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FX: Hang tight, there are about to be big breakouts

Posted on: 29 January 2019 , by: Boris & Kathy , category: Market Review

FX Weekly with Boris and Kathy

Hang tight – there are about to be some big breakouts in the forex market. Before the end of this week, US President Trump will need to decide if the March 1st China tariff deadline should be extended.

Everything he’s said so far suggests that it will but if he changes his mind at the last minute, which is always a possibility, currencies such as the Australian and New Zealand dollars will come crashing down. They won’t be the only currencies affected because a breakdown in trade talks and fresh tariffs on China will have global ramifications. Risk appetite will sour, stocks will fall and all high beta currencies will suffer. Now of course, if the deadline is extended and generously so, stocks will rise to fresh highs taking all of the major currency pairs up with it. A decision, good or bad will be a breath of fresh air for FX traders looking for volatility as we’ve just closed out a consolidative week with pairs like USD/JPY never venturing more than 50 pips from its high/low and EUR/USD fluctuating within a less than a cent range. There were bigger intraday moves in A$ and NZ$ but even those currencies did not see material change. The only trending currency was sterling but with Brexit negotiations going nowhere, traders have been reluctant to take big positions.

 

5 Day Return vs USD January 14-18, 2019

 

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US DOLLAR

Data Review

  • Fed Minutes – Many Fed officials not sure what rate moves would be needed in 2019. Almost all participants thought it would be desirable to announce a plan to stop reducing balance sheet later this year
  • NAHB Housing Market Index 62 vs. 59 Expected
  • Philadelphia Fed Index -4.1 vs. 14 Expected
  • Jobless Claims 216K vs. 228K Expected
  • Durable Goods 1.2% vs. 1.7% Expected
  • Existing Home Sales 4.94M vs. 5M Expected

Data Preview

  • Housing starts, building permits, house prices – House prices and real estate activity is weakening in the US and the data should reflect that
  • Consumer Confidence – Potential for upside surprise given recovery in equities and stronger University of Michigan Consumer Sentiment Index
  • Trade Balance – Potential upside surprise given end of year recovery in ISM manufacturing index
  • Q4 GDP – Potential downside surprise given sharp decline in retail sales, which was only offset slightly by stronger trade
  • Personal income & spending – Potential downside surprise given weaker wages and spending
  • ISM Manufacturing – Tough call this month as stronger manufacturing activity in NY offset by weaker activity in Philadelphia

Key Levels

  • Support 110.00
  • Resistance 111.00

If Trump Extends US-China Trade Deal Deadline, USD Won’t be the Most Attractive Currency

Last week, we talked about how the US dollar was past its prime and we saw evidence of that in the latest economic reports that showed manufacturing activity in the Philadelphia region contracting for the first time since May 2016. Orders for durable goods also fell while sales of existing homes continued to decline. None of these reports were game changers for the central bank but they reinforce the slowdown that has reduced the dollar’s luster. According to the minutes from January FOMC meeting, Federal Reserve officials are unsure what rate changes would be needed in 2019. Its clear that for the Fed, everything is data dependent and because they don’t have a strong conviction in one direction or another, investors continued to price in a greater chance of easing than tightening before the end of the year. With that in mind, the dollar is trading purely on risk on / risk off flows which will continue in the coming week. President Trump’s decision on the March 1st China tariff deadline will be the main focus as Q4 GDP is the most market moving piece of US data on next week’s calendar.

Extending the March 1st deadline is not a major concession for President Trump. He is already talking about a meeting with Xi and said “I can’t tell you exactly about timing, but the date is not a magical date. A lot of things can happen.” Trump knows that an extension does not equal an agreement and given the complexity of the talks, they are going to need more time. By extending the date, he’ll also be applauded by the markets so the decision should be an easy one. The key question is how long the extension will be - one month, two months, October or open ended? The longer the extension, the better it will be for risk appetite. While USD/JPY could rally, the biggest beneficiaries won’t be the dollar but rather AUD, NZD and EUR.

Although investors have largely ignored developments in Japan, it is worth mentioning the weakness in the latest trade and PMI numbers. Japanese exports fell by the largest amount in 2 years and manufacturing activity contracted for the first time in 2.5 years according to PMI. Probably in response to an early look at these numbers, Bank of Japan Governor Kuroda said if the economy weakens further, more assets could be bought and rates could be lowered.

Eurozone Economy- Central Bank Meeting


AUD, NZD, CAD

Data Review

Australia

  • RBA Minutes – Household consumption at risk if house prices fall further. See scenarios for hike or cut
  • Westpac leading indicators -0.01% vs. -0.26% Previous
  • Wage price index 0.5% vs. 0.6% Expected
  • Employment Change 39.1K vs. 15k Expected
  • Unemployment Rate 5% vs. 5% Expected
  • Full time employment 65.4K vs. -9.5k Previous
  • Participation rate 65.7% vs. 65.6% Expected

New Zealand

  • PMI Services 56.3 vs. 53.2 Previous
  • PPI Output 0.8% vs. 1.5% Previous
  • PPI Input 1.6% vs. 1.4% Previous
  • Credit Card Spending 1.4% vs. -0.5% Previous

Canada

  • Retail Sales -0.1% vs. -0.3% Expected
  • Retail Sales ex autos -0.5% vs. -0.3% Expected

Data Preview

Australia

  • PMI Manufacturing index – Manufacturing activity should remain subdued given weakness in China
  • Chinese PMIs – Chinese data is difficult to predict but activity should remain weak given US-China trade tensions

New Zealand

  • Q4 Retail sales ex inflation – Potential downside surprise given weakness in card spending in Q4
  • Trade Balance – Despite uptick in dairy prices, potential weakness because manufacturing activity slowed
  • NZ Q4 Terms of Trade – Trade activity actually improved at the end of last years

Canada

  • Consumer Prices – Sharp drop in price component of IVEY PMI signals lower inflation pressures
  • Current Account Balance – Potential weakness given significant deterioration in trade
  • Q4 and Dec GDP – Potential for downside surprise in quarterly data given weakness in retail sales & trade

Key Levels

  • Support AUD .7050 NZD .6750 CAD 1.3100
  • Resistance AUD .7200 NZD .6900 CAD 1.3250

AUD & NZD – Breakout or Fakeout Ahead?

Don’t be fooled by the lack of change in the Australian and New Zealand dollars this past week because both currencies experienced big moves intraday. Australian labor market numbers should have been the most important driver of A$ flows but instead, the currency fell victim to headline risk. Westpac became the first major bank to call for 2 rate cuts from the Reserve Bank this year. They felt that a lower growth profile and higher unemployment rate would require a response by the RBA in August and November. But what really sent A$ tumbling lower was China’s decision to ban imports of Australian coal into their northern port of Dalian. Yet the losses in A$ did not last long because RBA Governor Lowe said he’s optimistic about China-Australian relations and he’s surprised by the reaction in the A$ because this may not be “something directed to Australia.” He also made positive comments about the economy and house prices. At the end of the day the sustainability of Friday’s recovery in A$ hinges entirely on what President Trump decides to do about the March 1st Chinese tariff deadline. There’s no doubt that Australia will keep interest rates unchanged for the rest of the year but they will only lower rates if China is unable to get the tariffs lifted. The strong labor market will have a residual effect on the economy especially with full time work rising by the strongest amount in nearly 2 years and the unemployment rate at a 7 year low.

For the most part, the New Zealand dollar followed the Australian dollar higher – data including the PMIs services report and credit card spending was good. However, NZ$ sold off sharply on Friday morning after the Reserve Bank warned that by raising capital requirements, which is something they are proposing for top banks, a rate cut may be needed. However like A$, NZ$ recovered strongly on the back of US dollar weakness and trade talk optimism. So as you can see, a continuation of these recoveries hinges on trade hopes coming to fruition because NZD fundamentals in particular are not supportive of a strong rally especially if the Reserve Bank follows through with their proposal to nearly double capital requirements.

Thanks to stronger oil prices and a better than expected retail sales report the Canadian dollar ended the week up nearly a percent versus the greenback. The upside surprise in Canada’s labor market numbers was not unexpected after a strong jobs report. Canada is one of the bright spots in the world and with oil prices continuing to recovery, USD/CAD should be trading much lower. Bank of Canada Poloz expects a temporary slowdown in the economy but when the dust settles, rates will need to rise to neutral “over time.” Like many central banks, the BoC is data dependent but if trade tensions ease, they could raise interest rates quickly.


BRITISH POUND

    Data Review

    • Rightmove House Prices 0.7% vs. 0.4% Previous
    • Jobless Claims 14.2K vs. 20.2K Previous
    • Average Weekly Earnings 3.4% vs. 3.5% Expected
    • Unemployment Rate 4% vs. 4% Expected
    • CBI Total Trends Index 6 vs. -5 Expected

    Data Preview

    • PMI Manufacturing Index – Potential for upside surprise given unexpected jump in CBI Total Trends Index

    Key Levels

    • Support 1.2800
    • Resistance 1.3200

    PM May Getting Nowhere on Brexit

    Theresa May is running down the clock and getting nowhere with her Brexit negotiations. There was no breakthrough in her meeting with EU President Juncker this week and the UK government doesn’t see an agreement or vote happening next week. With less than 35 days to go before the March deadline, the lack of progress prompted Fitch to put the UK’s AA rating on negative watch. There are talks of her resignations, Labour members are starting to back a second referendum and EU Brexit negotiator Barnier warned that there is a high chance of an “accidental” no deal Brexit. Prime Minister May still has the option to request for an extension of Article 50, which is the most likely scenario particularly since the House of Commons is set to vote on amendment next week that could force May into this decision anyway. Yet sterling continues to trade higher on the hopes for an extension or a revised deal. We can never underestimate the power of hope because the resilience of sterling is astounding. Given the resistance of the EU, Tory Brexiters and other parties, May is setting up for defeat. Economic data was mixed with average weekly earnings growth slowing. While next week’s manufacturing PMI report could be stronger, the only thing that matters is Brexit.


    EURO

    Data Review

    • EZ ZEW Survey Expectations -16.6 vs. -20.9 Previous
    • GE ZEW Current 15 vs. 20 Expected
    • GE ZEW Expectations -13.4 vs. -13.6 Expected
    • German PPI MoM 0.4% vs. -0.1% Expected
    • German PPI YoY 2.6% vs. 2.2% Expected
    • EZ Consumer Confidence -7.4 vs. -7.7 Expected
    • EZ PMI Manufacturing 49.2 vs. 50.3 Expected
    • EZ PMI Services 52.3 vs. 51.3 Expected
    • EZ PMI Composite 51.4 vs. 51.1 Expected
    • GE PMI Manufacturing 47.6 vs. 49.8 Expected
    • GE PMI Services 55.1 vs. 52.9 Expected
    • GE PMI Composite 52.7 vs. 52.0 Expected
    • EZ CPI MoM -1% vs. -1.1% Expected
    • EZ CPI YoY 1.4% vs. 1.4% Expected
    • GE Q4 GDP Revisions vs. 0% Expected
    • GE IFO Business Climate 98.5 vs. 98.9 Expected
    • GE IFO Expectations 93.8 vs. 94.3 Expected
    • GE IFO Current 103.4 vs. 103.9 Expected

    Data Preview

    • EZ Confidence – Potential for downside surprise given weaker ZEW and IFO
    • German CPI – Potential rebound given recovery in PPI
    • German Employment Report – Potential downside surprise as job growth eased in services and manufacturing
    • EZ CPI – Will have to see how German CPI fares but possible recovery given weaker euro and higher oil prices

    Key Levels

    • Support 1.1300
    • Resistance 1.1400

    Euro – Some Bright Spots but Data Still Weak

    Outside of a beginning of week rally, we saw very little movement in the single currency. EUR/USD was confined to a 55-pip range Wednesday to Thursday as softer economic data prevented the pair from participating in the risk rally. The German IFO index fell to its weakest level since January 2015 with their economist predicting more weakness for Germany. The expectations component of the ZEW survey increased but the current conditions component of the report fell to its lowest level in 2 years. The EZ’s current account balance also fell to a 2 year low and investors are worried about Brexit and the potential for car tariffs. The US Commerce Department sent President Trump a confidential report on its recommendations for the auto industry. He hasn’t made any public comments but the auto industry in Europe and Japan needs to brace for hefty penalties. With that in mind, there’s light at the end of the tunnel because aside from a brighter outlook for investors, the Eurozone composite PMI index increased for the first time in 6 months. But technically, EUR/USD really needs to trade above 1.14 for shake off the downtrend and there’s been a lot of talk about extending the current TLTRO program.


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