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Friday, 05 November 2010 10:12

Gold Rally to Continue as Fed Stimulus Feeds Asset Prices

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.

Published in Forex News
Friday, 05 November 2010 10:12

New Zealand Dollar Boasts Strong Yield Forecasts, Bullish Outlook

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.

Published in Forex News

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.

Published in Forex News

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.

Published in Forex News

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.

Published in Forex News

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.

Published in Forex News

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.

Published in Forex News

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.

Published in Forex News

Contributed By: DailyFx

* Dollar Rally Less a Fundamental Recovery and More a Speculative Retrenchment
* Euro Strong Despite Deepening Financial Concerns, 3Q GDP Will Clarify Fundamental Bearing
* British Pound Likely to See More Influence from Quarterly Statement than Last Weeks BoE Decision
* Japanese Yen’s Plunge back to Fundamental Reality Delayed by BoJ’s Uneventful Policy Decision
* Australian Dollar will Clarify Interest Rate Expectations with Employment, Inflation Consensus
* Swiss Franc: What Happens When the SNB Starts to Yield to Inflation?

Dollar Rally Less a Fundamental Recovery and More a Speculative Retrenchment
The dollar put in for its biggest rally in nearly three weeks Friday. Yet, is that necessarily encouraging when it follows a series of three declines to the lowest levels the currency has suffered this year? Putting the currency’s week-end performance into context with comparisons to its relative lows and the fundamentals that have forced it to that level, it is premature to suggest that the greenback has put in for a meaningful reversal. Looking at the technical bearings of the greenback, we see that the most appealing argument for a reversal comes from the trade-weighted dollar index. With the greenback’s correction, this benchmark actually finds itself back above the long-term rising trendline (tracing its history back to the March 2008 swing lows) that was so dramatically broken in the previous session. However, the influence of this move is diminished when we look at the dollar’s showing against its major benchmarks. First of all, against the so-called high-yield Australian, New Zealand and Canadian dollars; the greenback actually lost ground for a seventh consecutive session. From the majors, the performance was more variable. The dollar struggled for gains against the Swiss franc, is conspicuously constrained to congestion against the yen and was overdue for a bounce following six consecutive declines against pound. EURUSD was the primary source of the dollar’s performance in a move back towards 1.40.

Gauging the greenback’s fundamental health is essential to establishing its direction going forward. That said, there are two major drivers working against the benchmark: a dramatic skew in the supply-and-demand for the currency and a remarkable run in risk appetite trends. The concept of a currency depreciating due to an overabundance is an elementary concept of value. For a market that is already incredibly liquid and has deeply-rooted channels of capital flow (like Chinese purchases of Treasuries); it supply and demand is oftentimes ignored. However, over the past few months, this has changed as investors start to react to the divergence in stimulus between major economies. In contrast to the European Central Bank’s, Bank of England’s and Bank of Japan’s decision to maintain policy this past week; the Federal Reserve confirmed traders’ fears/hopes by expanding its stimulus program by an additional $600 billion over a time frame of eight months. More than flooding the market with dollars, this effort has the (intended?) side effect of boosting investor confidence by lowering the cost of funds and encouraging traders to invest this leveraged position abroad. In fact, despite the dollar’s correction, the S&P 500 actually climbed into Friday’s close to a new two-year high. This strong finish was partially encouraged through the October employment figures. For a crowd that is predisposed to bullish trends, the better-than-expected 151,000 net increase in nonfarm payrolls (NFPs) was enough to lift the market. Yet, on closer inspection, the jobless rate is still at 9.6 percent, the underemployment rate is still 17 percent, the number of persons not in the labor force is at a record high and food stamp usage hit a record high. Risk trends played a clear role in interpreting this data.

As we look ahead to the coming week, the dollar has a natural selling point in the Fed’s liberal stimulus stance. Aiming to support growth (and perhaps asset prices), the policy authority puts the greenback at the bottom of the risk spectrum and amplifies the effect by simultaneously encouraging risk appetite. This will be difficult to overcome; but it is a trend that can break. A natural slump in investor confidence is the primary threat. A more interesting catalyst could be the upcoming G20 meeting as they label manipulators and perhaps work towards coordination.

Euro Strong Despite Deepening Financial Concerns, 3Q GDP Will Clarify Fundamental Bearing
With EURUSD clearing 1.40 and scaling multi-month highs, it is easy to overlook the actual fundamental performance of the euro itself. However, against the pound, franc and commodity dollars; this shared currency has pitched into a steep dive. This can perhaps be traced back to the recent surge in the Mediterranean members’ sovereign debt yields recently. Though it was somewhat under the radar, the funding costs for these already pained economies surged to records as German official look to torpedo confidence by threatening shared responsibility in losses for bond holders. Perhaps another sign of divergence in performance intra-EU will come via Friday’s 3Q GDP numbers.

British Pound Likely to See More Influence from Quarterly Statement than Last Weeks BoE Decision

Though the Bank of England was mum on its policy decision last week; a hold was all that was needed to boost the sterling against its troubled US counterpart. However, the reasoning for this decision is very important to gauging when/if stimulus will be expanded down the line. We will be offered evidence one way or the other come next week with the Quarterly Inflation report which is stocked with new growth and CPI forecasts.

Japanese Yen’s Plunge back to Fundamental Reality Delayed by BoJ’s Uneventful Policy Decision
Of all the non-FOMC central bank decisions this past week, the Bank of Japan’s rescheduled meeting was the most tension-filled. Having taken aggressive steps towards boosting markets and fighting deflation, it was highly likely that this meeting would end with a larger stimulus package. And yet, when the decision passed without event the yen was still lower on. Perhaps the market is pricing in further easing later down the line.

Australian Dollar will Clarify Interest Rate Expectations with Employment, Inflation Consensus
It’s hard to find to find fault with the Australian dollar with risk rallying and the RBA following through with its hawkish course. However, as the market works to squeeze every last inch of rally from the Aussie through pricing in forward rates and improved sentiment, the currency grows increasingly susceptible to even a modest correction in prevailing trends. That leverages a lot of importance on jobs and inflation data ahead.

Swiss Franc: What Happens When the SNB Starts to Yield to Inflation?
The Swiss franc is a currency that has appreciated despite its own fundamentals and policy authority’s effort to curb appreciation. And, just when it seems the Swissie is losing momentum, actual support looks like it is just around the corner. This past week, central bankers have stepped up their warnings that rates can’t be held low for much longer. Perhaps risk trends will take a turn by the time rate hikes are really priced in…

Published in Forex News

Contributed By: DailyFx


US Dollar Forecast Turns Bearish on Fed Actions, S&P 500 Rallies

Fundamental Outlook for US Dollar: Bearish

* Federal Open Market Committee announces fresh Quantitative Easing, US Dollar declines
* US Nonfarm Payrolls Jump in October, but US Dollar sees little traction
* View our monthly Euro/US Dollar Exchange Rate Forecast

The highly-anticipated Federal Open Market Committee interest rate announcement sent the US Dollar reeling against the Euro and other key currencies, and the sharp break suggests the Greenback may continue to drop through upcoming trade. For weeks now we have argued that the USD’s fate may depend on the FOMC’s subsequent actions. Fed officials certainly did not disappoint in announcing an aggressive second wave of Quantitative Easing, and the breadth of their actions stifled hopes of a sharp US Dollar recovery. The Greenback is likely to remain on the defensive in the week ahead as traders show little appetite to buy into aggressive dollar declines.

Consensus forecasts called for a fresh $500 billion in Fed asset purchases, and officials trumped expectations in announcing $600 billion in balance sheet expansion. It was perhaps little surprise to see the US Dollar fall on the larger-than-predicted sum of Quantitative Easing, and indeed the decision provides a strong headwind to the US Dollar through upcoming trade. The EURUSD break above previous highs now has our own technical strategist watching for a run towards 1.4500, and current momentum certainly points to fresh dollar declines.

We had previously called for an important US Dollar reversal on seemingly one-sided bearish sentiment and speculative positioning. Yet sentiment can and has remained extreme for extended periods of time, and we were clearly premature in our calls for USD strength. As it stands, bearish momentum and US Dollar fundamentals do not bode well for short-term trends. This is especially true in the face of strong rallies in the S&P 500 and broader financial market risk sentiment. It seems that the US Dollar has few things working in its favor, and it may in fact need to fall further before showing any real chance of important recovery.

A relatively empty week of US economic event risk leaves the currency at the whims of broader financial market volatility in the days ahead. It will clearly be important to watch whether the S&P and other ‘risk’ barometers can continue to fresh highs—especially as stocks hit their highest levels in two years. One wonders whether the Fed’s actions are enough to sustain such one-way rallies in the S&P 500 and declines in the US Dollar. As of this past week, markets show relatively little appetite to go against the trend amidst strong price momentum.

Published in Forex News
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