Daily Market Forecast by Capital Trust Markets

[CapitalTrustMarkets]

The Differences And Similarities Of Two Polar Opposite Traders

There are so many different approaches a trader can take to the foreign exchange markets that, for a beginner, it can be difficult to decide which one suits them best. To help out, here's an introduction to two fictional traders, their respective approaches and difficulties they each face.

Kara the office manager

The first trader is Kara. Kara is an office manager in the construction industry. She spends every weekday at work, meaning by the time she gets to look at her charts, her domestic markets have closed and there is very little volatility across the major pairs. This lack of volatility means she is unable to trade intraday, so she takes a long term, position trader's approach.

Every weekend she sits down with her favorite news sites and the latest economic data, and uses them to try to predict the long-term outlook of a currency. She forms a long-term bias based on her interpretation of the fundamental data, and places a trade that supports that bias.

The main difficulty Kara faces is that, while her bias may prove correct, the long-term nature of the trade means the market can go against her for quite some time before validating her opinion. This exposes her to considerable risk, and as a result, she has to set strict rules as to when she capitulates and takes her losses.

Mark the day trader

The second trader is Mark. Mark is a professional day trader, who spends his whole working day in front of numerous computer screens. Mark looks to profit from the short-term volatility that data releases create in the currency markets. He watches his economic calendar, and enters trades based on surprise data. Mark doesn’t really have a long term bias, at least not one that affects his trading, he simply reacts to what the data, and in turn the market, tells him.

The main danger associated with this approach, again, is risk. Markets can be extremely volatile around data releases, and will not always react in the way that the fundamentals suggest they should. This volatility exposes mark to potentially large losses in a very short amount of time. To overcome this risk he must incorporate strict stop losses into each trade, and avoid chasing profits when the market moves against his initial response.

All said...

These, of course, are just two of any different approaches. One thing to note however, is that although Mark and Kara are at the polar opposite ends of the trading scale—long term and extremely short term—they share the same main danger: risk exposure.

In short, it doesn’t matter what approach you take, the factor that will dictate your success is your approach to risk, and your strategy's approach to its management.

 

[CapitalTrustMarkets]

The Key Components Of Every Trading Plan

Every trader is different, but all successful traders have one thing in common. One day, they sat down and put together a trading plan, a method through which they would approach the markets. Here are the key components of a solid trading plan, and why they are necessary.

Analysis

Analysis is one of the more obvious components of plan, but you would be surprised how many newer traders brush over it. Be it technical, fundamental or a combination of the two, you should decide what tools you are going to use to help you interpret price action.

Entry Rules

Every trade you make should be based on a set of predetermined entry rules. By ensuring this is the case, you can completely eradicate the chances of you letting emotion dictate your trading, and in addition, the risk that comes with doing so. Make a checklist of your rules, and keep it by your computer. Every time you are about to action an order, run through the checklist to make sure the trade you are making meets all of your trade requirements. If it doesn’t, move on and look for another opportunity.

Exit Rules

Perhaps just as important as your entry rules, are your exit rules. These rules dictate when you close out a trade, be it for a profit or a loss. Before you enter a trade, you should already know how much profit you are targeting, and how much of your capital you are risking. This ensures you don’t take your profits too early and that you don't let your losers run, which are two of the most common mistakes traders make. The best way to incorporate your exit rules into your trading is to enter stop and limit orders with each trade you make.

Money Management

This is probably the most important part of any strategy. Money management rules help to ensure that, whatever the outcome of your latest trade, you will always have enough capital to enter another. The easiest way to incorporate money management into your trading plan is to decide on a maximum percentage of your capital that you are willing to risk on each trade, and never exceed this maximum. Many traders use 2%, which affords them many losses without going bust.

Emotional Approach

This is the component that most new traders overlook. There is no point in having rules such as those above if you do not have the emotional control to implement them consistently. You need to need to learn to be objective, and not let the outcome of trades affect the way you approach the markets.

 

[CapitalTrustMarkets]

The Ups And Downs OF The ECB Rate Decision

The ECB will announce its latest interest rate decision on Thursday, and recent Eurozone inflation data has led many to suggest ECB President Mario Draghi will cut the Eurozone base rate to zero. The suggestion has divided opinion, with some claiming a cut will be too hasty a reaction to a single piece of data, and others backing a cut to divert the threat of deflation. What are the arguments of both parties?

Arguments For

First, let's take a look at the argument for a cut. As mentioned, the main driver behind zero rates is to stave off the threat of deflation. Deflation occurs when prices of goods and services decline, and can lead to a fall in consumer spending. Initially, this seems counterintuitive; surely, if prices fell, consumers would purchase more? Maybe in the extreme short term, but not for long. Lower prices results in a cash flow restriction for producers and retailers. This leads to reduced production, which leads to an increase in unemployment. Higher unemployment results in reduced consumer spending. Further to this, the real danger of deflation comes from the next step in the cycle. Reduced consumption leads to oversupply of goods and services, which leads to even lower prices, and the cycle continues.

If Draghi cuts the rate to zero, it will be in the hope that it stimulates borrowing, and effectively reverse the cycle just described. It will also devalue the Euro, which will make European exports cheaper for foreign importers. This should stimulate production, and in turn, inflation.

Arguments Against

Now let's take a look at the argument against a cut. First, there is no guarantee it will make a difference. The base rate is the rate at which European banks can borrow money from the ECB. The banks however, do not have to release any of this money into the economy. Second, and perhaps more importantly, cheap money can lead to complacency.

Take the housing sector as an example. Low interest rates in the Eurozone have boosted the housing sector, as house buyers take advantage of cheap mortgages. Most Eurozone mortgages however, are variable against the base rate. As such, when the ECB raises rates, the repayments homeowners have to make each month will rise. Many will not be able to afford the increased repayments, and there will likely be a large number of defaults.

This concept is why the US stock markets panic every time Fed Chair Yellen hits at a rate increase, as a wave of defaults could send the US economy back into recession. Zero rates in the Eurozone therefore, will increase the likelihood of a return to default induced recession.

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Prepared by Samuel Rae - Chief Currency Strategist at Capital Trust Markets

 

[CapitalTrustMarkets]

USD/CAD Holds Off Long Term Channel Support For Fourth Straight Day

USD/CAD held off the long term channel support yesterday, for the fourth day in a row, showing the strength of the pair, investors are curiously waiting for the nonfarm payrolls report for a clear direction.

Technical Analysis

The pair is being traded near 1.1027 at 3:50 GMT in Asia. Strong support may be noted around the 1.1000 handle. A daily closing below the channel support could push the pair into stronger bearish trend, opening doors for steeper correction below the 1.0800 support area.

On the upside, the pair is likely to face hurdle near 1.1078 that is the 55 Daily Moving Average (DMA) ahead of the channel resistance which is currently standing around 1.1287. The pair might hold a tight range ahead of the US employment reports.

ISM Services PMI

The Institute of Supply Management (ISM) is due to release the US services Purchasing Managers Index (PMI) today. According to forecast, the number of people who claimed benefits for unemployment increased to 317K during the week ended on March 28 as compared to 311K in the week before, worse than expected actual outcome will be seen as bearish for USD/CAD and vice versa.

Nonfarm Payrolls

The US labor department will tomorrow release the nonfarm payrolls report for the previous month. Analysts have predicted an increase to 196K during March as compared to 175K in the month before. Generally speaking, high nonfarm payrolls are considered good for the economy hence the dollar tends to rise after the upbeat nonfarm payrolls report.

Canadian Employment Report

Tomorrow Statistics Canada will also release the unemployment rate figure. According to forecast, the rate of unemployment remained steady at 7% in March as compared to the same reading in the month before, better than expected actual outcome will be bearish for USD/CAD and vice versa.

Conclusion

USD/CAD is expected to hold a tight range before the Friday releases, selling the pair on downside breakout could be a good strategy.

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Prepared by Usman Ahmed, Chief Fundamental Strategist at Capital Trust Markets

 

[CapitalTrustMarkets]

Is Consensus Wrong In The Trade Balance Forecast?

The monthly US trade balance figure is set for release on Thursday afternoon, and consensus forecasts a deficit contraction. Seasoned traders will be well aware however, that fundamental releases often contradict consensus, and this may well prove the case this time around.

The Release

The trade balance figure is one of the most highly anticipated releases on the calendar, and its impact on both the foreign exchange markets and the domestic US markets has strengthened in recent years, mainly due to the vast increase in US national debt.

The Forecast

Consensus forecasts a small contraction, with the trade deficit tightening from 39.10B to 38.50B. A couple of fundamental factors however, both domestic and global, do not look to support this prediction.

Abenomics

The first is the continuing devaluation of the Japanese Yen. The aptly dubbed "Abenomics" has served to dramatically reduce the cost of Japanese exports, and global markets have turned to the nation for high ticket goods such as vehicles and appliances. Much of the increased demand for Japanese goods has been redirected from the US, not because the products on offer are any better, simply because the weakened Yen makes them cheaper. This has both served to weaken US export demand, and increase US import demand, which flies in the face of the deficit contraction prediction.

China

The second is the ongoing situation in China. Talks of an economic slowdown in the super economy were compounded on Tuesday as the HSBC manufacturing PMI release missed expectations, reported at 48.0 versus a forecast of 48.1. In the last ten years, US exports to China have grown by nearly 400%, and China is now the US' third biggest export market. The slowdown will likely have impacted US exports to China during the past month, and the trade balance figure will, in turn, likely reflect this.

To Finish...

An important point is that, while these factors suggest consensus may be incorrect in its forecast of the data, trading in advance of an expected miss can be a risky strategy. So many factors contribute to the headline figures that it can be difficult to say either way from which angle a surprise might come. Don’t be surprised however, if a downside miss plays out in this afternoon's release.

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Written by Samuel Rae - Chief Currency Strategist at Capital Trust Markets

 

[CapitalTrustMarkets]

What Are Draghi's "Instruments"?

The major event during in Thursday's markets was the ECB rate decision and its accompanying statement and conference. Many suggested a rate cut was on the cards, but ECB President Mario Draghi held the base rate steady at 0.25%. However, his conference tone was far from hawkish; arguably as dovish as it could have been without including a rate cut. In his introductory statement, Draghi said, “We will monitor developments very closely and will consider all instruments available to us." Obviously, "these instruments" include a rate cut, but what are some alternatives? Here are two.

Quantitative Easing

A number of major economies including the UK, the US and Japan have already turned to quantitative easing to help stem deflation and stimulate growth. Quantitative easing involves an economy's central bank creating money, and injecting it into the economy through the purchase of financial assets, mostly bonds, from institutions such as banks, pension funds and insurance companies. With the government buying bonds, the price of bonds rises, which makes them a less attractive investment. This, theoretically, promotes lending to businesses and individuals, stimulating consumption, employment and output.

The danger of quantitative easing comes when retail banks fail to expand credit offerings, and the increased money supply doesn’t reach businesses and individuals. To some extent, this has happened in the UK, causing the Bank of England to raise its quantitative easing level from a targeted $50B to just shy of $400B. Some, namely ECB member Jens Weidmann, go as far as to say the concept violates the ECB mandate, which prohibits monetary financing of government deficits.

A Tax On Reserves

The second main option is a tax on reserve holdings. Retail banks are required to hold a fraction of their total customer deposits with a central bank. Currently, the central bank pays the retail banks an interest (equal to the base rate) on these holdings. The ECB could reduce the nominal interest rate to below zero, i.e. -1%, which would serve to "tax" the reserves. Essentially, it would cost the retail banks 1% to hold reserves, which would theoretically stimulate lending to individuals and businesses (at a rate that exceeds 1%) to overcome the increased cost of their reserve holdings.

Final Word

Over the past 6 years, quantitative easing has grown to be seen as the more conventional tool out of the two covered here. It has however, not been as successful as many economists suggested it might. For this reason, the ECB may choose to take the less conventional approach to increase its chance of efficacy.

 

[CapitalTrustMarkets]

Forex Education – Why it is Important for Successful trade?

Forex industry with over $5.3 trillion business per day holds much for the investors. It is an investment industry where having money to invest is not enough. You also need to have Forex education and analytical skills in order to make profit. Otherwise reverse may happen and you can end up in wasting your investment.

Before investing money in loss trades, it is better to invest it in learning Forex. It will make you aware of how the Forex market works, what the main terminologies are, and what factors influence the currency prices. Moreover you will also learn to develop strategies for successful trades.

Some of the main things that a basic Forex course includes are:
• Forex terminology
• Chart analysis
• Trading mechanics
• Using trading software
• Understanding technical indicators
• Perform technical and fundamental analysis
• Risk management and much more.

Why Forex education is necessary?

It is important and necessary for anybody who wants to experiment with trading. Some of the main benefits are:

• Minimizes psychological Impact

It gives you self-confidence to trade and minimizes psychological impact that may hinder your ability to trade well. With Forex education, you learn to control your emotions and save yourself from any sort of major loss.

• Strategy development

It allows you to develop an informed strategy to trade. It gives you ability to create a strategy by analyzing market data and technical indicators. Without Forex education you will never be able to analyze charts and may end up in loss.

• Risk Management

It teaches you about how you can manage your investment risk. You can learn various risk management strategies used by top traders around the world. It gives you ample knowledge about portfolio management, hedging, arbitrage and other risk management tactics.

Where to get Forex education?

Experts recommend going to Forex professionals to learn trading. They can give you better insight as these people have practically applied every trading strategy. They not only give you theoretical knowledge but also give you industry exposure.

Besides going to professionals, you can self-learn by creating demo account and practicing it. Similarly you can read Forex articles and watch videos to improve your skills and practice trading strategies.

Remember, Forex education is a slow process. You can never be a Forex expert in one day. You need to be very patient during your learning period. Each passing day will take you a step forward towards Forex.

 

[CapitalTrustMarkets]

Should The Markets Be Paying More Attention to Crimea?

During the final two weeks of February, and through until around mid-March, the situation in Ukraine took a firm hold of the financial markets. Gold gained strength as risk off sentiment reigned supreme, amid talks of sanctions and the potential for military action. Now however, the markets seem to have completely forgotten about the potential crisis. Gold has lost nearly all of its February / March strength, and the major US indices are striking fresh highs almost daily. Is this ignorance warranted, or are we in for a shock?

First, it is important to point out that while the markets seem to have turned a blind eye to the potential for increasing geopolitical tension, it has by no means dissipated. Putin has called a number of his troops from eth Ukrainian border, yes, but that is not the issue at hand. The real issue is the political and economic sanctions that Europe, the US and Russia are trading back and forth.

Earlier this week, Russia effectively withdrew from NATO, withdrawing both its ambassador and any potential military cooperation. This raises the potential for a military standoff in Ukraine, between the now ousted Russia and NATO alliance troops. If there was ever a potential trigger for a return to risk off sentiment, a military standoff between Russia and the rest of the developed world would be high up on the list.

Further raising tensions, is the Russian plan for the future of Ukraine. During the past week, plans to partition the country have surfaced, camouflaged as federalism by Russian ministers. If global leaders thought a domestically supported annexing of Crimea was illegal, a forced partition of a country like Ukraine would be a very serious event. Civil unrest has crippled markets in recent times—think Egypt, Greece—and a partitioning of Ukraine would undoubtedly fuel considerable unrest.

Finally, during the last 48 hours, Russia has increased the price of gas to Ukraine by more than 80%. Russia has used its most exported commodity as a political weapon in the past, and the latest application of this method puts Ukraine, a nation already on the brink of bankruptcy, at considerable risk.

All said, while markets may have been distracted by the potential for a US rate hike and resurgent stock markets, there will undoubtedly come a point when the situation in Ukraine returns to the fore. As and when it does, expect a swift return to risk off sentiment and the volatility that ensues.

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Written by Samuel Rae - Chief Currency Strategist at Capital Trust Markets

 

[CapitalTrustMarkets]

Is Trouble Brewing In Japan?

Early this week, a number of key Japanese fundamental data will offer insight into the state of the Japanese economy. Trade and monetary policy is in the spotlight, as traders and investors continue to scrutinize the effect of the ongoing aggressive Japanese stimulus package. The package looks to be working, but looking a little deeper, is Japan heading for trouble?

First, a short history lesson. The lost decade, or two decades, depending on who you ask, have been covered in depth, but it's worth a quick recap to introduce the situation. In short, throughout the 1970s and 1980s in Japan, low interest rates and excessive monetary easing fueled a huge speculative asset bubble.

House prices, land prices and stocks boomed to unsustainable levels, and in response, the Bank of Japan raised interest rates sharply. The raise caused a wave of default, which led to the effective collapse of the Japanese financial system.

The collapse fueled a sustained period of deflation, pretty much right the way through until 2012. At the end of 2012, Japan appointed Shinzo Abe as its Prime Minister, and things started to change. His "three arrows" policy, combining fiscal stimulus, monetary easing and structural reforms has started to tackle deflation, and many suggest he is responsible for helping Japan avoid prolonged and serious recession.

However, some have suggested all is not as it seems. Proponents of Abe's policies point to the increase in CPI starting from June last year as a signal of Abenomics' effectiveness. Yes, inflation has returned, but core inflation, is still a way behind its raw data counterpart. Why? As is so often the case, it's all about supply. The nuclear power accident in Japan led to a closing of all the nation's nuclear stations, which means it is no longer self-sufficient in terms of power production. This shortage of supply (coupled with the increased cost of imported energy as a result of the weakened Yen) increases energy costs, which distorts CPI.

Another problem comes from the increasing government debt. Japan's current gross public debt is approximately $10T, equating to about 250% of its GDP. Couple this with Japan's famously aging population (and the near term pension levels this infers), and you get the makings of a potential crisis. An April sales tax hike, from 5%-8%, it intended to counter this potential crisis, but it could just as easily damage consumer spending.

Slowing consumer spending could undo the positives of Abenomics and, once again, send Japan into a drawn out deflationary period.

To add balance, Abenomics has sparked an increase in employment, a booming stock market, increased industrial production and rising GDP. In short, all is not doom and gloom. However, traders need be aware that aggressive expansionary policy has consequences, and it can only be a matter of term before they surface.


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Written by Samuel Rae - Chief Currency Strategist at Capital Trust Markets

 

[CapitalTrustMarkets]

The Dangers Of Over Reliance On Backtesting

One of the major advantages a computer has over its human counterpart is its ability to process huge volumes of data at breakneck speed. This unique ability has found application all through the modern world, and stock trading is no exception.

Back-testing a strategy across historical data (using a piece of software to test a particular strategy over a set period of historical price action) has grown to be considered a vital tool in any trader’s arsenal, but its nature is often misunderstood and in turn, its results misinterpreted. So what do you need to know?

Market Conditions

First of all, you must understand that test results are only useful when applied to relevant market conditions. Market conditions change quickly and considerably, and certain trading strategies will be effective under certain conditions, yet completely ineffective under others. For this reason, and to help overcome misleading test results, you should identify the market conditions you are looking to trade under (range, bullish, bearish etc), and test accordingly. There is no point testing a stock’s price action over a particular historical data set if current market behavior suggests the market is about to change. In short, try to identify the current market conditions, then look for an historical period that matches.

Trade Like A Robot

Second, you must recognize the fact that back-tested results are the sum of automated execution. Automated execution is both precise and unemotional, neither of which are qualities most individuals can lay claim to, let alone traders. Therefore, to replicate a test’s results you must incorporate both qualities into your personal style. Work hard to ensure that you stick to the rules of the strategy you tested, and don’t let emotions alter your operations.

Take Control Of Your Risk

Finally, even with correct interpretation of conditions, and infallible execution, a strategy can still fail if a sudden, unexpected shock (a fundamental data miss, for example, alters the direction of a market. The implication here is that, regardless of results and your perception of current market conditions, there is no substitute for strict risk management.

 

[CommexFX]

Daily Outlook 2-05-2014

EUR declined marginally against the USD and closed at 1.3869, in a quiet holiday trading session. However, later during the day, the US Dollar benefitted from data that showed the ISM manufacturing PMI in the US rose to a four-month high reading of 54.9 in April

GBP rose 0.08% against the USD and closed at 1.6890, after Markit PMI for the UK manufacturing sector rose more than market expectations to a reading of 57.3 in April

AUD weakened 0.12% against the USD to close at 0.9272.In economic news, the Reserve Bank of Australia’s (RBA) index of commodity prices fell to a new four-year low in April.

USD strengthened 0.06% against the JPY and closed at 102.31, following strong US ISM manufacturing PMI and consumer spending data.

 

[CommexFX]

Daily Outlook 7-05-2014

Dollar Index (79.14) has hit another 12-month low at 79.06 and as of now merging close to the real backing of 79-78.50. Still no indication of purchasers is obvious and further drop to 78.90-60 looks more reasonable to assume now. Just a break over 80.15 might be a starting indication of quality.

The Euro (1.3925) has broken over 1.3900 and hit a high of 1.3951 in this way. Keep an eye if ECB takes some venture close to 1.4000-50 yet a tear over 1.4050 might open the way to tremendous upside targets.

Dollar-Yen (101.60), even in the current frail state, has overseen so far to stay in the 10 week long wide run of 101-104. We continue viewing a break of the long haul help at 101.00-100.50 for significant proceeds onward the downside.

The Euro-Yen Cross (141.49) has remained practically unaltered as both Euro and Yen acknowledged significantly. The more extensive extent of 140.00-143.50 must be broken to create any serious move.

Pound (1.6971) has practically arrived at our target zone of 1.7000-50 as it made a high at 1.6996 in this way. Staying over 1.6850-30 on any redress, it may climb towards 1.7250-90 in the following few sessions.

Aussie (0.9342) broke over 0.9315 to make a high at 0.9367 of course yet it stays to be checked whether it figures out how to break over the solid safety zone of 0.9380-0.9400 to affirm an inversion. A disappointment may bring about an alternate tumble to 0.92.

Gold (1311.667) has stopped after its climb in the last two sessions, as safety close to 1315.32 holds for the present. A break over this level might guarantee an ascent towards 1320-1330. The twofold- base on the outlines demonstrates close term bullish quality which discredits the prior bearish perspectives. We may see a tumble to 1300 preceding a crisp upward rally.

 

[CommexFX]

Daily Outlook 8-05-2014

Dollar Index (79.2340) is attempting to ricochet from 79 yet work it exchanges over 79.50-55 soon, the danger remains. At the same time the band of 79.00-78.60 has given backing to almost 2 years now and that is the desire for bulls.

The Euro (1.3913) is going under a little rectification in the wake of breaking over 1.3900 and hitting 1.3951 in this way. Keep an eye if ECB takes some venture close to 1.4000-50 yet a tear over 1.4050 might open the route to enormous upside targets.

Dollar-Yen (101.87), even in the current feeble state, has overseen so far to stay in the 10 week long expansive extent of 101-104. We continue viewing a break of the long haul help at 101.00-100.50 for significant proceeds onward the downside.

The Euro-Yen Cross (141.75) has remained just about unaltered as both Euro and Yen acknowledged impressively however may move forcefully any day now. The more extensive reach of 140.00-143.50 must be broken to create a slanting move.

Pound (1.6948) is remedying in the wake of arriving at our target zone of 1.7000-50 as it made a high at 1.6996. Staying over 1.6850-30 on any rectification, it may climb towards 1.7250-90 in the following few sessions.

Aussie (0.9368) broke over 0.9315 to make a high at 0.9370 obviously however it stays to be checked whether it figures out how to break over the solid safety range of 0.9380-0.9400 to affirm an inversion and ascent to 0.9540-80. A disappointment may bring about an alternate tumble to 0.92.

Gold (Spot 1290) has plunged in accordance with yesterday’s desire of tumble to 1300. Pivotal Support seen in the 1290-1279 district over today-tomorrow. Necessities to hold to keep close-term bullishness in place and produce a bob towards 1325 once more. Break underneath 1279, if seen, could bring genuine uncertainty to Gold quality.

 

[CapitalTrustMarkets]

NZD/USD Plunges As Bears Take Control

Market Sentiment: Bullish

Key Takeaways
• Kiwi Dollar looks set for steep losses
• The sentiment will remain bullish as far as the 0.8515 support area is intact
• Selling on rallies is preferred in the short term

NZD/USD extended downside movement yesterday following the emergence of two-bar bearish reversal pattern which is considered a very reliable signal for strong downside risk in the near future. The sentiment however remains very bullish amid repeated higher highs and higher lows in the recent waves.

Technical Analysis

As of this writing, the pair is being traded near 0.8637. A resistance may be noted around 0.8647, the 50% fib level ahead of 0.8671 that is the intraday high of yesterday and then 0.8779, the swing high of the previous wave as demonstrated in the following chart. A break above the 0.8779 resistance area will spur renewed buying interest, exposing fresh all-time highs above the 0.8800 handle.

On the downside, the pair is expected to find a support near 0.8577, the 76.4% fib level ahead of 0.8515 that is the swing low of the previous wave. A break below 0.8515 will turn the long term sentiment to bearish due to Lower Low (LL) on the daily chart.

E-Card Sales

The electronic card retail sales in New Zealand rose by 5.7% during April compared with 5.1% increase in the same month of the year before, a government report said today. Similarly, the sales increased by 0.3% last month as compared to 0.0% increase in the month before. Generally speaking, higher card retail sales are considered bullish for NZD/USD and vice versa.

Trade Ideas

Considering the overall macro-economic scenario, selling the pair on rallies around 0.8700 could be a good strategy; the trade should be stopped on a break above the swing high of the previous wave while the target may be near the swing low of the previous wave as described above.

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Prepared by Usman Ahmed, Chief Fundamental Analyst at Capital Trust Markets

 

[CapitalTrustMarkets]

Is Australia Heading For Recession?

Fundamental Bias: Long Term Bearish

Key Takeaways:

• Australian real estate data set for release on Monday evening

• Rebalancing has boosted the demand for housing

• Variable rates could trigger a wave of mortgage defaults once the RBA tightens policy

• Australia could be heading for a 2008-esque recession

As the Asian markets open for business late on US Monday evening, the Australian Bureau of Statistics will report its latest home loans and house price index data.

Both figures offer insight into what will undoubtedly become a real hot topic in Australia at in the near future, one that could essentially send the nation’s economy spiraling downwards – the household debt situation. Because of their far-reaching effects, both figures could have a considerable impact on the value of the Australian dollar, both immediately following their release and going forward on a long term basis. Here’s what you need to know.

The Data

First, let’s look at why the data is important. It stems from the deflation of the decade long mining boom that has underpinned output growth in Australia. For a number of reasons, but primarily the decline in raw material demand from the flailing Chinese economy, employment in the mining sector is in decline and production is decelerating. For a country that relies heavily on one industry, this could be a severe problem heading forward. So what has been the Australian policymakers’ response? Simply put, monetary policy driven stimulus through low a sustained period of historic low rates.

Rebalancing

Low interest rates have mitigated the effects of the mining slowdown, with a sharp rise in real estate demand, and the new homes construction that follows. However, as demand has increased, so has the price of a home, alongside the number of individuals taking on mortgage debt.

The Looming Disaster

The problem lies in the fact that the vast majority of these mortgages are variable on the base rate. As long as rates remain low, there is no problem. As soon as the RBA starts to tighten policy however, many of the individuals that have taken a mortgage on rising prices will struggle to meet repayments. This wave of defaults will likely spark a credit tightening round, which in a very similar fashion to the 2008 US crisis, could plunge Australia into recession.

In Short

In short, the Australian economy is heading for real trouble. This turns the usual response to the upcoming data on its head. Whereas rising home sales and mortgage applications would usually suggest economic expansion and, in turn, strengthen the Australian dollar, the longer the real estate market heats up the larger the potential impact of a wave of mortgage defaults. For this reason, better than expected data will likely have a muted, or even negative, impact on the Aussie. Conversely, worse than expected data may boost the Aussie in the short term, primarily as it suggests that the real estate market may be cooling.

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Prepared by Samuel J Rae - Chief Currency Strategist at Capital Trust Markets

 

[CapitalTrustMarkets]

Fed Budget Balance Takes The Stage

Fundamental Bias: Neutral

Key Takeaways:

• US Federal Budget Balance set for release on Monday afternoon
• Increased employment activity should boost tax revenues, while tightening should reduce costs – equating to a gain on the previous release
• Consensus forecasts a surplus of 114.0B.

As the markets get moving for yet another week, Monday is something of a slow day as far as market-moving data is concerned.

There are, however, a couple of releases that have the potential to inject some volatility into the majors. One of these releases is the latest federal budget balance figure out of the US. The release comes ahead of Thursday's inflation data, and could sure up positive investor outlook as far as medium term US growth is concerned. Here's what you need to know.

Fundamentals

First, let's take a quick look at the current underlying fundamentals. In terms of overarching growth, the US economy hardly grew at all during the first quarter of this year, but many expect this to change during the current quarter with a spate of recent data hinting at acceleration.

Employment data has been leading the charge, with NFP blitzing expectations and jobless claims and the unemployment rate falling. First quarter GDP fell slightly short, as mentioned, but don't let this dampen your expected impact of an increasingly active labor force. As unemployment falls, an increase in disposable income and, in turn, consumer spending, should fuel an acceleration in output growth.

What are we looking for specifically in today's data? As employment has risen, US tax revenues should have increased. Combined with public spending austerity, this should facilitate a strengthening of the US's financial standing, with consensus forecasting a budget surplus of 114.0B, a large gain on the previous release of a 36.9B deficit.

Technicals

So what are the levels to watch? Take a look at the EURUSD chart below.

As shown, the USD strengthened considerably versus its European counterpart towards the end of last week, a gain fueled primarily through the jobless claims fall and something of a hawkish tone to Yellen's ensuing speech. In term support at 1.3733 is the downside level to keep an eye on – expect a better than expected budget release to catalyze a break below this level, with a close below offering up an initial downside target of April support at 1.3686. Looking to the upside, expect a miss to initiate a short term rally toward in term resistance at 1.3804, and the build up to Thursday's inflation data will likely cause some consolidation post-test of this level.

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Prepared by Samuel J Rae - Chief Currency Strategist at Capital Trust Markets

 

[CapitalTrustMarkets]

Is New Zealand’s Strength False Optimism?

Fundamental Bias: Short term – Neutral/ Long term – Bearish

Key Takeaways:

• New Zealand retail sales data set for release on Tuesday evening
• The nations property market is at risk of overheating, and could lead to long term trouble
• Short term, strong sales data would likely boost the NZDUSD towards recent highs.

After the US markets close on Tuesday evening, Statistics New Zealand will report the latest round of retail sales data, both the raw figure and its core counterpart.

The economic slowdown in China has weighed heavily on the New Zealand dollar, and recent data out of the Asian giant has led many to predict collateral damage across New Zealand, and in turn, added pressure on the nation's currency. So what might be the impact and implications of the upcoming data? Here's what you need to know.

First, let's take a quick look at what's going on in New Zealand at the moment. The general market outlook is positive, with most analysts looking to growth as a sign of optimism and pointing at the reduction in net migration to Australia as a supporting indicator of this bias. There are concerns however, that the growth could lead to difficulty a little farther down the line. In a similar fashion to Australia, the New Zealand property market is growing extremely fast. The nation now has the wold's third most overvalued property market, and what many are calling a housing bubble is being propped up by an equally precarious mortgage bubble. Two things could cause the latter to burst, which would create a mirrored response in the former.

The first is a rise in interest rates as a response to the growing economy. This has already happened consecutively over the past two months, and a further hike is expected this month. Too much, too soon would lead to many households struggling to pay their mortgage, and in turn, payment defaults.
The second is a worsening of the situation in China. New Zealand relies on China for a large portion of its dairy and meat exports, and a Chinese contraction would lead to a reduction in New Zealand's export revenue. This would cause a slowing of production, which would lead to unemployment and, once again, mortgage defaults.

Markets will likely not take this long-term risk into consideration in response to the upcoming retail sales data, but it is worth keeping in mind as far as impact magnification is concerned.

So what are the levels to keep an eye on? Take a look at the NZDUSD chart below.

Having hit fresh highs during the first half of last week, the pair found resistance at 0.8779 and corrected throughout the remainder of the week. Support at 0.8603 and in term resistance at 0.8672 are now the levels to keep an eye on. Consensus forecasts both releases at 0.9% growth, so look for a miss to test in term support, with a close below offering up an initial downside target of 0.85300. Conversely, look for better than expected data to boost the NZD, with an initial target of 0.8672. A close above this level would hint at a return to the overarching trend, and bring 0.8746 resistance into play.

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Prepared by Samuel J Rae - Chief Currency Strategist at Capital Trust Markets

 

[CapitalTrustMarkets]

Pre market volatility is inevitable in the cable

Fundamental Bias: Neutral

Key Takeaways:

• Wednesday morning will see a host of headline key data releases from the UK
• Expect considerable volatility in the cable before the US markets open
• In term support at 1.6823 and its counterpart resistance at 1.6973 are the levels to watch

Early on Wednesday US morning, the Office for National Statistics in the UK will report its latest claimant count data and unemployment rate.

Just an hour after the release, the Governor of the Bank of England Mark Carney will take the stage, and the BoE will release its latest inflation report. With such a flurry of high profile releases scheduled in such a short period, there could be some considerable volatility across the Sterling crosses. Here's what you need to know.

First, let's take a quick look at the current economic situation in the UK. Recent data has been mixed, but the general consensus is leaning towards a positive outlook. Retail sales beat expectations towards the end of last month, and production data across both the industrial and manufacturing spaces came in better than expected, suggesting expansion. However, first quarter GDP fell short and house price growth slowed on a QoQ basis, meaning tightening is far from a certainty.

Employment will play a key role in the actions of the central bank moving forward. Consensus forecasts a 30K decline in the claimant count, coupled with an unemployment rate of 6.8%. The latter of these two estimates is key, as it would represent the second consecutive month of unemployment below 7% - the level at which Mark Carney has stated that he would start to consider raising the base rate. So, consider an on target or better than expected release across these two figures as bullish for the sterling, on the assumption of the near term hike that would see the base rate lifted from its current all-time lows.

This brings us nicely to the inflation report, which as mentioned, follows the employment data. This is probably the bigger of the two sets of data in terms of its potential impact, as it will actually outline the expected timeline of the UKs monetary policy. Look for any hint of hawkishness to boost the sterling, again on expectations of a near term hike.

So what are the levels to watch?

In the event of a bullish round, look for current in term resistance to strengthen and catalyse a medium term reversal, with an initial upside target at 1.6974. A close above this level would bring 1.7041 into play as a secondary upside target. Conversely, look for a break below in term resistance to fail, validating an initial downside target of April support at 0.6683.

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Prepared by Samuel J Rae - Chief Currency Strategist at Capital Trust Markets

 

[CapitalTrustMarkets]

Can Japan Buck Its Lost Decade Trend?

Fundamental Bias: Neutral

Key Takeaways:

• Japan set to release latest round of GDP figures on Wednesday evening
• The figures will offer insight into the effectiveness of Abe's three arrows policy
• A bullish yen release could test triangle support, and catalyze a downside break towards 100.752.

During the early US evening on Wednesday, the Japanese Cabinet office will report the latest round of GDP data.

The two figures – quarter-over-quarter and year-over-year will offer insight into the effectiveness of the highly scrutinized Japanese economic policy. Here's what you need to know about the release, its fundamental underpinnings and its potential impact on the value of the Japanese Yen.

So, let's take a look at the fundamentals first. Most reading this will be more than aware than Japan is currently trying to drag itself out of what is commonly referred to as two "lost decades." While the validity of the concept is constantly questioned, it basically refers to the bursting of a giant asset bubble (not that dissimilar to that of the US in 2008) in the late 1980s, and the subsequent failed attempts to stimulate, and return to, any substantial economic expansion.

When he took the reins in December 2012, now Prime Minister Shinzo Abe vowed to buck the trend of sluggish growth, and announced his three arrows policy. The policy involves aggressive economic stimulation through a combination of monetary policy, i.e. QE and low rates; fiscal stimulus, i.e. infrastructure and public works development; and supply side policy, i.e. increasing private sector investment, farmland and encouraging employment.

Data out of Japan has not been particularly impressive, and more than anything, suggests that Abe's efforts may not be having the desired effect. Exports, imports, trade balance and production data have all missed expectations over the past month, and a better than expected household spending figure likely only came as a result of mass buying ahead of an April 1 sales tax hike. This said, consensus forecasts the QoQ release at 1.0% and the YoY release at 4.2%, so analysts expect to see some growth, albeit lackluster.

So what are the levels to keep an eye on? Take a look at the USDJPY chart below.

The pair has formed something of a symmetrical triangle throughout 2014, and is currently trading just shy of the triangle's lower channel at 101.766. In term resistance looks to be at the previous medium term swing high at 102.619. These two levels are the levels to watch heading into the release. A bullish yen release, i.e. one that shows better than expected growth across the two figures, would likely break to the downside and complete the triangle, with an initial target 100.752. Conversely, look for a bearish yen release to strengthen in term support at the triangle's lower channel and validate an initial upside target at 102.319. A close above this level would bring 103.283 into play.

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Prepared by Samuel J Rae - Chief Currency Strategist at Capital Trust Markets

 

[CapitalTrustMarkets]

All Eyes On Eurozone Inflation

Fundamental Bias: Bearish

Key Takeaways:

• Latest round of Eurozone inflation data set for release on Thursday morning.
• Analysts expect weak data, with no change on the previous 0.7% YoY.
• ECB could announce QE in June, which would offer up a long term bearish outlook for the Euro

Early on Thursday morning, Eurostat will report its latest round of inflation data.

With the potential for quantitative easing looming, the markets will keep a keen eye on the headline Eurozone data, and the upcoming CPI figures are the latest numbers set to be scrutinized. Will they compound QE expectations, or can the Eurozone finally find some reprieve? Here's what you need to know.

First, let's take a quick look at the current conditions in the region. Appropriately, it all revolves around inflation. Area-wide inflation stands at 0.7% as of last count, far short of the ECB's 2% target, and many believe that if the ECB don’t act, the Eurozone will plunge into deflation. The dangers of deflation need not be echoed, and a number of influential European policymakers have expressed their desire to act swiftly, before they become realized. The most likely outcome is that next month, the ECB will announce a round of quantitative easing. The structure of the QE remains in question, but the leading candidate is some form of GDP weighted bond buying program – which would go some way to maintaining a fairness, for want of a better word, throughout the process.

An inflation miss would strengthen the argument for a round of QE, and would in turn likely weaken the Euro versus its major counterparts. Conversely, while better than expected data will probably not be enough to allay the doves, it might inject some medium term strength into the single currency.

So what are the levels to keep an eye on? Take a look at the EURUSD chart below.

The Euro has lost considerable strength versus its US counterpart over the past five or so days, having collapsed from long-term highs to support just shy of April lows, at 1.3689. This level now serves as in term support, so look for a miss to catalyze a break, with a close below validating an initial downside target of 1.3661. Beyond that, look to February support at 1.3641. Conversely, look for a better than expected release to temporarily strengthen support and initiate a short-term correction of some of the recent losses. Look for a break above in term resistance at 1.3733 to bring 1.3804 into play as a medium term upside target.

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Prepared by Samuel J Rae - Chief Currency Strategist at Capital Trust Markets