Category: Analysis

02- Dec2016
Posted By: adminwmk
194 Views

Nonfarm Payrolls Preview: rate hike priced in, NFP needs to surprise big

The last month of the year is finally here, and will kick start with the release of the US Nonfarm Payroll report. The stars of the month however, will be the ECB and the FED, with the first expected to announce an extension in its stimulus program and the second forecasted to raise rates. Indeed, the employment report will be taken as a new hint of whether the FED can act this December, although for the past month, policymakers have been doing their best to limit the impact of a rate hike, anticipating the move.

The US economy is expected to have added 175,000 new jobs in November, slightly above October’s 161K, while the unemployment rate is expected to remain unchanged at 4.9%. Average hourly earnings are expected  to have rose by 0.3% monthly basis, and to remain flat at 2.8% in the year-on-year comparison.

Earlier this week, the ADP survey showed that the private sector added 216,000 new jobs in the same month, well above analysts´ expectations of 165,000, somehow anticipating a solid NFP. Better-than-expected figures will probably support the greenback, but considering that the market has already priced in a rate hike, the movement could be limited, particularly if the figures result in line with market’s expectations. It would take a strong upward surprise, and not only in the headline number, to re-ignite dollar’s rally.

The US Federal Reserve will meet next December 14th, and should be a shocker if traders save their bullets until then.

EUR/USD levels to watch

eurusddaily-636162008483125149

The EUR/USD pair has been stuck around the 1.0600 for most of this week after bottoming at 1.0517, a year low, in the previous one. The bearish momentum seen over the previous weeks has somehow eased, but given that the pair has remained below the 1.0700 level, the 23.6% retracement of the 1.1299/1.0517 decline, an interim bottom is not yet confirmed. In fact, the consolidation stage has helped daily indicators to correct the extreme oversold readings achieved early November, but in the same chart, a sharply bearish 20 DMA has extended its decline down to the 1.0680 region, where the pair topped this week.

If the upcoming employment report comes in line with expectations, the most likely scenario is that the pair will remained contained within the 1.0517/1.0700 range. It would take a very disappointing headline number and a recoil in wages to push the pair beyond the higher end of the range and the mentioned Fibonacci level, with scope then to advance up to 1.0745 first, and towards 1.0790 later.

A shocking upward surprise on the other hand, may take the pair down to 1.0505, December 2015 low, while below this last, the dollar can extend its gains, with the pair then falling down to 1.0460, 2015 yearly low.

08- Nov2016
Posted By: adminwmk
4088 Views

What Does a Trump Win Mean for Financial Markets?

This year, a new answer was born to questions like ‘why is (insert surprising or shocking event) happening’? The answer is simply: ‘because…2016’. Six months ago, most pundits called it a long shot that that Republican candidate Donald Trump might win the US presidential elections. Then again…itis 2016.

A Brexit was also considered to be a long shot, and yet, Britain did indeed end up unexpectedly voting to leave its European Union membership, sparking off waves of price reactions in the markets. The Gold price climbed so fast that investors got dizzy at the new heights. The Sterling and FTSE felloff the edge of the cliff so rapidly that they left queasiness in its wake.

So, what are the upside and downside scenarios for a Trump win? On the downside, it could look like the Brexit, with the S&P 500 taking the role of the FTSE. Investor confidence may fall dramatically in the short term, meaning losses in the S&P 500. The losses could be anywhere between five and 10 percent for the S&P, ending the eight-year bull run. In this context, the VIX could soar, tracking potential volatility that might follow the unexpected result of the election.

The other asset to take a lead role in this potential drama is the Mexican Peso. Ever since Trump made an election promise to builda wall to keep Mexican illegal migrants out of the US, the currency has been the best financial asset proxy to signal a Clinton win and a Trump loss. The Peso’s downward slide in the wake of the revelations over a new FBI probe announced in the last week of October into Hillary Clinton’s email issue is a fair indicator of the trend it might take in the event of a Trump win. The currency’s losses may even reach 15 percent.

It’s debatable whether the USD would take a hit or be a hit, given that the currency is often seen as a safe-haven in times of volatility. On balance, the USD could maintain and even rise against its rivals in the case of a Trump win, especially considering the Federal Reserve’s interventionist policies and caution since 2007. There’s little doubt, however, that another other safe-haven asset – Gold – would be preferred by traders. When the markets lose their risk appetite in the face of a short, sharp shock, they turn to Gold for comfort.

On the upside, an initial sell-off would create opportunities for smart money to dive in and take advantage of the market correction. Something similar was seen in the wake of the Brexit when the FTSE regained ground on bargain buying and central bank easing hopes.

Medium term, there could be additional developments in terms of investor sentiment. Businessman Donald Trump has made much of his economic policies like cutting red tape, which are likely to be popular with US companies. If his presidency becomes a reality, mergers and acquisitions activity could be boosted and flourish because of fewer regulations seen as restrictive or complicated. Business-friendly policies could also contribute to a reinvigorated financial services sector and investor confidence could return in earnest for the first time since the sub-prime crash in 2007. Stocks in the biotech sector – which suffered losses in the wake of Clinton’s criticism of EpiPen’s price hikes – could recover quickly if Trump is victorious.

A win for Hillary Clinton has already been priced in by the markets ahead of the elections, yet as always when it comes to expectations, they can be disappointed. After all, it is…2016.

05- Nov2016
Posted By: adminwmk
277 Views

Dollar Lives or Dies by US Election – 3 Scenarios

Now that the Federal Reserve’s monetary policy meeting and U.S. non-farm payrolls reports are behind us, investors can focus solely on Tuesday’s U.S. Presidential election.  Friday’s U.S. jobs report failed to change the market’s expectations for a rate hike in December.  A total of 161K jobs were created in October but September job growth was revised higher, the unemployment rate dropped back below 4.9% and average hourly earnings rose 0.4%, which was more than expected.  But the only thing that matters next week is who becomes the next President of the United States. Economics and monetary policy will take a back seat to the unfolding political drama especially since there are no major U.S. economic reports on the calendar. Over the past 2 weeks we have gotten a taste of how equities and currencies could trade if Donald Trump becomes President.  On November 1st, when a poll suggested that Trump led Clinton by 1 point, the Dollar index dropped 1%, the Mexican Peso fell 1.75% and the Swiss Franc soared 1.4%. Investors took the U.S. dollar lower against all of the major currencies as the race tightened and the polling gap between Donald Trump and Hillary Clinton closed. As shown in the chart below, USD/JPY has been taking its cue from Real Clear Politics’ 2016 Presidential Poll Average Value for Hillary Clinton (white line) – a similar relationship can be seen with the dollar index.  In the past 3 months when Clinton’s popularity rises the U.S. dollar strengthens and when it falls (like it has been recently), USD/JPY crashes.

U.S. elections don’t normally elicit major market volatility but the problem in 2016 is that for better part of this year, market participants did not consider a Trump victory realistic and now that the election is too close to call they are bailing out of U.S. assets and rushing to protect their portfolios.  Regardless of your political leanings it is hard to ignore the fact that investors fear a Trump Presidency.  His foreign policy, trade ideas and plan to overhaul the Federal Reserve scares domestic and foreign investors alike and the general lack of specificity could mean a long period of uncertainty. Beyond the immediate impact, investors also worry that if markets sell-off and the U.S. economy slows the Fed could forgo a rate hike in December which would exacerbate the slide in the dollar into yearend.

But what if Hillary Clinton makes history by becoming the first female President of the United States?  The market’s reaction depends on the margin of her victory.  So lets consider the 3 potential outcomes of Tuesday’s election:

Scenario #1 -Trump becomes President, Clinton accepts defeat. 

The greatest market impact would be a Trump victory and a willing Clinton defeat.  In this scenario, the U.S. will have a man with untested political skills and unknown policies in office. In this case, the biggest winners will be the euro, Swiss Franc and Japanese Yen and the biggest losers will be the U.S. dollar and Mexican Peso.  The Canadian dollar should also fall but its moves could be tempered by a weakening U.S. dollar.

Scenario #2 -Clinton becomes President, Trump accepts defeat

The greatest relief for foreign investors would be if Clinton becomes President and Trump willingly accepts defeat. She’s not without her own problems (and there are many of them) but the transparency of her policies and the continuity of stability would send the U.S. dollar sharply higher. In this scenario, the dollar and peso would rise against all of the major currencies with the biggest losers being the Japanese Yen, Swiss Franc and to some degree the euro.  However she would need to win by an uncontestably wide margin and Trump would need to accept defeat, which he has suggested that he wouldn’t.

Scenario #3 -Trump/Clinton becomes President by narrow margin.  Loser refuses to accept defeat.

The third scenario is the most likely one.  If Trump or Clinton becomes President by a very narrow margin and the loser refuses to accept defeat, the ongoing uncertainty would be extremely negative for the U.S. dollar, especially in the hours after the election. On a percentage basis, the greatest market volatility in financial assets (currencies, equities and commodities) will be in scenario 1 & 2.

There’s almost no point in discussing the outlook for other major currencies as next week’s price action will be dictated solely by the market’s appetite for U.S. dollars.  However, the Reserve Bank of New Zealand has a monetary policy announcement and a rate cut is expected! There have been as much improvements as deterioration in New Zealand’s economy.  Employment growth was strong, dairy prices increased and business confidence is up but the central bank’s main concerns are inflation and trade – both of which have been falling.  Cooler housing activity could give them the breathing room to cut rates.  The RBNZ rate announcement is after the U.S. election so the market’s reaction could affect their decision. It’s a close call and even if the Reserve Bank keeps policy unchanged, they will repeat that rates are coming down. This stands in sharp contrast to the outlook of the Reserve Bank of Australia who left rates unchanged this past week and issued a statement with a relatively optimistic tone, sending AUD sharply higher. Australian data has also been good with retail sales rising, the trade balance narrowing, service and manufacturing activity accelerating. The only big miss this past week was building approvals.  Chinese PMI reports was also better than expected which helped to boost AUD and NZD. There are no major Australian economic reports scheduled for release in the coming week but traders will be watching the latest trade numbers from China to see if the decline in import and exports eased in the month of October.

The Canadian dollar traded in a very narrow range this past week until Friday when it hit a fresh 7 month high on the back of significantly weaker trade data and mixed employment numbers. Although 43.9k new jobs were created in the month of October, all of the job growth was part time with fulltime jobs falling by -23k. Not only did this erase all of the past month’s gains but it reflects a worrying shift in the labor market with companies hiring only part time workers.  The trade deficit hit a record high as exports fell 1.2%. The weakness of the Canadian dollar is not having any positive impact on trade activity, which reinforces central bank Governor Poloz’s concerns.  Falling oil prices also added to the pain. Earlier this week Poloz said the downside risks seen in September have crystalized and suggested that they can’t understand some of Canada’s export weakness. The currency has fallen over 5% since its peak in June and yet there has not been a meaningful pickup in exports. Poloz will be speaking again in the coming week and we doubt that his outlook has changed.

Sterling extended its gains beyond 1.25 as the momentum from the British High Court’s ruling continued.  Between their decision and Governor Carney’s optimism, we now expect further gains in the currency as traders unwind their short positions. U.K. industrial production and trade balance are scheduled for release next week but these reports will matter little to a market focused on the U.S. election and risk appetite. The same is true for the EUR/USD. Traders sold euros aggressively last month and as the polls began to narrow, they realized they had to de-risk their portfolios and to do so they unwound their EUR/USD short positions, taking the currency pair sharply higher. In the coming week, we have German industrial production and trade numbers scheduled for release and the lower euro should help these reports but nothing matters more to the euro or any of the major currencies than the outcome of the U.S. Presidential Election.

Why is the dollar struggling?

Analysts at Brown Brothers Harriman explained that they had anticipated the dollar was going to be under pressure in the first part of the week.

Key Quotes:

“Today’s losses are coming despite slightly wider US 2-year premiums”

“Position adjusting seems to be the main factor, but it is not immediately clear if it is ahead of the ADP jobs estimate and FOMC meeting tomorrow or the US election.”

 “Trump’s support had bottomed before the FBI re-opened the investigation into Clinton’s emails, and his support appears to be continuing to edge higher.”

“We noted in our last technical view that the Dollar Index snapped a three-week advance last week.”

“We identified initial support in the 98.00-98.20 area and warned that a break could see 97.60.  Today’s low thus far is 97.74.  The Dollar Index has fallen through the 20-day moving average for the first time in a month.”

“A break of the 97.60 area would suggest a deeper correction is in store that could carry it toward 96.75.”

Categories:
30- Oct2016
Posted By: adminwmk
204 Views

8 Reasons to be Trading Forex Next Week

You should be trading currencies next week because excluding the U.S. Presidential election on November 8th, the next 5 days are jam packed with major event risks.  With 4 monetary policy announcements (from US, Japan, Australia and UK), 4 employment reports (US, Canada, Germany and New Zealand), PMIs and countless other key releases on the calendar, these will be some of the busiest days for FX traders in the month of November. Big moves are assured and we could even see new multi-month / year highs or lows set in the process. GBP/USD is not far from its 30 year low, USD/JPY could hit a new 3 month high, while USD/CAD and USD/CHF could reach fresh 7 or 8 month highs.  This coming week’s central bank rate decisions in November are not as important as the ones in December because no changes in monetary policy is expected but investors will be listening closely for their tone / bias and guidance as they will set expectations for next month’s potential moves. While it may be hard to whittle down to the most important releases (because there are so many of them), the primary events will be the Federal Reserve meeting, the Bank of England’s Quarterly Inflation Report and U.S. non-farm payrolls.

Barring the unexpected news that the FBI has re-opened its investigation into Hillary Clinton’s emails, this past week has been a great one for the U.S. dollar with Friday’s stronger than expected third quarter GDP report adding fuel to the market’s optimism.  We doubt that this investigation will have any impact on the election a week and half from now but political headlines can add to the volatility expected this coming week. The dollar ended the week higher against most of the major currencies.  USD/JPY broke above 105, USD/CAD breached 1.34 and GBP/USD came close to breaking the 1.2100 handle.  It is almost hard to believe that USD/JPY was trading near 100 a month ago but thanks to the Federal Reserve’s persistent commitment to raising interest rates this year even in the face of softening labor and spending data, U.S. yields and the U.S. dollar rose strongly over the past month.  Data in the past week was mostly better with growth accelerating, manufacturing activity improving, new home sales rising, and the trade deficit narrowing but a slow recovery in the labor market and upcoming election is making consumers nervous.  The Federal Reserve isn’t going to change its message next week so the ISM non-manufacturing and non-farm payrolls report will be more important as they will either ease or harden the market’s doubt about December tightening.  Fed fund futures are pricing in a nearly 75% chance of a rate hike at the end of the year but if less than 175K jobs were created in October, putting the average near 165K, those expectations will fade as it will cast doubt on the central bank’s rosy outlook.  With that in mind, since we are anticipating hawkishness from the Fed and the FOMC meeting is 2 days before NFP, we expect the dollar to trade strongly in the front of the week. The Bank of Japan also has a monetary policy meeting and while no changes are expected, weak growth necessitates more easing and investors are eager to find out if they will act in December or surprise with a November move.

Sterling took a beating this past week and the prospect of further losses hinges on the Bank of England. In many ways next week is more important for the British pound than the U.S. dollar because the latest UK PMIs and Quarterly Inflation Report will be released.  Immediately after Brexit, the PMIs plunged, then it recovered in the months that followed and now there is some fear that we will begin to see weakness again. Most of this past week’s economic reports like consumer prices, employment and GDP surprised to the upside but retail sales was weak. Yet sterling came under heavy selling pressure on growing Brexit fears. The headline on Friday that Northern Ireland would not challenge Brexit caused a flurry of activity but is not particularly surprising. The big question next week is whether the BoE will lower its economic forecasts and signal plans to ease.  When Governor Mark Carney spoke this past week, he drove sterling higher when he said there were limits to monetary policy. GBP is at risk of a short squeeze so if the Quarterly Report echoes this sentiment by emphasizing the improvements in the economy and downplaying Brexit, we could see a sharp rise in the currency.  We don’t think that is likely because Carney has been very vocal about the risks of Brexit.  Both the manufacturing and services PMI will be released before the Quarterly report and they will help set expectations for the more important release.

Compared to other major currencies, the data impacting the euro next week is less significant which means the path of the currency will most likely be determined by the market’s appetite for U.S. dollars.  Having fallen to a 7 month low this past week, EUR/USD appears to have bottomed.  We could see 1.10 but further gains should be limited as we expect dollar bulls to remain in control at the start of the week.  On Friday, we learned that consumer prices in Germany grew at its fastest pace in 2 years, which is a function of the weaker euro and higher energy prices. This adds to the string of positive surprises that we seen all week from the Eurozone. Monday’s third quarter Eurozone GDP report and Wednesday’s German labor data are the key numbers to watch.  Job creation was the strongest in 5 years according to the PMIs and another healthy release could keep the currency supported into FOMC.  Like sterling, short positions are near extreme levels, which makes the currency vulnerable to a squeeze in the coming days / weeks.

Of the 3 commodity currencies the weakest one this past week was the Canadian dollar.  Oil prices peaked and data surprised to the downside with retail sales falling and consumer price growth missing expectations.  The Bank of Canada left interest rates unchanged but cut their growth and inflation forecasts, adding pressure on the currency. While August GDP, Canadian employment and the IVEY PMI reports are scheduled for release this week they will take a back seat to all other major global releases.   The Australian dollar on the other hand is likely to march to its own beat with a Reserve Bank of Australia meeting, Australian PMIs and retail sales on the calendar.  After last week’s stronger CPI report, we believe that the RBA’s neutral monetary policy bias will lend support to the currency. While AUD/USD may be pressured by positive USD flows, the Australian dollar could see stronger gains versus the euro, Swiss Franc, Yen and sterling.  AUD has shrugged off rising iron ore and gold prices but we believe these rallies will return as drivers for the currency in the coming week.  Meanwhile Chinese PMIs will affect both AUD and NZD.  The New Zealand dollar has been surprisingly resilient in the face of deteriorating trade data. New Zealand’s employment report is scheduled for release next week and according to the PMIs labor market conditions weakened in the third quarter.

Categories: