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Fundamental Forecast for Dollar:Bullish
- In a deluge of event risk this week, the FOMC rate decision stands as a focal point for the Dollar and market sentiment
- A status quo or slightly hawkish lean from the Fed risks reviving the fallout of the ‘Taper Tantrum’
- See the fundamental and technical forecast for the USDollar in our updated 4Q Forecast Trading Guide
The US Dollar managed to muscle out a modest advance this past week despite favorable winds for investor sentiment (through benchmarks like S&P 500 and volatility indexes) as well as a persistent dovishness in rate forecasts. Such resilience given the downgrade in its return potential and disinterest in safe havens is encouraging. However, that shouldn’t lead us to view the currency as being fundamentally indestructible. Last week was a period of respite. Reflection after the broad selling of ‘risk’ through the opening half of October is reasonable when key, open-ended fundamental themes are unresolved…and facing the kind of definitive milestones we expect in the week ahead. Both the Greenback and market-wide sentiment may finally find their cue for trend in the forthcoming event risk.
From a wealth of US and global event risk scheduled through the coming week, the most potent catalyst will be the Federal Open Market Committee’s policy decision Wednesday (18:00 GMT). This will be important for the Dollar on multiple levels. It will most readily feed speculation surrounding the relative future yield of the US currency and its assets. In the past few weeks, US rate forecasts have collapsed. A combination of downgraded global growth forecasts, tepid domestic data and provocative comments from a few Fed officials has pushed out expectations for the first rate hike and the trajectory of the pace thereafter.
From Fed Funds and Eurodollar futures (used to hedge interest rate risk), we find the market doesn’t entertain the chance of the first hike in the policy regime change until September 2015. Previously, the running consensus was for a ‘mid-2015’ move interpreted as the June 17 meeting. Furthermore, the pace of tightening has been downgraded so that now the benchmark rate is expected to be 0.46 percent on December 2015 and 1.36 percent come December 2016. The FOMC’s own consensus forecast for the same periods released just last month are 1.13 and 2.50 percent respectively. That is a substantial discount the market is ‘pricing in’.
This severe discrepancy will shape the market’s reaction to the event itself. Given the dovish view, a ‘neutral’ outcome could elicit a strong bullish outcome for the Dollar. In this case, holding true to the central bank’s trend through its past meetings of a final Taper to the QE3 program and undisturbed consensus (cautious optimism for the economy and employment) would indicate to the market that the Fed is keeping to its schedule and the consensus forecasts they produced in September. To meet the market’s level of dovishness, we would need to see either a delay in the final Taper (highly unlikely) or a significant softening to the tone in the monetary policy statement that accompanies the announcement.
What makes the upcoming rate decision even more intoxicating for the Dollar is its potential systemic influence over sentiment. Many attribute the sharp drop in global equities and other return-oriented markets earlier this month to a ‘Taper Tantrum’ – or the realization that stimulus regimes were shifting and the support for excessive risk taking was reversing. If that fundamental assessment is accurate, the Fed maintaining its path towards tightening can quickly wipe out this past week’s gains and definitively undermine a precarious market structure of record leverage, tepid participation and dependency on extremely low volatility conditions. In other words, we could see an aversion to risk that can fully engage the greenback’s safe haven quality.
While much of the Dollar’s and market’s potential revolves around the FOMC decision, there will be plenty of event risk at hand. The US 3Q GDP reading and the impact to the Euro (the second most liquid currency) from a glut of important event risk should also be monitored. Yet, should push come to shove, an active response to the FOMC will override all other interests. – JK
This past week’s calm optimism was likely an interlude for a bigger shift in market conditions. With a FOMC decision, US GDP, ECB Stress test and much more ahead; stability will be put to the test.
The US Dollar managed to muscle out a modest advance this past week despite favorable winds for investor sentiment (through benchmarks like S&P 500 and volatility indexes) as well as a persistent dovishness in rate forecasts.
The fundamental outlook for USD/JPY remains bullish as Federal Open Market Committee (FOMC) moves away from its easing cycle, but the dollar-yen may struggle to press fresh highs next week should the Bank of Japan (BoJ) refrain from further expanding its asset-purchase program.
The New Zealand Dollar may fall if the RBNZ withdraws its promise of future rate hikes while a status-quo FOMC statement sees Fed tightening bets rebuild.
The Aussie may remain under pressure over the coming week as elevated volatility caps carry demand, while US-centric event risk offers potential “breakout” catalysts.
Gold prices are softer this week with the precious metal off by 0.55% to trade at $1231 ahead of the New York close on Friday.
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Fundamental Forecast for Australian Dollar: Neutral
- AUD/USD Remains Range-Bound Despite Plenty Of Intraday Volatility
- Void of Major Domestic Data To Leave Steadfast RBA Policy Bets Intact
- Volatility Swell and US-Centric Event Risk To Offer AUD/USD Guidance
The Australian Dollar witnessed another week of wild intraday swings that seemingly found little follow-through. Traders looked past another status-quo set of RBA Meeting Minutes that reinforced the prospect of a “period of stability” for rates. Further, CPI figures remained contained within the central banks’ target range, doing little to alter steadfast policy expectations. Similarly, top-tier data from regional powerhouse, China, failed to deliver lasting cues for the currency.
A light domestic economic docket over the coming week is likely to leave RBA policy bets well-anchored and see the Aussie take its cues from elsewhere. While the AUD’s yield advantage has remained robust, its appeal has waned due to elevated volatility levels. This in turn is likely to cap carry trade demand for the currency even alongside broader improvements in risk sentiment.
The catalyst for the next break lower for AUD/USD is likely to emerge from the US Dollar side of the equation. The upcoming FOMC decision may offer the spark needed if the statement offers a more hawkish lean that focuses on labor market improvements, rather than subdued inflation.
Speculators remain net short the pair according to the latest COT figures. Yet positioning is roughly half what was witnessed in mid-2013, suggesting the short trade is far from being “crowded”.
Downside risks remain centered on the 2014 lows near 0.8660, which if broken on a ‘daily close’ basis could pave the way for a descent on 0.8320 – the July 2010 low.For more on the US Dollar side of the equation read the weekly forecast here.
Written by David de Ferranti, Currency Analyst, DailyFX
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Fundamental Forecast for Gold:Bearish
- WTI Bounces From 80.00 Floor, Gold Remains Vulnerable Ahead Of US Data
- Gold 1217 and 1207 are Possible Support Levels
- Sign up for DailyFX on Demand For Real-Time Gold Updates/Analysis Throughout the Week
Gold prices are softer this week with the precious metal off by 0.55% to trade at $1231 ahead of the New York close on Friday. The losses come amid a sharp rebound in broader equity markets with the S&P 500 marking its strongest weekly performance since early January 2013. Although newswires remain largely dominated by Ebola headlines, markets have largely shifted focus with all eyes on next week’s key US event risk.
Looking ahead to next week, the FOMC policy meeting will be central focus with the central bank widely expected to end its asset purchase program. With headline CPI data this week coming in stronger than expected, close attention will be given to the verbiage of the accompanying policy statement as investors look for clues as to the Fed’s outlook on interest rates. The advanced read on 3Q GDP is released the following day with consensus estimates calling for a print of 3% q/q, down from the robust 4.6% q/q seen in 2Q. A hawkish tone to the policy statement on the back of the improving US data flow is likely to put pressure on bullion prices with the technical picture suggesting that prices remain vulnerable heading into the end of the month.
From a technical standpoint, gold reversed off of a key resistance range defined by the June close lows, the 38.2% retracement of the July decline and the 61.8% extension of the advance from the October low at $1244/48. Although the rally reached as high as $1255, prices failed to close above and the focus remains on this key resistance range. A breach above $1248 eyes more significant resistance at $1260/63 and $1283 where ultimately we would start looking for favorable short entries. Support rests with the 38.2% retracement of the monthly advance at $1222 with subsequent support objectives eyed at $1206 and $1178/82. It’s worth noting that while this week’s price action shifts our near-term bias to the short-side, the initial monthly opening range did break to the topside and another run at the highs cannot be ruled out before the broader downtrend resumes. Look for the FOMC rate decision to offer a catalyst here as we head into the close of the month with our attention shifting to the November opening range.
—Written by Michael Boutros, Currency Strategist with DailyFX
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Fundamental Forecast for New Zealand Dollar: Bearish
- NZ Dollar Vulnerable if RBNZ Opts to Augment Future Rate Hike Pledge
- Status-Quo FOMC May Send Kiwi Lower as Fed Tightening Bets Rebuild
- Help Identify Critical Turning Points for NZD/USD Using DailyFX SSI
The New Zealand Dollar is in for a volatile period in the week ahead as a hefty dose of domestic fundamental event risk is compounded by high-profile macro-level developments. On the home front, the spotlight is on the RBNZ monetary policy announcement. September’s outing marked a shift into wait-and-see mode after four consecutive rate increases. The central bank is widely expected to maintain the benchmark lending rate unchanged again, putting the policy statement under the microscope as traders attempt to infer where officials will steer next.
Last month, the RBNZ argued that while “it is prudent to undertake a period of monitoring and assessment before considering further policy adjustment…some further policy tightening will be necessary.” Since then, CPI inflation has plunged to the weakest in a year while the exchange rate – a perennial source of concern over recent months – arrested a three-month decline and began to recover. This may prompt the central bank to withdraw language signaling renewed rate hikes are on the horizon after the current “assessment period” runs its course, an outcome which stands to undercut yield-based support for the New Zealand Dollar and send prices lower.
Externally, the central concern preoccupying investors is the ability of a resurgent US economy to underpin global growth, offsetting weakness in China and the Eurozone. That puts the FOMC monetary policy announcement in the spotlight. Janet Yellen and company are widely expected to issue one final $15 billion reduction in monthly asset purchases to conclude the QE3 stimulus program. The probability of a surprise extension seems overwhelmingly unlikely. That means the announcement’s market-moving potential will be found in guidance for the timing of the first subsequent rate hike inferred from the accompanying policy statement.
Recent weeks have witnessed a moderation in the Fed tightening outlook as global slowdown fears encouraged speculation that the central bank will want to safe-guard the US recovery from knock-on effects of weakness elsewhere by delaying normalization. Indeed, fed funds futures now reveal priced-in expectations of a rate hike no sooner than December of next year, far later than prior bets calling for a move around mid-year. A change FOMC statement reflecting renewed concerns about persistently low inflation would validate this shift. Alternatively, a restatement of the status quo would hint the markets’ dovish lean has over-reached, triggering a readjustment and putting pressure on the Kiwi. Considering the Fed’s steady hand through the first-quarter US slowdown, the latter scenario seems more probable.
- USD/JPY Struggles to Push Above Former Support; Will the BoJ Ease Policy Further?
- EUR/USD Vulnerable on Dismal ECB Bank Stress Test; Lower-High in Place?
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Chart – Created Using FXCM Marketscope 2.0
- Upward trending channel favors topside targets for USD/JPY, but may face a short-term pullback as it comes up against trendline resistance.
- Still need to see a break of the bearish momentum on the Relative Strength Index (RSI) to favor a higher-high for USD/JPY, especially as it struggles to push & close above former support around 108.20 (61.8% retracement) to 108.30 (1.618% expansion).
- Key support remains around 105.10 (38.2% expansion) to 105.20 (50.0% expansion).
- Even though Bloomberg News reports 25 of the 130 commercial banks have failed the European Central Bank’s (ECB) stress test, EUR/USD remains bid as only 10 are expected to face a capital shortfall.
- Despite the headlines, the results may put increased pressure on the ECB to implement more non-standard measures; Euro-Zone Consumer Price Index (CPI) will be close watched next week as the core rate of inflation is projected to hold steady at an annualized 0.8%.
- Despite the recent volatility in the DailyFX Speculative Sentiment Index (SSI), retail-crowd is net-long EUR/USD going into the last full week of October, with the ratio standing at +1.14.
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Chart – Created Using FXCM Marketscope 2.0
- The bullish breakout in the Dow Jones-FXCM U.S. Dollar Index remains favored ahead of the Federal Open Market Committee’s (FOMC) October 29 meeting as the central bank is widely expected to halt its asset-purchase program; however, the forward-guidance for monetary policy may have the greater impact in driving the USDOLLAR as market participants largely look for the first rate hike in 2015.
- The advance 3Q GDP report will also be in focus as the U.S. economy is expected to grow an annualized 3.1% after expanding 4.6% during the three-months through June.
- Looks as though a near-term bottom is in place given the string of closes above 10,950 (38.2% retracement), with 11,120 (1.618) to 11,138 (0.618%) in focus going into the month-end.
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— Written by David Song, Currency Analyst
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