Sunday, July 26, 2009

Weekly Preview: Key Clues From Global Markets –Part II




Japanese Yen seeks the next driver of risk appetite, USD/JPY may be the most volatile currency on Monday
Fundamental Forecast for Japanese Yen: Neutral


- Earnings season draws to a close; but where does that leave risk appetite?
- Japan’s trade balance improves as both imports and exports plunge
- Yen crosses don’t offer a clear cut technical outlook
Direction from the Japanese yen is often the product of risk appetite. However, the primary source of what has essentially been a market-wide advance in risk appetite these past two weeks seems to have petered out. Earnings releases are in decline and there are very few individual releases on the docket that can initiate a global shift in sentiment on its own. Among other potential catalysts – like growth speculation – there are many contingencies and shades of gray that could make the yen a very difficult currency to trade going forward.
Through the end of this past week, we have seen upside surprises decrease, and the notoriety levels of the reporting companies recede. Looking back on the week four Fed ‘Stress Tested’ banks report losses and many more blue chips missed forecasts. Looking ahead, there are very few major reports due; but more importantly, there are far fewer days when a group of notable earnings releases will be reported at the same time (and therefore can generate enough influence to catalyze risk appetite. One of the last opportunities for an earnings related swell is on Thursday when ExxonMobil, MetLife, Walt Disney, Dow Chemical, Travelers and Colgate are scheduled to release.
If earnings don’t drive markets, what will?

Conceivably, there may be enough upward momentum built up in stocks to keep sentiment and program-trading bullish.

There may also some fundamental news items driving sentiment. There are many growth-related indicators on the docket to feed the outlook for the world’s recovery; but it is Friday’s US GDP figure that will truly establish the progress of the global economy. The consensus calls for a significant moderation of the nation’s contraction. However, whether we receive a positive or negative surprise (or no surprise at all), that is a long time to wait when market conditions seem to require an immediate resolution.

There is a long list of Japanese economic data that should make the week a crucial one. We will see Retail Trade on Tuesday, followed by Industrial Production on Wednesday. It is unclear whether or not the recent improvement in production will be hindered by persistent yen strength, or if that influence will be felt now or later. Thursday will hold both the Jobless Rate and Consumer Prices. CPI should hold considerable weight because any perceived threat of deflation may spell trouble for the BoJ’s quantitative easing exit plan strategies.

USD/JPY could be the most volatile pair for Monday

USD/JPY will be the currency in play when trading reopens. Japan will release Corporate Service Price on Sunday at 23:50GMT or 7:50PM EST followed by U.S. New Home Sales at 14:00GMT or 10:00AM EST on Monday USD/JPY advanced for the second week in the row, putting it in the Range Trading Zone which we determine using Bollinger Bands. Despite a temporary rally, the pair remains in a multi-month downtrend. If USD/JPY manages to break next level of resistance hovering at 50-day SMA which coincides with the 1st Standard Deviation at 95.50, an uptrend may emerge. Nonetheless, if the pair drifts below the1st Standard Deviation of the Bollinger Bands which represents current support level at 93.25, the currency pair could head towards 90.


Fundamental Outlook for British Pound: Neutral


-U.K. GDP contracted by 5.6% annually, which was the most since records began in 1955
-U.K. Retail Sales rose more than expected by 1.2%, Led by a 4.7% increase in textiles
-BoE voted 9-0 to keep rates and QE measures unchanged
The British pound ended a week of choppy price action heading lower as the 2Q GDP preliminary reading showed a deeper than expected contraction of 0.8% against expectations of 0.3%. Economic growth on the year dropped by a 5.6% which was the most since record keeping began in 1955.

The growth figures raise concerns that the BoE would need to add to their quantitative easing efforts in order to ensure an economic recovery. The release of the MPC’s minutes from the July meeting showed that after considering additional measures the committee unanimously voted for no changes but would review their alternatives again in August when they release their quarterly inflation report. A 1.2% increase in retail sales spurred hope that domestic consumption would start to improve as non-food sales rose 1.6% pointing to an increase in discretionary spending. However, elevated unemployment levels and the service sector declining by 1.0% in the second quarter will make future growth challenging.
Although the drop in growth is alarming, the improving outlook for the global economy which was evident in the massive rally in equities during the week could keep the MPC on hold. Bank of England Deputy Governor Charles Bean said this week that the economy may have stopped shrinking which could signal the potential for an improvement in the central bank’s growth estimates when they release their latest report on August 12. The growth numbers and the corresponding inflation outlook will determine the future course of action.

GBP News to Note

The economic calendar this week will give us further insight into the U.K. housing market and prevailing credit conditions.

  • The Nationwide Building Society is expected to show that house prices rose 0.2% in July as thawing credit markets are underlining demand. Indeed, mortgage approvals are forecasted to rise to 47,000 from 43,400 in June which would be the highest since April, 2008 but still far below the ten year average of 97,000.
  • The BoE lending report mortgage lending was showing sign of improving but that credit for consumers and businesses remains a challenge.

The GBP/USD has been trading at the top of its recent range of 1.6000-1.6700 which could leave it susceptible to a move lower. However, we have seen solid near-term support from the 20-Day SMA at 1.6371, which is starting to converge with the 50-Day SMA at 1.6260- a level that has held since March.

GBP/USD: Topping Out?

The pound is weaker across the board thanks to a dreary GDP report. Anyway you look at it growth prospects in Great Britain suddenly seem much more pessimistic.

  • Growth in the UK slid by more than double expectations by -0.8 percent marking the fifth straight quarter of contraction, a streak trumped only by the recession in the seventies.
  • Furthermore, annualized figures showed the largest drop since records began in 1955.

Among the most depressed sectors was the financial industry, a segment that will be crucial for any chance at recovery.

In response to the wake-up call that today’s report provided, former BoE member David Blanchflower is calling for an expansion of Quantitative Easing, potentially doubling programs that are already in place. Blanchflower believes that if the bank does not take action, an economic recovery will never fully materialize.

His comments are in stark contradiction with what many have touted as the potential for the unwinding of QE initiatives. In fact, many economists are concerned that letting these initiatives go on for too long may even distort financial markets.

However, it is clear that the UK condition is much worse than expected which may require further easing by the BoE. Such a decision would be disastrous for the pound, not to mention a big drain on the bank’s credibility. Economic data for next week include housing data, consumer credit and confidence.


With no economic data from any of the 3 commodity producing countries, the Canadian, Australian and New Zealand dollars traded higher. Finance Minister Jim Flaherty confirmed the echoed the comments made by the Bank of Canada this week. He said he sees encouraging signs that the domestic economy is stabilizing and there is potential for growth in the third and fourth quarters, but he is worried about the impact of the strong Canadian dollar. The loonie came within a whisker of testing its year to date high.

In the week ahead, outside of GDP numbers on Friday, there is no market moving Canadian data on the calendar. Therefore we expect the loonie to move with oil prices. Should crude head towards $70, the USD/CAD could fall to a new yearly low. If it simply stabilizes here or falls, we may see a sharp rebound in the currency pair.


There were no exciting developments for the Australian or New Zealand dollars last week but that could change this week with the Reserve Bank of New Zealand meeting to discuss monetary policy. Australian Central Bank Governor Stevens will also be delivering a speech on the “Challenges for Economic Policy.” For the NZD and AUD, official comments will be major news.


Crude oil and gold continue to follow the general direction of stocks, though not necessarily on the same day, nor at the same time, nor to the same degree. For no clear reason, oil would climb sharply one day while gold was quiet, then the opposite would happen on another day. Or, neither would move while stocks did, or stocks would be flat while one or both moved.

Look for key news items on growth, especially Friday’s US GDP numbers to provide the likely direction, though if there are no surprises, crude inventories can provide fuel for movement.

Other News to Watch

China – US Economic & Strategic Dialogue

Next week, the U.S. will be holding an economic and strategic dialogue with China, the first under the Obama Administration. U.S. officials provided details on some of the topics. The two nations are expected to talk about boosting recovery efforts.

The US will be pushing for

  • more Chinese consumer spending
  • openness to foreign investment
  • a more active Chinese role in moderating North Korea’s push for nuclear weapons and general bellicosity

The Chinese will seek assurances of a stronger dollar, or at least minimal further declines, in order to protect the value of their approximately $800 billion of USD reserves.

In the longer term, prominent commentators have noted that Premier Wen Jiabao has pushed Chinese companies to hasten their “going out strategy” and for the first time ever, he said the government could use foreign exchange reserves to help companies invest abroad.

It the Chinese plan on spending lots of money to buy things, traders would want to own these assets, or those that benefit from this increase in Chinese demand.

China has long preferred to take stakes in companies that meet their resource needs and based upon their 2008 trade activities, we would expect their domestic firms to look for investments in companies that produce electrical machinery, power generation equipment and commodities in countries like Saudi Arabia, Brazil, Australia and even Japan or Germany.

If correct, this thesis suggests long term long opportunities for currency traders in the Brazil Real, Australian Dollar and Japanese Yen, possibly at the expense of the USD, which would be their currency of choice to fund these purchases.

However, it’s not clear that the USD would suffer much, since the Chinese may well continue to buy US Treasury bonds to help fund US spending (much of it on Chinese goods) while spending USD on foreign asset purchases as a means of maintaining, but not increasing, their current dollar holdings. The Chinese do not, after all, want to drive down the value of the dollars they hold by sparking a run on the USD.


Disclaimer & Disclosure: The opinions expressed are not necessarily those of AVAFX. The author may have positions in the above mentioned instruments.

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