from Mr Fischer over the weekend coupled with a firm result on Augusts’ US jobs report may shift the timeline further forward. Consensus forecasts call for a 220,000 payrolls increase, marking a slight pickup from July. Leading survey data reinforces the likelihood of a supportive outcome, pointing to strong hiring trends in the service sector, which accounts for three quarters of the US labor force.

Meanwhile on the home front, the RBA will deliver its monitory policy announcement. As with the Fed, the downturn in market sentiment over recent weeks has rekindled speculation that Governor Glenn Stevens and company will cut rates at least once over the coming 12 months. The priced-in probability of a move at this meeting is at 31 percent however, suggesting the baseline scenario favors standstill. This means traders will look for a directional catalyst in the text of the policy statement and the extent to which it telegraphs a dovish shift in officials’ outlook.

On balance, the reintroduction of near-term Fed tightening risk poses a two-pronged threat to the Aussie Dollar, first on the basis of an adverse shift in expected yield differentials and second via sentiment trends in the event that nearing stimulus withdrawal fuels risk aversion. An accommodative turn in RBA rhetoric stands to compound selling pressure. Needless to say, a surprise interest rate cut would only make matters worse. The currency stalled after spiking to a six-year low against its US counterpart early last week but downside follow-through may be just around the corner.

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Weekly Trading Forecast: FX Traders Brace for Huge Week Ahead

Major market volatility is nearly guaranteed on big tests ahead for the US Dollar and broader FX markets. Here are the critical events we’re watching.

US Dollar Forecast – US Dollar Volatility Near-Guaranteed, but Which Direction?

It was a difficult week for traders as the initial US Dollar breakdown left many (including us) looking for further losses.

Euro Forecast – EUR/USD August Advance to Unravel Further on Dovish ECB, Upbeat

The sharp pullback in EUR/USD may gather pace in the week ahead should the European Central Bank (ECB) signal a further expansion of monetary policy, while another 200K+ U.S.

British Pound – Sterling Runs into Support as Carney Takes the Stage at Jackson Hole

The British Pound was caught up in the rollercoaster risk-off/risk-on ride of the week in a very similar manner as the Euro and Japanese Yen; albeit with more subdued price action.

Japanese Yen Forecast – JPY Bulls Brace for BOJs Next Bailout

JPY saw its biggest rally vs. the USD since 2009 throughout this week’s early market turmoil.

Australian Dollar Forecast – Australian Dollar at Risk on RBA, Rebuilding Fed Rate Hike Bets

The Australian Dollar looks vulnerable to deeper losses in the week ahead as Fed rate hike bets rebuild while RBA rhetoric takes a dovish turn.

Gold Forecast – Gold Reverses as Fed Expectations Rebound – US NFP to Clear the Way

Gold prices plummeted this week with the precious metal off by more than 2% to trade at 1137 ahead of the New York close on Friday.

Weekly Trading Forecast: FX Traders Brace for Huge Week Ahead

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Sterling Runs into Support as Carney Takes the Stage at Jackson Hole

Sterling Runs into Support as Carney Takes the Stage at Jackson HoleSterling Runs into Support as Carney Takes the Stage at Jackson Hole

Fundamental Forecast for British Pound:Neutral

The British Pound was caught up in the rollercoaster risk-off/risk-on ride of the week in a very similar manner as the Euro and Japanese Yen; albeit with more subdued price action. With Mark Carney scheduled to speak over the weekend at the Jackson Hole Summit, near-term price action in the British Pound will likely be determined by whether or not Mr. Carney takes on a hawkish or more dovish tone. There are reasons that could be cited for either direction, as the panic exhibited earlier in the week is cause for concern when examining when to raise rates.

Just last week we were looking at a surprise inflation read out of the UK that created breaks of resistance as the Sterling trended higher. The Panic of Monday saw the Cable trade up to previous resistance at the 1.5800 level as carry trades quickly unwound in a ‘flight-to-safety.’ But as cooler heads prevailed while support was coming in across global markets, GBPUSD was free to float with expected monetary policy dichotomies as the Greenback strengthened against most major currencies. All told, the Sterling was one of the weakest performers on the week as that sucker-punch to global growth expectations raises a red flag on expected rate hikes out of the BoE.

From a technical standpoint, the Sterling caught support at a key 1.5350 level, which is the 50% retracement of the Financial Collapse low of 1.3500 to the seven-year high of 1.7190. The 61.8% retracement of this Fib retracement is at 1.5781, which is very near the top that was set on Monday and crossed on Tuesday as the Sterling trended lower.

Breaks below 1.5350 should be construed bearishly, as traders look to open short positions if and when the Sterling sinks to a 2.5 month low. Until then, this is a range with support that could provide an attractive risk-reward ratio by simply trading to the mid-line of the previous range.

Perhaps more attractive are setups in the Sterling against CAD, Aussie or Kiwi. This way traders can avoid the US dollar in the midst of the pandemonium over when/if/how/why this first rate hike may come out of the Fed. Each of these commodity currencies are presenting attractive technical setups against the British Pound, and this can be a prime way of trading the continued melt in commodity prices, which is one of the few themes that markets seem sure of at the current moment.

NFP on Friday will likely shape the weekly performance in GBPUSD; and the Bank of England rate decision in the following week could prove telling as to Monetary Policy Committee and Mr. Carney’s opinion on future rate hikes and policy trajectory given the multiple concerns for global weakness that are currently present.

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Gold Reverses as Fed Expectations Rebound- US NFP to Clear the Way

Gold Reverses as Fed Expectations Rebound- US NFP to Clear the WayGold Reverses as Fed Expectations Rebound- US NFP to Clear the Way

Fundamental Forecast for Gold:Neutral

Gold prices plummeted this week with the precious metal off by more than 2% to trade at 1137 ahead of the New York close on Friday. The decline snaps a 2-week winning streak for bullion prices after reversing sharply off technical resistance on Monday. The pullback eyes near-term support ahead a key U.S. data print that may largely dictate the outlook for September.

Much of gold’s advance has been driven by fears that a slowdown in China coupled with a strengthening dollar and subdued inflation may limit the Fed’s scope for a September lift off. However commentary out of committee members this week suggests that the central bank may yet still be on pace with Fed Vice-Chair Stanley Fischer largely arguing that a rate hike is still on the table as the central bank remains ‘data dependent.’ In contrast, recent remarks from New York Fed President William Dudley may be pointing at a growing rift within the committee as the permanent voting-member sees a ‘less compelling’ case for higher borrowing-costs.

Looking ahead to next week, traders are likely to eye the August Non-Farm Payroll report with greater importance especially as consensus estimates calling for another 220K expansion along with a downtick in the unemployment to an annualized 5.2%. Signs of a further reduction in labor market-slack may boost interest rate expectations as the central bank remains largely upbeat on the economy, and a positive reaction in the greenback could dampen the appeal of the precious metal and fuel the recent selloff.

We noted last week that from a technical standpoint, “rallied nearly 8% off the lows with the advance eyeing a resistance confluence just higher at 1170 where the 61.8% retracement of the May decline converges on the upper median-line parallel extending off the 2014 high.” Indeed the gold advance fizzled just pennies shy of the 1170 barrier before plummeting more than 4.4% before paring a portion of the losses into the close of the week. Interim support stands at 1.1120 backed by key support at 1095/98 where the monthly open converges on the low-week & low-day closes. A break below this level puts the resumption of the broader bear trend back in focus targeting the 1067. Resistance now stands at 1154 with a breach above 11170 needed to invalidate the broader downside bias. We’ll be looking for the monthly opening range to offer more clarity with NFPs on Friday likely to spur added volatility in bullion prices.

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JPY Bulls Brace for BOJs Next Bailout

JPY Bulls Brace for BOJs Next BailoutJPY Bulls Brace for BOJs Next Bailout

Fundamental Forecast for Yen:Bearish

JPY saw its biggest rally vs. the USD since 2009 throughout this week’s early market turmoil. However, given the central bank stimulus of the 2011 – 2014 move from 75.552 to as high as 125.85, many Yen bears are increasing expectations that the Bank of Japan will come to the rescue once again in order to push JPY lower and USDJPY through resistance. While the risk of sentiment was seen everywhere from the close of last week to the open of this week, what may have been more impressive so far was the rebound.

Monday’s low of 116.07 is yet to be tested. The drop was the strongest Yen move seen in five years as price collapsed from the weekly open of 121.878. Monday’s sell-off earned the moniker, ‘Black Monday’. However, it was met with Turnaround Tuesday, at least in FX. The turnaround point was highlighted as support as per our Volume at Price Indicator.

The rebound on Tuesday through Friday was equally impressive as price on Thursday afternoon came within 60 pips of the weekly high. Equity markets showed an even more impressive rebound bringing to mind the recent October 15, 2014 ‘mini-flash crash’ low, which was followed by new highs. Given the four year bull market in USDJPY and six your bull market in equities, which are highly correlated to USDJPY, it’s understandable that many are wondering if another new multi-decade high is around the corner. Speaking of rebound, as of the time of writing, SPX 500 is now up on the week as well as the Nikkei 225.

From a Fundamental perspective, domestic data for Japan seems to be in line with economists’ expectations although a bit disappointing with the Bank of Japan’s own forecasts given their market support. Currently, external factors could be what forces Abe’s hand for additional support. This week saw Japan July national CPI come in as expected at 0.2% YoY, some were wondering if we would get a negative print due to the commodities depression, but that did not materialize.

Additionally, Bank of Japan presidentKuroda frustrated those hoping for immediate BoJ action by sticking to a hawkish tone in regarding economic developments, but his statements had little positive impact on JPY. The market’s reaction or lack thereof on Kuroda’s speech hints that JPY may remain focused on external asset market moves. Next week hosts a series of tier 1 data points from Japan such as Industrial Production on the 30th, Finalized Manufacturing PMI for August, YoY CapEX, and Yoy Monetary Base. However, as mentioned earlier, eyes will likely be directional bias in global asset markets.

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EUR/USD Downside Levels to Watch Ahead of ECB, NFP

Talking Points:

- EUR/USD Bullish Formation Under Pressure Ahead of ECB Meeting.

- USD/JPY Rebound Mired by Bearish RSI Momentum, Wait-and-See BoJ.

- USDOLLAR Recovery Continues Despite Mixed Data; Widening Dissent Within Fed?

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EUR/USD

EUR/USD Daily Chart

Chart – Created Using FXCM Marketscope 2.0

  • Ongoing series of lower highs in EUR/USD may highlight a further decline should former resistance around1.1180 (23.6% expansion) to 1.1210 (61.8% retracement) fail to provide near-term support, with the RSI failing to retain the bullish formation from July.
  • In light of the dovish rhetoric coming out of the European Central Bank (ECB), a greater willingness to further embark on the easing cycle at the September 3rd policy meeting may produce near-term headwinds for the single currency.
  • DailyFX Speculative Sentiment Index (SSI) shows retail crowd remains net-long EUR/USD since March 9, but the ratio remains of off recent extremes as it sits at -1.65, with 38% of traders long.

USD/JPY

EUR/USD Downside Levels to Watch Ahead of ECB, NFP

  • Sharp rebound in USD/JPY may carry into September should the RSI breakout of the bearish formation; may see the dollar-yen continue to move in tandem with risk sentiment as the Bank of Japan (BoJ) continues to endorse a wait-and-see approach.
  • Despite the efforts by China to restore investor confidence, may see market sentiment continue to falter without a larger response from the major central banks.
  • Along with a bullish RSI trigger, would favor a closing price above former-resistance zone around 121.70-80 (38.2% expansion) to favor a resumption of the long-term bull trend.

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Read More:

Price & Time: Everybody Is An Equity Trader Now

EURJPY Rebound to Offer Short Entries Ahead of ECB- 137.50 Critical

USDOLLAR(Ticker: USDollar):

EUR/USD Downside Levels to Watch Ahead of ECB, NFPUSDOLLAR Daily Chart

Chart – Created Using FXCM Marketscope 2.0

  • Despite the unexpected slowdown in the U.S. Core Personal Consumption Expenditure (PCE), the Dow Jones-FXCM U.S. Dollar continue to carve a series of higher lows & highs.
  • May see the dollar trade on a firmer footing ahead of the Fed’s September 17 interest rate decision as Vice-Chair Stanley Fischer sees inflation returning to the 2% target, with the door open for a rate hike next month.
  • The sharp rebound may spur another test of 12,049 (78.6% retracement), but need a closing price above the key region to favor a resumption of the long-term bullish trend amid the failed attempts from earlier this year.

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U.S. Economic Calendar

— Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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