Best Thread FXCM/DailyFX Signals and Strategies

[Jason Rogers]

US Dollar Forecast to Rally Further Against Euro, Canadian Dollar

Aggressive US Dollar rallies have been met with similarly aggressive forex trading crowd selling, giving us contrarian signal to continue buying US Dollars against major counterparts. Our SSI-based trading strategies have remained heavily long the USD against the Euro, British Pound, Canadian Dollar, and Australian Dollar through recent trading. Needless to say, said strategies have had a very strong run of performance on the Greenback’s aggressive uptrend. Continued sentiment extremes leaves our short-term USD-bullish bias intact absent a material shift in price and trading crowd positioning.

 

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Re: US Dollar / Japanese Yen 04-27

Written by DailyFX Analyst Jamie Saettele

If the USDJPY is on the verge of breaking higher, then price should remain above 9270. This is the level I am moving risk to on these longer term positions. 9712 is where the rally from 8813 would equal the rally from 8481 (arithmetic) and is the initial objective. However, the drop below short term parallel channel support warns that the rally from 9160 may be just a b wave in a larger corrective pattern (triangle or flat). 9270 defines the trend.

How long term of a position are you in?
What was the entry for this long term position?

 

[Jason Rogers]

Re: US Dollar / Japanese Yen 04-27

How long term of a position are you in?
What was the entry for this long term position?

The last update for the USD/JPY technicals was on April 29th. Jamie was at the FXCM Currency Trading Expo in Las Vegas so the technicals section has not been updated since then. Below is the chart from the last update on April 29th. For entry levels and the timeframe for the position, please contact Jamie Saettele directly at [email protected]

 

[Jason Rogers]

U.K. Faced with First Hung Parliament Since 1974, GBP/USD Extends Four Day Decline

Written by DailyFX Analyst Michael Wright

Tories have won the most MPs in the U.K. general election but have failed to seal the deal and win majority as the U.K. is now faced with its first hung parliament in decades. Ending off the election, the conservative party had 306 seats but needed 326 seats to win, confirming that we are indeed at the finish line. This result will lead investors to look towards next week’s Bank of England interest rate decision as traders fret about future fiscal policy.

http://www.dailyfx.com/export/story-images/2010/02/market_alert/election.jpg​

What is a hung parliament?
Specifically, a “hung parliament” is one in which no single party has an overall majority (no more than half of MPs in the House of Commons). As Cameron puts it, “a hung parliament is instability, uncertainty, potentially higher interest rates, potentially Britain losing its credit rating.”

What this means for the U.K.
Senior Labour officials have said that under the rules of Britain’s constitution, the sitting prime minister in a hung parliament makes the first attempt at forming a ruling partnership. Meanwhile, Moody’s Investor Services reaffirmed its AAA credit rating for Britain and said that the hung parliament is not a “direct threat” to the stable outlook held by the group as they expect to see a “fiscal adjustment that is no looser nor slower than was outlined by all three political parties during their respective pre-election campaigns.” Furthermore, the rating agency stated that “the absence of a one-party majority does not necessarily weaken the government ability nor its inclination to stabilize public debt metrics in the coming years.”

The last hung parliament was February 1974, and history thus far is repeating itself as the U.K. is once again faced with a huge public debt, now nearing 12%. Worrisome, the total debt is forecasted to reach 88%, exceeding the European Union’s average. Ahead of the election, European Commissioner Olli stated that reducing the deficit was “by far the first and foremost challenge, no matter who wins.” Making it even more difficult, nobody won. Unlike 1974, Britains do not have the time to call a second election later this year. Market’s might decide they are out of time and lead Europe’s second largest economy down the Greek ally, pushing up borrowing costs and driving down the price of gilts. This scenario can materialize going forward if a compromise is not made immediately. Adding further pressure onto the region, 1 year credit default swaps (insurance against default) rose to the highest level since in two months, and is ranked 8th amongst the Western European countries, with Greece leading the way at 1,277.0.

On the other hand, a hung parliament may have the adverse effect and send the message to politicians that indeed Britains are feed up with the current electorate system. With the U.K.’s debt crisis now in the spotlight subsequent to speculation of Greek contagion fears, the timing couldn’t be any worse for the country to experiment with a government that has happened only five times in the past century. Nevertheless, after extending a four day decline, the British pound may remain under pressure as market participants may look towards the BOE’s rate decision next week on May 10th as traders fret about future fiscal policy.


Written by Michael Wright
Questions? Email me at [email protected]

 

[Jason Rogers]

Euro Future Bleak Regardless of ECB or EU Bailout Efforts

Written by DailyFX Analyst John Kicklighter

Fundamental Forecast for Euro: Bearish

• - A market panic reveals the contagiousness of Euro-area financial troubles
• - The ECB holds interest rates, rebuffs speculation that it will begin purchasing bonds
• - EURUSD cannot extend a bear trend without at least a temporary correction

After the close of the markets on Friday, European officials ended a summit with another round of promises for regional stability and efforts to defend the euro from speculation. Under normal circumstances, these would be considered strong remarks; and the currency would likely be set up for a strong open next week. However, the problem facing the regional economy is far from normal. After weeks of cat and mouse where officials have tried to reassure without actually paying for its efforts; policy makers have been forced into action as the prospect of a financial crisis has neared the point of inevitability. Having delayed in its response to market participants’ concerns, the EU (in conjunction with the IMF) has seen its obligations inflate from 45 billion to 110 billion euros in loans just to prevent Greece from collapsing. Since the begrudging agreement to these bailouts, it has become quite clear that not even these sums can keep the nation afloat. What’s more, with downgrades to Spain’s and Portugal’s sovereign credit ratings, doubt has been cast over the health of other EU members.

While an objective view of the situation in Europe leaves us with the assessment that conditions cannot be easily fixed, speculative interests are highly sensitive to effort – especially when the currency can be considered temporarily oversold. The past weeks settlement left EURUSD at its lowest holding in 14 months. What’s more, the burst of activity that led the market to its current floor was extraordinarily volatile. Such a setup leaves the euro prone to a quick recovery on even a questionable perk (general risk trends willing). The outcome of this weekend’s meetings could offer just such a boost. After the Friday meeting of leaders from those 16 countries that share the euro, there was an enigmatic promise to both protect the currency and help stall the spread of credit concerns across the region. After a follow meeting with the full regalia of the European Union, specific steps will be announced. But what can they commit to? Those with the check books know that a promise to provide funds will likely be called to task; and an ongoing bailout of the European community is much larger than the collective members can afford. Stretching themselves to a plan to safeguard the entire region would be considered preposterous. On the other hand, a redoubled focus on Greece could prevent one of the certain catalysts to a crisis from igniting (for how long is another question). Alternatively, if the approach taken is considered another wait-and-see effort mixed with a little cheerleading, it will only be a matter of time before market uncertainty naturally spreads and infects other members.

With such an intense focus on the financial stability of European economies, there may seem little need of economic data. However, the foundations of economic activity and interest rate forecasts are essential to both the near and long-term outlook for the currency. Should data deteriorate, confidence in the stability of the financial and monetary union will weaken far more quickly. What’s more, without a robust economic backdrop, a financial panic can turn into a general crisis. This is the pressure that saddles this week’s GDP numbers. With China, the United States and United Kingdom having already released their growth figures; it is now the European group’s turn. Spain has already reported its own recovery from a two-year recession with a meager 0.1 percent expansion through the first three months of the year. Over the coming days, Portugal, Italy, France and Germany are all expected to report growth through the same period. Should there be any wavering in growth before the impact of the recent market fear set in, confidence that stimulus can offer a meaningful boost will all but disappear. - JK

 

[Jason Rogers]

EUR/USD: Trading the U.S. Consumer Price Report

Tuesday, 18 May 2010 14:44 GMT | Written by David Song, Currency Analyst

Consumer prices in the U.S. are expected to tip 0.1% higher for the second consecutive month in April, while the headline reading for inflation is projected to expand to an annualized pace of 2.4% from 2.3% in March, which would be the highest reading since January.

Trading the News: U.S. Consumer Price Index

Why Is This Event Important:

As Fed Chairman Ben Bernanke maintains his pledge to keep borrowing costs near zero for an “extended period,” subdued inflation would certainly give the central bank scope to maintain a dovish policy stance in the second-half of 2010, which could lead investors to scale back expectations for a rate hike later this year. However, as the economic recovery gathers pace, heightening price pressures may lead the FOMC to drop its dovish bias for monetary policy and lead the central bank to raise its outlook for growth and inflation.

What’s Expected:
Time of release: 05/19/2010 12:30 GMT, 8:30 EST
Primary Pair Impact : EURUSD
Expected: 2.4%
Previous: 2.3%

Will This Be Market Moving (Scenarios):

Consumer prices in the U.S. are expected to tip 0.1% higher for the second consecutive month in April, while the headline reading for inflation is projected to expand to an annualized pace of 2.4% from 2.3% in March, which would be the highest reading since January. At the same time, the core CPI is anticipated to fall back to 1.0% from 1.1% in the previous month, and the ongoing slack within the real economy may continue to drag on inflation as households face a weakened labor market paired with tightening credit conditions.

The Upside

As personal spending accelerates in the first-quarter, businesses may look to pass on higher costs to consumers as household confidence continues to recover. At the same time, the Fed said that “the labor market is beginning to improve,” with Kansas City Fed President Thomas Hoenig arguing that “exceptionally low levels of the federal funds rate for an extended period was no longer warranted,” and rising price pressures could certainly lead the FOMC to normalize policy further over the coming months as it aims to balance the risks for the economy

The Downside

However, firms may look to absorb the rise in raw materials as policy makers continue to see ongoing slack within the economy, and a weaker-than-forecast inflation report could weigh on interest rate expectations as the Fed anticipates pressures to remain moderate over the medium term. The MPC said that “economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” and the Fed may look to support the economy throughout the second-half of the year as policy makers aim to encourage a sustainable recovery.

How To Trade This Event Risk

Higher inflation would certainly limit the central bank’s willingness to maintain a dovish policy stance over the coming months as it maintains its dual mandate to ensure price stability while promoting full-employment, and price action following the release could set the stage for a long dollar trade as investors increase speculation for a rate hike later this year. Therefore, if the headline reading rises to an annualized pace of 2.4% or higher, we will need to see a red, five-minute candle following the data to generate a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance after taking market volatility into account, and this risk will establish our first target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its market in an effort to lock-in our profits.

On the other hand, the weakness in the labor market paired with the ongoing slack in the real economy may continue to drag on inflation, and a weaker-than-expected CPI report could weigh on the exchange rate as market participants curb expectations for the central bank to tighten monetary policy later this year. As a result, if price growth unexpectedly holds flat or expand at a slower pace from the previous month, we will favor a bearish outlook for the greenback, and will follow the same strategy for a long euro-dollar trade as the short position laid out above, just in reverse.

 

[Jason Rogers]

Euro Weakens as Germany Bans Short Selling, British Pound Extends Decline...

Written by David Song, DailyFX Currency Analyst

The Euro extended the previous day’s decline and slipped to a low of 1.2143 during the overnight trade as BaFin, the German regulator, banned naked short selling of European government bonds in order to temper the “exceptional volatility” in the financial markets.


Talking Points
• Japanese Yen: Benefits From Risk Aversion
• Pound: BoE Votes Unanimously in May
• Euro: Construction Rises the Most in 14-Years
• U.S. Dollar: Consumer Price Index, FOMC Minutes on Tap

At the same time, Bundesbank President Axel Weber said that “a tightening of the fiscal framework is imperative and urgently needed” while speaking to lawmakers in Berlin, and went onto say that the European rescue plan “strains the fundamental principle of the monetary union that individual countries are responsible for their own finances.”

Moreover, European Central Bank board member Juergen Stark argued that the EUR 750B bailout package will only help to “win time, but it won’t solve the fundamental problems of the individual euro-region countries” during an interview with a German television network. As investors remain skeptical of the European rescue plan, with policy makers continuing to take extraordinary steps to curtail the risks for contagion, the ongoing turmoil in the region may lead the Governing Council to maintain a loose policy stance throughout the second-half of the year as the central bank aims to balance the risks for the economies operating under the fixed-exchange rate system. Nevertheless, the economic docket showed construction outputs in the Euro-Zone increased 7.6% in March after contracting a revised 7.2% in the previous month to mark the biggest rise since March 1996, while building activity weakened at an annualize pace of 5.2% to mark the slowest pace of decline since December 2009.

The British Pound weakened against the greenback for the sixth day, with the exchange rate slipping to a low of 1.4240 in the European trade as the Bank of England maintained a relatively dovish outlook for future policy. The May meeting minutes showed the MPC voted unanimously to hold the benchmark interest rate at 0.50% and maintain the asset purchase target at GBP 200B earlier this month as “the committee’s central view remained that the substantial margin of spare capacity would continue to bear down on inflation” over the coming months. At the same time, the BoE said that “near-term inflation prospects had risen, reflecting the depreciation of sterling and higher oil prices,” and went onto say that “some members interpreted recent developments in firm’s cost and pricing behavior as potentially suggesting that the damping effects on inflation from the margin of spare capacity might be somewhat weaker” than initially expected. In addition, the governing board reiterated that “a significant fiscal consolidation” was needed going forward in order for the nation to “avoid unnecessary increases in the cost of issuing public debt,” and argued that the ballooning budget deficit has “created further uncertainty about the prospects for activity and inflation.”

The greenback rallied against most of its currency counter parts as investors scale backed their appetite for risk, while the Japanese Yen appreciated across the board, with the USD/JPY slipping below the 200-Day SMA (91.18) to a fresh weekly low of 91.09. However, the dollar is likely to face increased volatility going into the North American session as consumer prices in the world’s largest economy is forecasted to expand at an annualized pace of 2.4% in April, while the FOMC is scheduled to release its April meeting minutes later today at 18:00 GMT. The central bank is likely to maintain a dovish policy stance as the deterioration in the labor market paired with tightening credit conditions continue to weigh on the recovery, but a shift in the Fed’s economic assessment could stoke a sharp move in the exchange rate as investors mull over the outlook for future policy.

 

[Jason Rogers]

British Pound Forecast Very Bearish versus Japanese Yen

Written by DailyFX Analyst David Rodriguez

GBPJPY – The ratio of long to short positions in the GBPJPY stands at 2.70 as nearly 73% of traders are long. Yesterday, the ratio was at 2.04 as 67% of open positions were long. In detail, long positions are 6.1% higher than yesterday and 9.2% stronger since last week. Short positions are 19.7% lower than yesterday and 20.1% weaker since last week. Open interest is 2.4% weaker than yesterday and 11.6% below its monthly average. The SSI is a contrarian indicator and signals more GBPJPY losses, and three of our SSI-based trading strategies are accordingly short.

WEEKLY OVERVIEW

Sharp Japanese Yen gains have led to similarly aggressive forex crowd JPY selling, giving us strong contrarian bias to buy into Yen strength. Indeed, three of our Speculative Sentiment Index-based trading strategies remain short the British Pound and US Dollar against the Japanese Yen. Incredible forex market volatility makes short-term forecasts especially difficult, but current sentiment extremes suggest that the JPY may continue to strengthen amidst financial market upheaval. The US Dollar is similarly forecast to continue gaining against the Canadian Dollar and British Pound, giving our SSI trading strategies a distinctively short ‘risk’ trading bias.

 

[Jason Rogers]

Chart of the Day: EURUSD

Written by DailyFX Powercourse Instructor Thomas Long

An update on the 4-hour chart of the EUR/USD shows that the sellers are making their way back into the market and pushing it down.

The next test is the 1.2143 low of May 18th. I would continue to look for selling opportunities as long as the market remains below the 1.30933 high of May 10th.

 

[Jason Rogers]

The New Zealand dollar has started to see price action quiet along with the broader market following Friday’s flight to safety on the back of the U.S. labor report. The upcoming RBNZ rate decision on June 9th could lead to further consolidation for the NZD/USD with expectations for a change in policy.

The New Zealand dollar has started to see price action quiet along with the broader market following Friday’s flight to safety on the back of the U.S. labor report. The upcoming RBNZ rate decision on June 9th could lead to further consolidation for the NZD/USD with expectations for a change in policy. A Bloomberg survey of economists is predicting the central bank will raise rates 25 bps to 2.75% which is generating underlining support for the pair. However, a diming global growth picture has kept the pair under pressure and limited upside potential. The conflicting forces could help create an ideal scalping environment especially considering that there is a significant support level just below.

The NZD/USD failed to break below major support at 0.6590-38.2% Fibo of 0.4898-0.7636 following a second test of the technical level. It is unlikely that we will see markets take the pair below the level with expectations of a rate hike. Currently, the pair is in a short-term descending channel with the upper and lower bounds at 0.6650 and 0.6550 respectively.

The NZD/USD failed to break below major support at 0.6590-38.2% Fibo of 0.4898-0.7636 following a second test of the technical level. It is unlikely that we will see markets take the pair below the level with expectations of a rate hike. Currently, the pair is in a short-term descending channel with the upper and lower bounds at 0.6650 and 0.6550 respectively.

 

[Jason Rogers]

New Zealand Dollar Set to Move on Interest Rate Decision

The New Zealand dollar is in focus, as an eventful week of central bank interest rate decisions kicks off tomorrow. While the RBNZ is widely expected to hike its official cash rate by 25 basis points, markets suggest there is a 28% chance that the central bank surprises by holding rates steady.

Expectations are for the RBNZ to hike rates 25 basis points tomorrow. Market conviction is currently medium, with overnight index swaps suggesting a 72% probability that a hike occurs. Though Governor Alan Bollard has indicated that monetary tightening would be taking place over the coming months, there is a small possibility that action will be delayed as the European crisis unfolds.

 

[Jason Rogers]

EUR/GBP Currency Cross: Technical Outlook

Written by DailyFX Analyst Jamie Saettele

The EURGBP has broken lower and bearish objectives remain at 7600-7700 and 7900. Daily RSI is not oversold yet…and the bulk of a trending move often occurs after an ‘oversold/overbought’ reading is reached. Near term, price ideally stays below 8340 (above would shift focus to 8380 and 8420). A drop below Monday’s low could complete 5 waves down from 8812 and find support just below 8200 (8190 was resistance back in 2008).

 

[Jason Rogers]

Gold Could Hold onto Gains Despite a Rebound in Risk Appetite

Written by John Kicklighter

​

Fundamental Forecast for Gold: Bullish

- Hungary reverses its claims of default, tempers the potential for new highs for gold, lows for equities
- Gold stalls at May’s record high, awaits a meaningful sign of either reversal or continuation​

Gold is traditionally treated as a safe haven asset when the financial markets start to rumble. The past six months have had more than a few tremors; and the impact on the precious metal has been quite clear. This past week, the commodity tested a new record high before retracing from a loose hold around the same level that May’s swing high would find itself capped at. For many, this is a strong sign that the bull market is flagging and could very well reverse course. However, putting this single drive into perspective, we can see over month’s worth of price action that the market has in fact established a zone of congestion that does not easily sway the larger bull trend off its course. Looking for the specific catalyst that can revitalize a long-standing advance or otherwise steep gold into a significant reversal, scheduled event risk takes the lowest position on the totem pole. As for the impulsive shifts in risk appetite, that is not the primary concern for gold bugs. Considering the market has reached the heights it has due to a demand for an alternative to fiat currencies and other traditional assets and safe havens, we could in fact see gold weather a surge in risk appetite better than other harbors to uncertainty – like the US dollar.

To establish what the medium-term momentum of gold is likely to be; we need to assess what market dynamics have pushed it to its current bearing. It is true that this asset is a safe haven; but it is not one of the ready alternatives for so called ‘hot money’ given its high cost and the weakness of its correlation to traditional markets like equities. If speculative markets show signs of recovery next week, it would be a first step in reversal. Naturally, this will draw capital from money markets and government debt as investors try to harvest yield; but capital parked behind gold was put there not for safe keeping (indeed given its volatility and expense, it is a relatively poor protection) but rather because there was a need to avoid deeper structural uncertainties such as the spread of a financial crisis and sovereign credit risk. In the early stages of a capital market reversal, the pressure on a sovereign downgrade will not shift significant; and the probability that another EU shock or that China’s markets will stall are still extraordinarily high. This does not mean these conditions won’t improve slowly however.

Looking for definable event risk, that can spark speculative interests and thereby given short-term volatility from gold, we have a relatively modest economic docket. Interest rate decisions for the BoJ and SNB are particularly important. While neither will change their benchmark rate; the Japanese authority is expected to announce further steps towards jumpstarting inflation and lending. The SNB could offer its own response to EU troubles and will no doubt address is strong currency. With a focus on debt burdens, the UK’s public sector borrowing will be noted with interest. Other notable releases include the Japanese business sector confidence survey for 2Q, UK employment figures and US consumer-based inflation. - JK

 

[Jason Rogers]

Weekly Spotlight: Europe’s Outlook Progressively Worsens

Written by Michael Wright


European woes continue to remain in the spotlight, and it is unlikely that the lens will change focus in the near or medium term as ballooning budget deficits in the 16-member euro area continue to rattle the markets. Indeed, Europe’s outlook seems to progressively worsen week by week, and we may see the bloc slip back into recession by the end of this year.


Talking Points
• Euro Defines “the Unholy Trinity”
• Concerns increase of Double-Dip Euro-zone Recession
• Why a Euro Breakup Will Lead to Chaos


Taking a look at recent developments, on Friday, May 28th, Fitch downgraded Spain’s long term foreign and local currency issue default ratings from “AAA” to “AA+,” while Hungary’s Prime Minister on June 8th raised the possibility that the country might default because the previous administration “manipulated” figures. As of late, Moody’s became the third rating agency to downgrade Greece’s government bonds. Greek notes were slashed into junk territory, deepening worries about Europe’s debt crisis. With the credibility of Greece on the line, there are not too many solutions for the ailing economy.


First and foremost, the EU-IMF life line worth nearly $1 trillion will give Greece time to cut its fiscal deficit, one being, scaling back its stimulus measures. If indeed fiscal measures remain controllable amid domestic resistance, the recent jump in bonds may calm, and fears that the Greek government is not credible coupld perhaps taper off. On the other hand, a debt restructuring plan/debt swap could be proposed, similar to the Brady Bond plan. The program was effective in Latin America during the 1980’s where toxic assets were transformed into marketable debt through the use of another financial instrument. In this case, Greece will remain a part of the euro-zone and negotiate with its bondholders. All in all, we can expect the euro bloc to do everything in its power to avoid one or more countries from exiting the euro in order to avoid further negative spillover effects. However, as the bloc remains intact, market participants fear that the Euro-zone will slip back into recession by the end of the year.


Concerns of Double-Dip Euro-zone Recession
As of late, I noted that concerns of a downturn for the 16-member euro area were increasing as it comes to light that governments will have to phase out stimulus measures amid ballooning budget deficits that they are faced with. Adding onto my specualtion, Fitch Ratings recently said that they see “increasing concern that there will be a double-dip recession in the euro-zone”, and went onto say that “it’s becoming an increasingly plausible alternative.” This alternative may become a reality as the lifeline package is surely not enough for the indebted countries.


Why a Euro Breakup will lead to Chaos
If one or more countries leaves the euro, the likely result will be an abundance of lawsuits. Preston Keat, research director of consulting firm Eurasia Group notes that local companies with contracts linked to the euro will be thrown in turmoil, and “all contracts- including those governing wages, bank deposits, bonds, mortgages, taxes, and almost everything else” will have to be redenominated in the new currency. “In short, this would violate all kinds of laws and treaties and rules at the national, EU, and internal levels,” he later adds. I concur with Keat, however, it is noteworthy that a default will also destabilize the euro zone and trigger a recession, with the after effects of global contagion. Thus, the talk of Greece or any other country leaving the euro is highly unlikely.


Euro Defines “the Unholy Trinity”
In academia, some economists would say that the single currency is a pure example of the Mundell-Fleming “trilemma,” in which the model is used to argue that an economy cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy. However, the model does not take into consideration, default, inflation, or future price levels. Whether this model is right, one thing for sure is that fiscal contraction in the 16-member euro area will cause deflation over time, and an exchange rate is expected to return to some sort of purchasing power parity in the long run. Therefore, the expected deprecation means a nominal and real depreciation in the single currency within the short term.


What can we expect going forward?
Looking ahead, the ECB is said to take a 5 percent haircut on all Greek bonds which are posted as collateral with the central bank, leading Greece to post additional bonds in order to cover the spread. At the same time, an EU draft report warned that there is a need for more deficit cuts in both Portugal and Spain by next year. Moreover, the report said the “snowball” effect will impact Spanish and Portuguese debt, and a similar report is likely to be released about Italy as the country is heavily indebted as well. All in all, though there is a much needed correction for the EUR/USD, we may see price action push lower in the medium term.

 

[Jason Rogers]

US Dollar Likely to Slip Further as S&P 500, FX Markets Hit Summer Lull

Written by David Rodriguez

​

Fundamental Outlook for US Dollar: Neutral

The US Dollar finished the week sharply lower against the Euro and other major counterparts amidst a sharp recovery in the S&P 500 and broader financial market risk sentiment. Last week we wrote that the US Dollar’s inability to sustain a move below $1.20 against the Euro signaled that USD bulls grew tired and further EURUSD losses were less likely. In fact, the most recent CFTC Commitment of Traders report shows that Non-Commercial traders scaled back their US Dollar longs against the Euro (EURUSD shorts) by a record amount in the week ending June 15—emphasizing the sharp sentiment shift among markets. Given downward momentum through recent trade, we suspect that the coming week could bring further US Dollar losses against the relatively resurgent Euro and other key currencies.

Whether or not the US Dollar continues its recent slide through the week ahead will almost certainly depend on the trajectory of the S&P and broader risk appetite. Said correlation to financial market sentiment will make it especially important to watch reactions to Wednesday’s US Federal Open Market Committee (FOMC) interest rate decision, while several mid-tier economic releases could force volatility on large surprises. Overnight Index Swaps show traders have priced in zero probability of an interest rate move through the announcement, but the event may nonetheless spark volatility on the attached rhetoric. Those same OIS rates show markets predict that the Fed will raise rates by a paltry 34 basis points in the coming 12 months—the lowest expectations since the Dow Jones Industrials Average traded near 8000 in the first half of 2009.

Traders clearly expect that central bank will leave rates and monetary policy stance unchanged, but any surprises could force substantial moves across financial markets. The key question may be whether the relatively hawkish minority within the FOMC becomes more vocal in their calls for a withdrawal of unprecedented monetary policy stimulus. Uneasy conditions in financial markets and relatively mixed evidence of a true economic turnaround suggest that officials will leave official commentary largely unchanged. Yet such effectively neutral market expectations may make for especially large volatility on any subsequent surprises.

Financial markets seem to have hit somewhat of a summer lull. Our DailyFX 1-week Volatility Index has seen its largest peak-to-trough drawdown since the aftermath of the Lehman Brothers bankruptcy in late 2008. The S&P 500 Volatility Index has seen similar declines, and limited volatility expectations lessen the likelihood of major market moves in the week ahead. Given relative complacency in financial markets, the safe-haven US Dollar could continue to slip lower against the Euro and other key counterparts. FX traders should nonetheless wait and see what the FOMC rate decision will bring. If there were one foreseeable event that could break the relative calm, a hawkish shift by the US central bank would likely be it.

 

[Jason Rogers]

Eur/usd

Written by Thomas Long

The series of higher highs and higher lows has been broken on the EUR/USD hourly chart as this pair has moved down through the previous low of 1.22414.

However, there still is this little item called the FOMC meeting and their annoucement today at about 2:15PM Eastern to deal with first. I would not think that we will see alot of selling pressure before then but one never knows for sure what a market will do. This move down through support is bearish for this pair as the daily chart still shows a strong downtrend and now the intraday charts are moving down also. I would look for selling opportunities, but wait until after the FOMC announcement today to open any longer-term positions.

 

[Jason Rogers]

US Dollar Index

This hourly chart of the US Dollar Index shows a market that has one more hurdle before completing the reversal from the downside back to the upside.

The daily chart continues to show a strong uptrend with this current pullback finding support and starting to reverse back to the upside. Confirmation of this reversal would be a move up through yesterday's high in the 86.50 area. But until that happens, we should not expect to see any decent moves by any of the USD based pairs in the direction of the trend. This would include any further move down by the EUR/USD.

 

[Jason Rogers]

NFP’s and Manufacturing Data Could Dictate Risk Sentiment and Dollar Direction

5 Key Economic Events to watch this week. Written by DailyFX analyst John Rivera.

• German Unemployment Change (JUN) – June 30 – 07:55 GMT
The number of unemployed in Europe’s largest economy is forecasted to have fallen for an eleventh straight month. German jobless ranks are expected to have declined by 28,000 in June adding to the 45,000 the month prior. An improving labor market could help ease concerns over the debt issues in the region as it is a sign that domestic growth is improving. The Euro has consolidated recent gains and improving fundamentals could be a catalyst to push the single currency higher.

• Canadian GDP (APR) – June 30 – 12:30 GMT
Growth in Canada is forecasted to have improved by 0.1% in April slowing from 0.6% the month prior. A disappointing retail sales figure for the period has already started to dim expectations for further tightening from the BoC which could be amplified by a flat or negative GDP reading. Domestic fundamentals may lose their impact on price action as Governor Carney has stated that global factors will need to taken into account in determining future monetary policy.

• U.K. PMI Manufacturing (JUN) – July 1– 08:30 GMT
The pace of expansion in the U.K. manufacturing sector is forecasted to have slowed according to the Purchaser’s manger’s index. Economists are looking for the gauge to slip to 57.5 from 58.0 which shouldn’t raise eyebrows as the sector has grown for the eight straight months. Indeed, the prior month’s reading was the highest in over 15 years as a weak pound has made British exports attractive. Signs that activity is sustaining will add to the case that the country could maintain growth despite the proposed cuts in government spending building upon current bullish pound sentiment.

• U.S. ISM Manufacturing (JUN) – July 1 --14:00 GMT
The latest revision of first quarter GDP for the U.S> showed a 16% increase in exports as demand from abroad continues to spur activity and growth. The manufacturing sector continues to be the key to the U.S. recovery and the ISM gauge is the most important reading for it. Therefore, the expected weakness to 59.0 from 59.7 could add to growing concerns over domestic and in turn global growth which could ironically benefit the dollar which continues to be a safe haven for investors. Conversely, an improvement would signal a sustainable recovery as the sector may be able to bridge the gap between government spending and a return of consumer consumption.

• U.S. Non-Farm Payrolls (JUN) -- July 02 – 12:30 GMT
The biggest key for a sustainable U.S. recovery is the labor market and if projections hold true investors could be disappointed. Economists are forecasting a job loss of over 100,000 which would be the first time the economy gave back jobs since last December. However, just as last month’s gains were inflated by the census so is this month’s losses as private payrolls are expected to have gained by 113,000, which is more relevant for the longer –term picture. If markets look past the headline figure then we could see a surge in risk appetite which could weigh on the greenback and yen while benefitting the Euro and commodity dollars.

 

[Jason Rogers]

US Dollar: Six Month Outlook

Written by John Kicklighter

US Dollar: Six Month Outlook

From a low set in late November, the US dollar spent the first half of 2010 in a steady and inexhaustible rally to 15-month highs. Through the mid-point of the year, the single currency would not even suffer a correction that could be construed as the beginning of a potential reversal. That is, until June rolled around. There are many explanations for the greenback’s mid-year retracement; but no single justification better encompasses the motive to the altered course better than risk appetite itself.

From a low set in late November, the US dollar spent the first half of 2010 in a steady and inexhaustible rally to 15-month highs. Through the mid-point of the year, the single currency would not even suffer a correction that could be construed as the beginning of a potential reversal. That is, until June rolled around. There are many explanations for the greenback’s mid-year retracement; but no single justification better encompasses the motive to the altered course better than risk appetite itself. In the dollar’s climb through the opening half of the year, there was a disputable argument to be made that the US economy was carving a stronger pace than its many of its global counterparts or that the Federal Reserve would turn to rate hikes before the European Central Bank or Bank of England. However, the true source of the currency’s strength was in its appeal as a safe haven. Given the prevalence of news headlines that warned that the sovereign credit ratings were at risk, China (the leader of the economic and speculative recovery) was overheating and the European Union was fostering its own financial crisis; the need for speculative sanctuary was obvious.

What currency traders must to consider heading into the second half of the year is whether the need for safety could truly dissipate or will it continue to intensify. Furthermore, it is important to establish whether the benchmark currency will maintain its role as the FX market’s preferred safe haven or if that responsibility will be passed on to another currency. And, for a forecast that spans more than a few months, a proper assessment of the US dollar will have to perform analysis that goes beyond the unpredictable nature of speculative interests. Should the underlying current for investor sentiment stabilize, the currency’s performance will fall once again to the seemingly ordinary task of establishing the relative strength of the US economy and its financial markets. What’s more, long-term concerns like potential sovereign credit risks and demand for an alternative reserve currency may start to play a bigger role in the dollar’s bearings.

Shelter from the Storm

The virtues of the US dollar as a safe haven when global conditions start to deteriorate were well established during the height of the 2007-2008 financial crisis. This role has only been furthered cemented into the speculative market’s consciousness with the souring of risk appetite through the first half of this year and the subsequent appreciation of the greenback. Where does the expectation for safety drawn from? For international investors, the most communicable appeal for dollars during periods of uncertainty resides in the supposed safety expected from investing in US treasuries and money market accounts. The sheer depth of these markets along with the untested virtuousness of their ratings (so far) make it a bright beacon for international investors. And, beyond the applicable safe havens in the US market, there is always the cache that the US capital market is one of the most liberal in the world with extensive investor protections. This along with the ‘habit’ of sending funds to the US during times of hardship (similar to how it is done in gold) has maintained the dollar’s buoyancy when the concept of fear is all too real.

Heading into the second half of the year, it may seem that some of the more pressing global financial threats have eased. However, this is more likely a lapse in logical analysis (or more appropriately a shift in the balance of fear and greed) than a true improvement in conditions. Perhaps the most imminent hazard to financial stability is another flare up in the European Union’s own crisis. Borne from the troubles entailed with burgeoning deficits amongst member economies in an effort to stabilize the economy while still meeting the EU’s strict limits on debt limits, this is a long-term problem by design. Greece, the worst offender, was provided a 110 billion euro bailout by the Union and the IMF. Realizing the issue could spread beyond this one economy, a blanket 750 billion European Financial Stability Facility was approved should any further assistance be needed from another economy. This was a sizable program aimed at forcing confidence. However, those European countries that have been forced to cut spending in order to meet deficit goals will find that the implications for growth and social unrest could find that temporary assistance cannot fix the underlying problem. Should Greece or another EU member decide to restructure its debt obligations or simply defaults, it could undermine the entire European system and send investors reeling for a verifiable safe haven. Short of this critical incident, sovereign downgrades, countries finding themselves locked out of the market and threats of splitting up the Union could generate a more measured impact on underlying sentiment.

Though, the European Union’s financial difficulties are the most palpable threat to market-wide sentiment at the start of the second half of the year (as this is a problem that has generated significant response from the markets already in 2010); it is important to realize that there are other concerns that could upset the delicate balance between fear and greed. One of those concerns that had commanded investors’ attention before Europe crowded out the headlines was a possible asset bubble in China. To help fortify the world’s second largest economy during the previous financial crisis, officials boosted stimulus and leveraged lending. During the period of rapid expansion, this balance of debts could be supported. Now, however, government support is being withdrawn and policy is being rapidly tightened in an attempt to control the problem after the fact. Should foreign demand not compensate for an already anemic level of domestic consumption, the imbalance in the economy (further exacerbated for capital markets due to the lack of foreign funds due regulations limiting a liquidity buffer). And, should China falter, the repercussions for its Asian neighbors could be severe; while the consequences for the rest of the world will also be substantial. Other issues that could instigate a swell in speculative concerns include: an increased focus and sense of uncertainty surrounding sovereign credit ratings; another economic slump; and an early withdrawal of government stimulus before economies and markets are prepared to shoulder the burden.


Read more: DailyFX - US Dollar: Six Month Outlook http://www.dailyfx.com/forex/market..._Dollar__Six_Month_Outlook.html#ixzz0sFniLD00

 

[Jason Rogers]

Forex Options Markets Warn of Euro, US Dollar Volatility

Written by David Rodriguez

Recent forex market moves have led to a sharp advance in forex options market volatility expectations, making short-term forecasts especially difficult and warning of large US Dollar moves ahead. Shifts in FX Options risk reversals have been especially dramatic in fast-moving pairs such as the British Pound/US Dollar and US Dollar/Swiss Franc.

Recent forex market moves have led to a sharp advance in forex options market volatility expectations, making short-term forecasts especially difficult and warning of large US Dollar moves ahead. Shifts in FX Options risk reversals have been especially dramatic in fast-moving pairs such as the British Pound/US Dollar and US Dollar/Swiss Franc. In both cases, our benchmark breakout-style risk reversals trading system would have gone short the US Dollar amidst noteworthy declines. Forecasts for the Euro are admittedly much more difficult to determine, however, and it will be critical to watch the next moves in the Euro/US Dollar currency pair.