Contributed By: DailyFx
Europe Session Key Developments
* IBEX 35 Experiences Largest Decline Among 5 Major Indexes
* German Dax Rallies to Two Year High
European Stocks Mix after US Jobs Report
European Markets closed mixed as the Stoxx 600 was on the verge of extending a six-month high, after U.S. payrolls climbed more than forecast, increasing optimism the overall economy will recover. Total payrolls advanced 151,000, exceeding the median estimate of economists surveyed by Bloomberg news and following a revised 41,000 drop the prior month that was smaller than initially estimated. The recent market rally has been facilitated by the US Federal Reserve’s decision to pursue further quantitative easing by purchasing 600 billion dollars in assets. The overall effect and the risks associated with this purchase are unknown, but as of now, investors seem to be speculating a positive outcome. However, many are weary that the Fed’s QE will not do as much as anticipated and the market has already priced in any effects. In corporate news, earnings across Europe seem to remain strong as the majority of large corporations seem to be beating estimates. At the end of the day, 5 of the 18 western European markets climbed.
FTSE 100 / 5,875.35 / +12.56 / +0.21%
The FTSE 100 fluctuated between gains and losses as 6 out of 10 sectors closed in the green. The benchmark gauge rose after better than expected US payrolls propelled the index to its highest level in more than 2 years. Vedanta Resources, Xstrata Plc and Antofagasta Plc all advanced more than one percent as copper reached a 28-month high after workers went on strike n Chile. Smith & Nephew Plc climbed 5.1 percent as the company announced third quarter profit that outpaced expectations. ARM Holdings Plc, a UK designer of semiconductors, increased 3.3 percent as CEO Warren East announced the tablet PC market could grow to as much as 60 million unit sales next year. Royal Bank of Scotland Group Plc fell 3.8 percent as the lender reported a smaller than expected net loss.
CAC 40 / 3,916.73 / -0.05 / -0.00%
The French benchmark gauge declined today, trimming its weekly advance to 1.9 percent. Alston SA fell 2.6 percent to 34.87 Euros after Societe Generale SA lowered its recommendation for the world’s largest power equipment maker to “sell” from “hold.” Etablissements Maurel & Prom SA advanced 1.3 percent as the company announced third quarter sales that outpaced expectations. Lafarge SA fell 2.2 percent after two straight days of gains. The company reported an 8 percent decline in third-quarter profit.
DAX / 6,754.20 / +19.51 / +0.29%
The German index slightly advanced at the end of the trading session on Friday. The benchmark gauge rallied to a two-year high after US payrolls beat forecasts in October, boosting optimism about the overall economy. HeidelbergCement AG advanced as Ludwig Merckle increased his stake in the world’s third-largest maker of cement and concrete. Pfeiffer Vacuum Tecyhnology AG advanced 3.5 percent as Goldman Sachs Group Inc. recommended buying the share. Singulus Technologies AG slumped after forecasting an operating loss. Deutsche Bank AG advanced 1.6 percent as CEO Josef Akermann announced that he sees enormous potential in the Chinese market.
IBEX 35 / 10,428.10 / -174.70 / -1.65%
The Madrid benchmark index experienced the largest loss among the 5 major benchmark indexes as 9 out of 10 sectors closed in the black. Banco Sabadell SA fell for a third day, losing 3.8 percent, as the company announced that shareholders holding more than 90 percent of Banco Guipuzoano SA have accepted its takeover bid. Grifols SA fell 2.6 percent after the largest maker of blood-plasma products in Euroope announced it would seek ways to expand in the US. Service Point Solutions SA declined 1.8 percent, the third decline this week alone. The company will finance acquisitions through share sales as it resumes takeovers after a two-year halt.
S&P/MIB / 21,816.10 / -256.94 / -1.16%
The Italian index closed the week in the red after yet another decline. A2A SpA dropped for a fourth day this week, losing 1.7 percent. Cheuvreux downgraded the stock to “outperform” from “selected list” as the third quarter based on a weaker outlook by the company. Banca Monte dei Paschi di Siena SpA declined 3.5 percent after Bank of America Merilll Lynch Global Research announced that Italian banks took a more conservative view on revenue evolution in light of moderate growth expectations for the overall economy. Fiat SpA advanced 1.6 percent, gaining for a third straight day after S&P assigned a prelimary BB+ rating with a negative outlook to Fiat Industrial, the unit that the CEO is spinning off.
Contributed By: DailyFx
The Japanese Yen is little changed after the Bank of Japan kept its benchmark overnight interest rate target between 0.0% and 0.1%, while maintaining its asset purchase program at $5 trillion Yen and its credit-loan program at 30 trillion Yen. The central bank also got into more specifics with regard to what type of exchange traded funds and real estate investment trusts it would buy with the funds.
Some market participants speculated that the BOJ would increase the size of its quantitative easing program from $5 trillion Yen after the central bank moved the date of the November meeting forward so that it would follow shortly after the Federal Reserve policy meeting. But as the Japanese currency did not advance meaningfully on the Fed action—it actually fell versus some of its rivals—there was little urgency for the BOJ to act after having done so just last month.
Traders will have to watch to see whether USD/JPY can hold recent lows near 80, just above the all-time lows of 79.75. If it can, there is a good chance the pair may finally be bottoming out. Otherwise, a break would simply be seen as a resumption of the downtrend that has plagued this pair for months now.
Traders may wish to focus on Yen crosses such as AUD/JPY, NZD/JPY, and CAD/JPY, for they have the potential to advance irrespective of what the U.S. Dollar does.
Contributed By: DailyFx
Gold Rally to Continue as Fed Stimulus Feeds Asset Prices
Fundamental Forecast for Gold: Bullish
* Gold Rockets to Record High as US Dollar Sinks Post-FOMC
* British Pound, Gold Prices Carve Out Strong Correlation
Gold prices head into the coming week perched at a new record high just below the $1400 figure, with continued gains promised ahead after the Federal Reserve announced it would top up the stimulus punchbowl with $600 billion in additional asset purchases.
Past experience leaves little hope that the Fed’s actions will stoke business spending directly, with companies still opting to sit on large piles of idle cash after the Fed’s previous, larger experiment in quantitative easing. However, the central bank is betting it can tackle the problem from the other end, boosting asset prices with cheaply available liquidity to make investors feel richer and encourage spending, which in turn will shake the corporate sector out of complacency.
Whether or not this “wealth effect” can meaningfully contribute to setting a foundation for long-term economic growth remains uncertain. Indeed, risky assets (stocks, commodities, high-yielding currencies) have rallied considerably since putting in a post-crisis bottom in early 2009 on the back of the Fed’s previous efforts and yet – as Ben Bernanke himself has pointed out – unemployment remains uncomfortably high and overall economic growth is still decidedly sluggish. It is this very uncertainty that promises assure that gold is a major beneficiary of the latest liquidity injection, pushing prices higher in the near term. To wit, investors still unsure whether to expect deflation if the Fed’s actions flounder or runway inflation if policymakers overshoot their target will likely continue to find gold an attractive store of value to guard against either scenario.
Contributed By: DailyFx
New Zealand Dollar Boasts Strong Yield Forecasts, Bullish Outlook
Fundamental Forecast for New Zealand Dollar: Neutral
* New Zealand Dollar rallies as employment surprises to the topside
* View our monthly New Zealand Dollar/US Dollar exchange rate forecast
The New Zealand Dollar surged against its US namesake amidst a similarly strong week for the US S&P 500 and broader ‘risk’, capitalizing on sharp declines in the US Dollar to trade at its highest in nearly two years. The US Federal Reserve sent the USD tumbling and stocks significantly higher as it enacted an aggressive second wave of Quantitative Easing in a highly-anticipated monetary policy decision. Implications for the US Dollar were almost-universally bearish, and a stronger-than-expected labor market report made the New Zealand Dollar the largest gainer among all G10 currency through the week’s close.
Impressive New Zealand employment data leaves fundamental momentum firmly in the NZD’s favor, and the NZDUSD looks likely to test the psychologically significant $0.8000 mark in the week ahead. A comparatively empty week of event risk out of both the US and New Zealand suggests that the NZDUSD will take its cues from the S&P and broader financial market ‘risk’. The US equity index recently hit its highest levels in over two years on an impressive post-FOMC rally, and there are few signs that the index will reverse course.
The correlation between the New Zealand Dollar and equity markets trades near record-highs, and increased focus on NZD yields suggests that this dynamic will remain intact through the foreseeable future. Overnight Index Swaps currently price in an impressive 90 basis points of Reserve Bank of New Zealand interest rate hikes through the coming 12 months. Said forecasts are nearly double those of any other G10 central bank, and it seems that the New Zealand Dollar will continue to enjoy widening interest rate differentials for some time through the future. Assuming relatively stable conditions in global financial markets, this should continue to support the New Zealand currency against the low-yielding US Dollar through the foreseeable future.
Contributed By: DailyFx
Australian Dollar at Greatest Risk of Risk Reversal, Curbed Rate
Fundamental Outlook for Australian Dollar: Bullish
* The RBA delivers a predictable surprise by lifting its benchmark to 4.25 percent
* AUDUSD breaks parity and trades technical barriers for momentum as a gauge for strength
With risk appetite climbing to new heights, it should be no surprise that the Australian dollar is pushing untold levels against many of its fundamentally hobbled counterparts. This past week, we saw the Australian dollar push well beyond parity against the severely battered US dollar on its way to closing out a seven consecutive session advance. And, to establish that this is not just an anti-greenback move, we have also seen significant strength from the Aussie against the Canadian dollar, Swiss franc, Japanese Yen, euro and British pound. That said, the currency may be growing too dependent on the progress of speculative interest and carry trends to sustain a consistent drive. At the first sign of profit-taking or dimmed optimism, the market could quickly pull back this mature trend.
As such, our first fundamental concern when analyzing the Australian dollar should be the bearing of the S&P 500 and US dollar. The equity index is one of the most consistent manifestations of sentiment; but the dollar has taken a special place on the risk spectrum thanks to the Fed’s efforts to pump speculative capital throughout the global system. However, to ensure that the commodity currency maintains its ties to these underlying catalysts, we should recognize that its place is at the top of the return totem. Just as the worst performer in this scale (the greenback) is prone to a sharp recovery as selling pressure backs off from an extreme, the Aussie dollar can quickly succumb to profit taking. Making the currency exceptionally prone to this shift is the focus on the consistency of monetary policy. The RBA decided to hike its benchmark lending rate last week; but the quarterly policy statement they released later would notable temper inflation forecasts as well as growth projections through 2011. This alone wouldn’t curb the central bank’s pace; but perhaps if data started to show a more detrimental course. In the days ahead we have employment change and consumer inflation expectations figures. Should either of these sow doubt, it would significantly amplify and waver in underlying risk trends.
Aside from the inflation and jobs figures, there is a range of other important indicators including lending figures, consumer confidence and business sentiment. The RBA’s Financial Stability Review could carry more weight than all of these if it were able to deliver a surprise – which is unlikely. In the end, one of the biggest non-risk drivers traders may face is the influence of the G20 meeting. Rather than alter optimism; this meeting could alter the course of FX coordination. That would be a good thing from a global economic perspective; but for an Aussie dollar taking advantage of favorable capital flows through this inequity, harmony could actually lead to declines. Given the depth of these policies; it would be extremely difficult to come to any meaningful agreement; but as the adage goes: where there is a will, there is a way.
Contributed By: DailyFx
Canadian Dollar To Hold Range As Growth, Interest Rate Outlook Falter
Fundamental Forecast for Canadian Dollar: Bearish
- Canadian Employment Misses Expectations
- USDCAD: Bears Eye Range Bottom Near Parity
- US Dollar Canadian Dollar Exchange Rate Forecast
The Canadian Dollar extended the rally from the end of October, with the USD/CAD falling back below parity, and the exchange rate may continue to push lower over the following week as it maintains the downward trending channel carried over from the previous year. However, as the USD/CAD approaches the lower bounds of its range, there could be a short-term reversal following the sharp decline over the last two-weeks, and the dollar-loonie may trade within wide range going into the end of the year as price action holds above the 78.6% Fibonacci retracement from the 2007 low to the 2009 high around 0.9900-20.
With the economic docket expected to reinforce a weakened outlook for the Canadian economy, a batch of dismal data could spark a reversal in the exchange rate as investors weigh the prospects for future policy. Housing starts in Canada is forecasted to weaken to an annualized pace of 182.0K in October from 186.4K in the previous month, which would be the slowest pace of growth since December, while the trade deficit is projected to widen to CAD 1.6B in September from CAD 1.3B as the rebound in global trade tapers off. As the Bank of Canada embraces for a tepid recovery, with Governor Mark Carney holding a cautious outlook for the region, the slower pace of economic expansion could lead the central bank to maintain a wait-and-see approach in December as the prospects for future growth remains clouded with uncertainties. According to Credit Suisse overnight index swaps, investor are pricing only a 4% chance for a 25bp rate hike on December 7, and interest rate expectations could deteriorate in the weeks ahead as the central bank adopts a highly dovish tone for monetary policy.
If a USD/CAD reversal unfolds over the following week, the exchange rate should work its way back towards the top of its range, but price action may be confined by the 200-Day SMA at 1.0323 as the pair failed to close above the moving average in October. As a result, the dollar-loonie may trade within a 300 pip range throughout November as the central bank adopts a dovish tone, and interest rate expectations could play an increased role in driving future price action for the dollar-loonie as the BoC pledges to “carefully consider” any further tightening in monetary policy. At the same time, with the G20 Summit kicking off in South Korea next week, comments from global policy makers could spark increased volatility in the currency market, but we expect BoC Governor Carney to maintain a cautious outlook for Canada as he expects the economy to operate below full capacity until the end of 2012.
Contributed By: DailyFx
British Pound Looks to Quarterly Inflation Report to Dictate Price Action
Fundamental Forecast for British Pound: Bullish
* British Pound Rally To Gather Pace As BoE Maintains Currency Policy
The British pound rallied for the second consecutive week against the U.S. dollar on the back of weakness in the world’s largest economy and continued growth in the U.K. This week will be critical for the British pound as concerns of elevated consumer prices linger. Thus, the Bank of England’s quarterly inflation report on Wednesday will provide some light for GBP traders ahead of the highly anticipated Bank of England minutes, which will be released the week following.
The spotlight will shift from the FOMC rate decision to the quarterly inflation report which is expected to take into account the massive spending cuts of approximately 800 billion pounds announced by the government approximately two weeks ago in order to battle its high budget debt. Last quarter, policy makers said that growth remained weighted to the downside, and went onto note that consumer prices were above the central bank’s 2 percent target due to temporary factors from oil prices and the value added tax (VAT) measures. It is also worth noting that the BoE said that the forthcoming increase in the standard rate of VAT to 20.0 percent from its current level of 17.5 percent will add to inflation throughout 2011. Similar concerns of the VAT will likely be highlighted on Wednesday, but whether the central bank changes its tone with regards to growth will be one of the main focuses amongst market participants. Indeed, economic activity topped economists’ expectations in the third quarter, while Bloomberg News reported that the S&P credit rating agency said the U.K. does not face the risk of a downgrade as pressure eases on the Bank of England to add further stimulus measures. It seems that the Bank of England also feel as if they can weather the storm in the near term as policy makers refrained from adding onto their asset purchases last week. All in all, the quarterly inflation may provide clues ahead of the Bank of England Minutes. Not to overlook, industrial and manufacturing production, and the NIESR GDP estimate are all on tap.
Strength in the British pound cannot solely be attributed to growth in the U.K. The Fed recently announced new asset purchases of 600 billion dollars in order to stimulate growth as the economy continues to face major hurdles. As a result, the greenback has come under pressure against most major currencies. Meanwhile, the employment rate is at 9.6 percent, and will likely push higher, while households face slow wage growth and tight credit conditions. Despite the upbeat Nonfarm payrolls report, it is worth noting that America will need to add 232,400 jobs a month to return to the pre-depression labor force levels (which is very unlikely). Thus, the question that now arises in the global markets is if the recent actions by the Fed will boost growth, or will there be QE3 announced in the future. Many analysts and economists expect the latter, and countries are concerned that impact of the Fed’s action will undermine their own economies. However,during the short term, the U.S. dollar looks poised to continue its southern journey against most major currencies.
Taking a look a look at the GBPUSD, the pair has halted its three day decline; however downside risks are capped by 1.600. Going forward, I will look to buy any dips as my bias remains to the upside. The MACD continues to point to further advancements in the pair, while the parabolic SAR has yet to reverse course. At the same time, our speculative sentiment index stands at -1.26, and signals for additional gains.
Contributed By: DailyFx
Japanese Yen Shows Signs of Faltering, Will BoJ Surprise?
Fundamental Forecast for Japanese Yen: Bearish
* BoJ leaves rates unchanged, increases scope of asset purchases
* Labor Cash Earnings in September Rose 0.9% beating expectations of 0.5%
The Japanese yen had it first losing week against the greenback in the last seven but failed to break from its prevailing long-term bullish trend. A stronger than expected U.S. Non-farm payroll report helped the dollar find a bid, as the 151,000 jobs generated more than doubled estimates of 60,000. The Fed’s announcement of a $600 billion asset purchase program sunk the dollar mid week, but markets were expecting the telegraphed move and most of its implications were already priced in the market. Thus, if we continue to see strong fundamentals from the world’s largest economy markets may start to price in the potential for a rise in U.S. inflation and future tightening which could be supportive for the reserve currency. Indeed, we have already seen Overnight index swaps go from giving a zero percent chance of a rate hike in January to 9.5% as the focus shifts to the next move for the FOMC. Meanwhile, risk appetite derived from QE2 and the labor report saw the Asian currency lose ground to the other major currencies and has several on the verge of a trend shifts.
Japanese policy makers didn’t follow their U.S. counterpart’s lead and add to their own quantitative easing efforts. The central bank held their target rate at 0.0% to 0.10%, while expanding the scope of the asset that will be bought with their existing $62 billion program to include real estate investment trusts. Although the move helped buoy Japanese equity markets it had little impact on yen valuation. It could be a matter of time before the monetary authority has to amplify their efforts as Yen strength continues to be a burden or Japanese exporters and is placing downward pressure on prices. Additionally, we can’t rule out a second round of intervention as current conditions could allow for a more meaningful impact than their initial efforts.
The upcoming economic calendar is expected to bring more bad news for the Japanese economy with consumer confidence, machine orders and producer prices all weaker from the month prior. We don’t expected any of the release to market moving as risk trends and dollar sentiment will continue to be the main drivers. Overall markets may quiet following the extreme volatility y that was seen this week and an overall light docket, which could provide the environment for a constructive move from the USD/JPY as the pair closed above its 20-Day SMA at 81.23 fro the first time since September 22nd, making a bullish case for the pair.
Contributed By: DailyFx
Euro Fundamental Troubles Growing Behind Anti-Dollar Appeal
Fundamental Forecast for Euro: Neutral
- Germany’s Chancellor, Finance Minister push bond holder responsibility, drive sovereign rates higher
- Despite a largely in-line policy outcome, the euro rallies on ECB decision given Fed contrast
- EURUSD advance to a fresh eight-month high as the pair falls into the next wave of its advance
How is strong is the euro fundamentally? This may seem an easy question. We could look at the performance of EURUSD and say that it is exceptionally robust considering the currency market’s most liquid pair pushed eight-month highs this past week. However, this US dollar’s own pain is undeniably responsible for much of this pair’s gains. What’s more, the buy pressure behind this particular pair (again, which can be heavily influenced by the ebb and flow of the dollar) oftentimes spills over to other euro crosses. This can make it difficult to assess the unique strength or weakness of this shared currency. However, it is essential to establish the euro’s own fundamental bearings when trading the currency; because when the cross market winds die down, those concerns that were previously overlooked can quickly come rushing to the forefront. Such a shifting of gears is certainly probable this week as the dollar runs short on catalyst and the euro falls into its own drivers.
If we are looking to identify the most influential driver for the euro, we should actually gauge the strength of the dollar. The direction of the greenback is not so important as its momentum. The benchmark currency holds such incredible sway over the euro and other counterparts when it is driven by a stiff fundamental wind (just as risk appetite, interest rate speculation or any other dominant driver can take control of price action). For the dollar, the damage has been done with this past week’s FOMC decision to balloon its stimulus program by another $600 billion and lengthen the maturity of the debt it is looking to buy. Having passed this hurdle, a major cloud over the FX market has unleashed its torrent and moved on. That isn’t to say the stimulus theme is passed. As long as risk appetite trends continue to rise, the euro can absorb the capital that is jettisoned from the US. That said, sentiment trends may need a specific catalyst to maintain momentum now that the capital markets are exploring new highs. So, euro traders should keep track of risk trends via the greenback oddly enough.
In the absence of overbearing dollar or risk trends; the euro may actually fall back on its own fundamental drive (not an unusual situation for some of its crosses actually). In the coming week, we have a few big concerns to watch for. On the docket, we have a range of noteworthy economic data; but the indicator with the greatest pull is the 3Q GDP numbers. Most of the big numbers come on Friday; but we should be aware of the Spanish numbers coming out a day earlier. As one of the ‘peripheral’ economies that are struggling to balance recovery with austerity; it is an important one. At the end of the week, we have Greece and Portugal releasing alongside Italy, France, Germany and the Euro Zone. This data is made all the more important for the other primary concern.
Financial stability is quickly deteriorating in Europe according to bond spreads and swap rates. This past week, Irish and Greek 10-year sovereign bond yields surged to records as fears that Germany’s attempts to make bond holders responsible for a portion of future losses chocked off already feeble confidence in the underperforming nation’s around the EU. So far, this troublesome development has been pushed to the background; but if growth figures show the trouble is on both sides; it will be far more difficult to ignore.
Contributed By: DailyFx
After the Fed announced its plans to purchase an additional $600 billion in assets to boost its stimulus effort, the dollar was put on its back foot as the losses it had suffered in the previous two months were all-at-once justified. And, with the following day's risk-based rally and the policy contrast from the ECB and BoE, the selling pressure behind the greenback would be fortified. As long as risk appetite is on the rise, investors see the opportunity to leverage themselves on cheap US capital and invest it in carry positions that provide remarkable yields elsewhere (a trade that even the IMF's chief economist has voiced support for). It is this fundamental premise that I keep in mind while looking at the dollar's week-end bounce. As long as risk trends hold up, this bounce is more likely a correction on profit-taking rather than a reversal. Going forward, the bearings and pace of risk appetite will be my primary fundamental concern.
With my attention turned to risk trends, I'm more confident in sticking with my long EURUSD setup. With a pullback towards the big 1.40 level, I decided to jump in on a reduced position at 1.4050 (originally I was looking for 1.41; but we were already below that level before I came into the office). There is still a risk that this could turn into a deeper reversal come Monday should investor sentiment sour; but it is a risk I'm willing to take with a stop and first target set at 140 pips. My other dollar position is actually a long setup in my very-reduced and long-term fundamental setup for USDJPY. With very low leverage and a token stop set at 77 (I would probably stop out well before getting to that level as I would follow sentiment's interaction with fundamentals), this is a position that is looking to take advantage of a gradual reversal. I'll add should the pair break above 82 and 83.
Looking ahead to next week, there are a few interesting setups for me to keep track of. I am waiting to see if USDCAD can break below its long-term rising trendline at 0.9950 to give another dollar-short opportunity (this one relying less on risk appetite trends for direction). Another Canadian dollar position that I am waiting for is CADJPY. A break of that long-term wedge I was keeping track of looks good - and I'm long-term bearish the yen - but I'll wait for a pullback to 80.80 or thereabouts along with confirmation of strong risk appetite to start the week for an entry. Another breakout that has drawn my attention is the EURJPY. We did get a pullback here; but with a target entry around 113.80 and the weekend draining liquidity, that it would be prudent to wait until next week to jump in to get the lay of the land.