CHF
Returning to Primary Safe-Haven Status If Global Growth Returns?
Outlook: Neutral
Summary
Swiss Retail Sales Rose 0.9% in June, following a 1.4% decline the month prior
Exports rose 4.1% in July on increasing demand from Europe
Swiss Investor Confidence Rose to 18.6 from 0.0, which was the highest in three years
Summary Table of Key CHF Events
Details
The threat of SNB intervention continues to provide a ceiling for its appreciation, which may well have prevented a new high against the USD last week. A week full of positive fundamental data helped lessened the threat as signs that the economy is recovering may keep the central bank on the sidelines. A 4.1% rise in exports was encouraging as the gains came from Europe, its main trading partner, justifying the bank’s efforts. Like the USD/CHF the EUR/CHF saw its decline stalled as it failed to break below the 200-Day SMA for a second time, which has been a level of support that has held firm since the central bank took action in late June. A 0.9% gain in Swiss retail sales and the ZEW survey of investor sentiment rising to a three year high of 18.6 are clear signs that the domestic economy is improving. Furthermore, second quarter growth in Germany and France and signs that the U.S. is headed for a recovery should lessen the concerns of the MPC. SNB member Thomas Jordan stated this past week that the bank is comfortable with current exchange rates and is seeing signs of a recovery as demand for exports rise. However, he would go on to state that "We have always made clear that we will not tolerate a rise of the franc against the euro. We believe an appreciation right now is economically dangerous and not justified." Therefore, we may continue to see the verbal intervention from members anytime exchange rates reach undesirable levels. Traders anticipating such action may do the banks work for them as they continue to be reluctant to push the levels beyond their current ranges.
Main CHF Economic Events
The Swiss Franc has been traditionally been an ideal safe haven currency that rises in times of fear. Next week’s full of GDP readings from the majors which could be the catalyst for re-establishing this relationship. The economic docket will also add insights into the domestic economy with the UBS consumption indicator, quarterly employment report and KOF leading indicator on tap. Although a decline in employment could weigh on domestic growth expectations, the forecasted improvement in the leading indicator would validate the prevailing optimism. The USD/CHF and EUR/CHF could both see appreciation this week as they are trading and the lower bound of the ranges, resistance levels to watch are 1.0778-50-Day SMA and 1.5255-20 Day SMA respectively.
The threat of SNB intervention continues to provide a ceiling for its appreciation, which may well have prevented a new high against the USD last week. A week full of positive fundamental data helped lessened the threat as signs that the economy is recovering may keep the central bank on the sidelines. A 4.1% rise in exports was encouraging as the gains came from Europe, its main trading partner, justifying the bank’s efforts. Like the USD/CHF the EUR/CHF saw its decline stalled as it failed to break below the 200-Day SMA for a second time, which has been a level of support that has held firm since the central bank took action in late June. A 0.9% gain in Swiss retail sales and the ZEW survey of investor sentiment rising to a three year high of 18.6 are clear signs that the domestic economy is improving. Furthermore, second quarter growth in Germany and France and signs that the U.S. is headed for a recovery should lessen the concerns of the MPC. SNB member Thomas Jordan stated this past week that the bank is comfortable with current exchange rates and is seeing signs of a recovery as demand for exports rise. However, he would go on to state that "We have always made clear that we will not tolerate a rise of the franc against the euro. We believe an appreciation right now is economically dangerous and not justified." Therefore, we may continue to see the verbal intervention from members anytime exchange rates reach undesirable levels. Traders anticipating such action may do the banks work for them as they continue to be reluctant to push the levels beyond their current ranges.
Main CHF Economic Events
The Swiss Franc has been traditionally been an ideal safe haven currency that rises in times of fear. Next week’s full of GDP readings from the majors which could be the catalyst for re-establishing this relationship. The economic docket will also add insights into the domestic economy with the UBS consumption indicator, quarterly employment report and KOF leading indicator on tap. Although a decline in employment could weigh on domestic growth expectations, the forecasted improvement in the leading indicator would validate the prevailing optimism. The USD/CHF and EUR/CHF could both see appreciation this week as they are trading and the lower bound of the ranges, resistance levels to watch are 1.0778-50-Day SMA and 1.5255-20 Day SMA respectively.
CAD
Pressed By Sentiment, BoC Intervention Threats, Weakening Growth
Outlook: Bearish
Summary
Consumer Prices Slump in July
Foreign Investments Increase for the Sixth Month in June
Risk Appetite Creates Volatility but Lacks Direction
Commodity related firms in China report earnings, may clarify strength of Chinese commodity demand, surprises could affect stocks, commodities and commodity currencies and those that move opposite them (i.e. virtually all global asset markets)
Summary Table of Key CHF Events
Outlook: Bearish
Summary
Consumer Prices Slump in July
Foreign Investments Increase for the Sixth Month in June
Risk Appetite Creates Volatility but Lacks Direction
Commodity related firms in China report earnings, may clarify strength of Chinese commodity demand, surprises could affect stocks, commodities and commodity currencies and those that move opposite them (i.e. virtually all global asset markets)
Summary Table of Key CHF Events
Details
The Canadian dollar strengthened against its currency counterparts this week as oil prices pushed back above $70 a barrel however, the USD/CAD may continue to trend sideways over the following week as the economic docket is expected to reinforce a weakening outlook for the world’s eighth largest economy. At the same time, Credit Suisse overnight index swaps show investors are pricing a 100bp rate hike over the next 12-months as the Bank of Canada anticipates economic activity to contract at a slower pace than initially expected, and the rise in the interest rate outlook may continue to drive the dollar-loonie lower over the near-term as market participants see a risk of a slower recovery in the U.S.
Taking a look at USD/CAD price action, the currency pair failed to cross back above the 50-Day SMA after stalling at a high of 1.1127 on Monday, and retraced the advance from the second week in August to reach a low of 1.0820 by the end of the week. The sharp pull back may follow into the week ahead as market participants raise their outlook for global growth but nevertheless, as the dollar-loonie holds above 1.0792, the August 13 low, we may see the pair maintain its current range over the following week as investors weigh the outlook for future policy.
Main CAD Events
The economic docket for the following week is expected to reinforce a weakening outlook for future growth as economists forecast retail sales to fall 0.1% in June, and households may continue to cut back on consumption and increase their rate of savings as labor demands falter. Moreover, the current account deficit is anticipated to widen to 11.8B from 9.1B in the first quarter as global trade conditions remain weak, and fears of a slower recover in the U.S., Canada’s biggest trading partner, may lead businesses to scale back on production and employment throughout the second half of the year in an effort to lower their cost structure. At the same time, producer prices are projected to fall 0.5% in July, while the cost of raw materials are anticipated to drop 0.5% from June, and the weakening outlook for price growth may hamper the prospects for a rate hike next year as the BOC maintains a dovish outlook for inflation.
As growth and inflation falter, the central bank may ease policy further in the coming months and look beyond the interest rate to support a sustainable recovery as the board ‘retains considerable flexibility in the conduct of monetary policy, and the BoC may attempt to stem the appreciation in the exchange rate over the coming months as the outlook for the global economy remains highly uncertain.
The Canadian dollar strengthened against its currency counterparts this week as oil prices pushed back above $70 a barrel however, the USD/CAD may continue to trend sideways over the following week as the economic docket is expected to reinforce a weakening outlook for the world’s eighth largest economy. At the same time, Credit Suisse overnight index swaps show investors are pricing a 100bp rate hike over the next 12-months as the Bank of Canada anticipates economic activity to contract at a slower pace than initially expected, and the rise in the interest rate outlook may continue to drive the dollar-loonie lower over the near-term as market participants see a risk of a slower recovery in the U.S.
Taking a look at USD/CAD price action, the currency pair failed to cross back above the 50-Day SMA after stalling at a high of 1.1127 on Monday, and retraced the advance from the second week in August to reach a low of 1.0820 by the end of the week. The sharp pull back may follow into the week ahead as market participants raise their outlook for global growth but nevertheless, as the dollar-loonie holds above 1.0792, the August 13 low, we may see the pair maintain its current range over the following week as investors weigh the outlook for future policy.
Main CAD Events
The economic docket for the following week is expected to reinforce a weakening outlook for future growth as economists forecast retail sales to fall 0.1% in June, and households may continue to cut back on consumption and increase their rate of savings as labor demands falter. Moreover, the current account deficit is anticipated to widen to 11.8B from 9.1B in the first quarter as global trade conditions remain weak, and fears of a slower recover in the U.S., Canada’s biggest trading partner, may lead businesses to scale back on production and employment throughout the second half of the year in an effort to lower their cost structure. At the same time, producer prices are projected to fall 0.5% in July, while the cost of raw materials are anticipated to drop 0.5% from June, and the weakening outlook for price growth may hamper the prospects for a rate hike next year as the BOC maintains a dovish outlook for inflation.
As growth and inflation falter, the central bank may ease policy further in the coming months and look beyond the interest rate to support a sustainable recovery as the board ‘retains considerable flexibility in the conduct of monetary policy, and the BoC may attempt to stem the appreciation in the exchange rate over the coming months as the outlook for the global economy remains highly uncertain.
AUD
Continuing to Rise with Risk Appetite
Outlook: Bullish
Summary
RBA squashes hawkish rate speculation by saying it doesn’t want to choke growth confidence off “prematurely”
RBA’s Edey says consumer confidence already returning to high levels
Breakout potential grows for AUDUSD as pair nears its 2009 highs
Commodity related firms in China report earnings, may clarify strength of Chinese commodity demand, surprises could affect stocks, commodities and commodity currencies and those that move opposite them (i.e. virtually all global asset markets)
Removal of withholding tax on foreign holdings of the government bonds in order to attract investors. The Australian government expects to issue a record AUD$ 60 Billion in debt in the current year, raising gross debt of the country to 15% of GDP
Summary Table of Key AUD Events
Outlook: Bullish
Summary
RBA squashes hawkish rate speculation by saying it doesn’t want to choke growth confidence off “prematurely”
RBA’s Edey says consumer confidence already returning to high levels
Breakout potential grows for AUDUSD as pair nears its 2009 highs
Commodity related firms in China report earnings, may clarify strength of Chinese commodity demand, surprises could affect stocks, commodities and commodity currencies and those that move opposite them (i.e. virtually all global asset markets)
Removal of withholding tax on foreign holdings of the government bonds in order to attract investors. The Australian government expects to issue a record AUD$ 60 Billion in debt in the current year, raising gross debt of the country to 15% of GDP
Summary Table of Key AUD Events
Details
The Australian dollar is arguably the best, fundamentally situated currency in the market; and yet it has pulled back significantly from its highs for the year over the past few weeks. Naturally, we would attribute this retracement to a shift in market sentiment; but that would contradict the new highs in equities and commodities. Where are the cracks in the Aussie dollar’s solid fundamental foundation? Is the currency’s correlation to risk slackening or has its economic stability lost its appeal?
More than likely, it is mixture of both elements; and over the next two weeks we will know with a little more certainty what is driving the Aussie dollar and whether the currency will finally push forward to revive its bullish trend or turn to a deep retracement.
Over the coming week, both risk appetite and expansion considerations will factor it; but much of this influence will come from outside of Australia’s economic boarders. First up, market sentiment will be fed by the outlook for both the global economy and financial markets to stabilize and grow. It is important to reiterate “stabilize and grow” as indications so far point to a recovery from the worst recession since WWII; but growth beyond returning to positive territory looks feeble through the second half of 2009 and well into 2010. If this is the case, investors may quickly find themselves overextended in the capital markets, seeking a rise in returns that will not develop for some time.
Main AUD Events
Speculation is extremely fickle and prone to violent reversals. Should market participants deem the yield forecasts overblown, the buildup in capital behind risky assets could be quickly unwound as investors look to overweight their portfolios in relatively ‘risk-free’ securities like government debt. Qualifying sentiment will be a series of major GDP releases (including the US, UK and German 2Q figures). While these readings may be second round measurements, the updated component data could significantly alter forecasts for the second half. Outside of pull of these major economic releases, there are any number of unforeseen events that could catalyze risk appetite one way or the other. This weekend’s Jackson Hole Symposium (a collection of some of the most influential policy makers in the world) could produce a warning or outlook that significantly alters the market’s impression of risk and reward.
The Aussie dollar could also be the engineer of its own fate through its own growth and yield potential. There are a few notable economic indicators due over the coming week that will pave the way for key events at the beginning of next month. Notably, we are expecting back to back releases of construction work and business investment for the second quarter. These vital elements to broader growth were among two of the worst performing components of a 2Q GDP number that barely avoided the official moniker of a technical recession. Both are expected to show a market improvement in pace for a measure of activity and credit health.
However, the numbers will play a bigger role in standing in as a reasonable benchmark for those speculating the following week’s official GDP release. If the economy contracts in the second quarter, it could dramatically deflate the appeal of the Aussie dollar as an outperformer. Otherwise, a sharp improvement could help it to better weather ill-fated turns in risk appetite. What’s more, these numbers will be a lead in to the RBA rate decision (scheduled the same day as the GDP report – on September 1st). In the minutes from its last policy decision, the policy authority said it did not want to ‘prematurely’ choke growth; but then again the Governor has also suggested the benchmark is currently at ‘emergency’ levels. Expect speculation surrounding the Aussie dollar to increase significantly over the next two weeks.
NZD
The Australian dollar is arguably the best, fundamentally situated currency in the market; and yet it has pulled back significantly from its highs for the year over the past few weeks. Naturally, we would attribute this retracement to a shift in market sentiment; but that would contradict the new highs in equities and commodities. Where are the cracks in the Aussie dollar’s solid fundamental foundation? Is the currency’s correlation to risk slackening or has its economic stability lost its appeal?
More than likely, it is mixture of both elements; and over the next two weeks we will know with a little more certainty what is driving the Aussie dollar and whether the currency will finally push forward to revive its bullish trend or turn to a deep retracement.
Over the coming week, both risk appetite and expansion considerations will factor it; but much of this influence will come from outside of Australia’s economic boarders. First up, market sentiment will be fed by the outlook for both the global economy and financial markets to stabilize and grow. It is important to reiterate “stabilize and grow” as indications so far point to a recovery from the worst recession since WWII; but growth beyond returning to positive territory looks feeble through the second half of 2009 and well into 2010. If this is the case, investors may quickly find themselves overextended in the capital markets, seeking a rise in returns that will not develop for some time.
Main AUD Events
Speculation is extremely fickle and prone to violent reversals. Should market participants deem the yield forecasts overblown, the buildup in capital behind risky assets could be quickly unwound as investors look to overweight their portfolios in relatively ‘risk-free’ securities like government debt. Qualifying sentiment will be a series of major GDP releases (including the US, UK and German 2Q figures). While these readings may be second round measurements, the updated component data could significantly alter forecasts for the second half. Outside of pull of these major economic releases, there are any number of unforeseen events that could catalyze risk appetite one way or the other. This weekend’s Jackson Hole Symposium (a collection of some of the most influential policy makers in the world) could produce a warning or outlook that significantly alters the market’s impression of risk and reward.
The Aussie dollar could also be the engineer of its own fate through its own growth and yield potential. There are a few notable economic indicators due over the coming week that will pave the way for key events at the beginning of next month. Notably, we are expecting back to back releases of construction work and business investment for the second quarter. These vital elements to broader growth were among two of the worst performing components of a 2Q GDP number that barely avoided the official moniker of a technical recession. Both are expected to show a market improvement in pace for a measure of activity and credit health.
However, the numbers will play a bigger role in standing in as a reasonable benchmark for those speculating the following week’s official GDP release. If the economy contracts in the second quarter, it could dramatically deflate the appeal of the Aussie dollar as an outperformer. Otherwise, a sharp improvement could help it to better weather ill-fated turns in risk appetite. What’s more, these numbers will be a lead in to the RBA rate decision (scheduled the same day as the GDP report – on September 1st). In the minutes from its last policy decision, the policy authority said it did not want to ‘prematurely’ choke growth; but then again the Governor has also suggested the benchmark is currently at ‘emergency’ levels. Expect speculation surrounding the Aussie dollar to increase significantly over the next two weeks.
NZD
Topped Out for 2009?
Outlook: Bearish
Summary
New Zealand Prime Minister seeks ‘Single Market’ with Australia
Finance Minister says New Zealand to avoid ‘profligate’ fiscal spending
New Zealand Producer Prices flat after two quarters of deflation
Summary Table of Key NZD Events
Outlook: Bearish
Summary
New Zealand Prime Minister seeks ‘Single Market’ with Australia
Finance Minister says New Zealand to avoid ‘profligate’ fiscal spending
New Zealand Producer Prices flat after two quarters of deflation
Summary Table of Key NZD Events
Details
The New Zealand dollar started the week sharply lower on similar pullbacks in the US S&P 500 and risk sentiment, but a later reversal leaves the NZD at its highest weekly close on a year-to-date basis. Last week we claimed that the currency may have set its highest levels for 2009 following its pronounced correction. Yet markets seemingly have other things in mind, and the sheer strength of the global equity market rally gives us pause in our NZD-bearish assessment. We have argued (and will continue to argue) that the New Zealand Dollar is at major bullish sentiment extremes—making a turnaround inevitable. Yet, to borrow a heavily-overused quote from famed economist John Maynard Keynes, “The market can stay irrational longer than you can stay solvent.” Limited event risk in the week ahead suggests volatility may slow, but that hardly rules out further New Zealand dollar rallies.
Main NZD Events
Markets are unlikely to force any major NZD moves on either RBNZ Inflation Expectation survey results or the upcoming Trade Balance report, but the former could have implications for the future of domestic interest rates. Currency traders have largely ignored shifts in interest rate forecasts for the Euro, US Dollar, and other key currencies. Yet relatively high domestic yields remain a source of New Zealand Dollar demand, and we should keep a close eye on sharp shifts in Reserve Bank of New Zealand interest rate forecasts. Given that the RBNZ explicitly targets inflation within a range of 2-3 percent, any especially surprising results could move NZD yields and the currency itself. Otherwise, it may be important to keep a lookout for unexpected results out of the mid-week Trade Balance report. We remain committed to our calls for a sustained NZDUSD and NZDJPY pullback on clear sentiment extremes. The key difficulty remains the timing of such pullback. At the end of the day, however, the pair can’t continue going higher forever .
Conclusion & Suggestions
TRADING OPPORTUNITIES: Each of the three are real possibilities:
· Play the Pullback: Stocks and other risk assets at highs, dollar deeply shorted, be ready when key calendar events (see above) hit this week or if stocks moves down to short risk assets, go long the JPY, USD, CHF (in that order) against other currencies.
o For currency traders, possible pairs to short in that case could be: AUD/USD, JPY/USD, NZD/USD, or long USD/CAD. To play these via ETFs: short (FXA, FXC, FXE), (UUP), (DBV). Long (UDN), (FXY), (FXF). See prior analyses for info on why markets remain overbought, overpriced, vulnerable to pullback.
o For stock index traders, short the major global indexes. Via ETFs, short (SPY), long (SDS). Commodity traders would short gold, crude, etc. Via ETFs, short (GLD). Still looking for a good oil ETF. Better to use CFDs for oil.
· Play the Up Trend: However, markets continue to focus on the positive and could continue up as long as no major news contradicts ongoing recovery story or questions current risk asset prices. Continuing low interest rates and upward stock momentum a plus for risk assets. Trade the opposite of the above.
· Play the Trading Range: If no major news, markets could stay in flat trading range.
Note: Always use stop loss orders.
Disclosure and Disclaimer: The opinions expressed herein are not necessarily those of AVA FX. The author may hold positions in the above mentioned instruments.
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