Revenge of the Nerds: Safe-Haven Currencies Poised to Rally? If This September Stays True to Form...
The Big Picture
Get ready! As noted in Part 1, this week will show an increase in significant news. We have GDP from Canada, Australia, Switzerland and Europe. There are rate decisions from Europe and Australia, Sweden and others. Employment data will come from Europe, Canada and the US including possibly the biggest event of the month: US Non-Farm Payrolls . Also, there are special events: general elections in Japan and the G20 meetings during the weekend.
Finally, with summer holidays over, there should be a return to higher, more normal trading volume. That should provide greater stability under normal conditions, but also allow potential for bigger spikes when truly market moving news hits. If nothing else fills that roll, look to this Friday’s US non-farms payroll report, considered the most important indicator of US employment, and thus one of the key measures of US and global economic health.
USD: Will Traditional September Pullback in Risk Assets Bring USD Rally?
Summary of Past Week’s Events
- Conference Board consumer confidence surprisingly surged to a 3-month high in August
- Despite revisions, the University of Michigan’s consumer confidence index fell slightly
- US durable goods orders up by the most in 2 years, but mostly from 1-time cash for clunkers
- S&P has LOST an average of 30 points in Sept. over the past 10 years . A bad month for stocks would likely boost USD demand as traders seek a safe haven at the expense of commodities and risk currencies [AUD, NZD, CAD, EUR]
- Extreme oversold USD, overbought risk assets situation is ripe for such a reversal, but could market resilience continue to overcome negative news?
Summary Table Key USD Events This Week
A consolidation week: ended the past week on a mixed note across the majors, losing against the New Zealand dollar, Australian dollar, and Japanese yen, but rising versus the Swiss franc, euro, Canadian dollar, and British pound. The US dollar index remains above a rising trend line connecting the July 2008 and August 2009 lows.
Trading conditions have been extremely difficult, even for those that thrive on range trading, as the low volumes so often associated with the summer create highly choppy price action, and this may remain the case throughout next week ahead of the US Labor Day holiday.
Main Events & Possible Results
There are a number of indicators due out over the next week that could trigger breakouts for the US dollar. However, unless there is something very surprising, a cautious bias in trading could likely take over from midweek ahead of the headline event-Non Farms Payroll data.
On Tuesday, the ISM manufacturing index is projected to rise above 50 – the point of neutrality – for the first time since January 2008, which would suggest that the sector is finally experiencing a legitimate recovery in business activity. If the US government’s recently ended “cash for clunkers” program has been the main driver of this improvement, then there could be a noticeable drop in output in coming months. In the near term, a strong ISM manufacturing reading might bode well for the US dollar, though beware of drops in the coming months unless the program is extended.
The main event risk for the US dollar on Wednesday will be the release of the minutes from the Federal Reserve’s last meeting on August 12. Following that meeting, the policy statement eventually led to a quick return to risk-taking that pushed the greenback lower, as the Federal Open Market Committee (FOMC) said that the current "policy actions…will contribute to a gradual resumption of sustainable economic growth" and that they had decided to gradually slow the pace of Treasury securities purchases. A reiteration of these statements has the potential to lift risk appetite further, but indications that FOMC members are feeling uneasy about the outlook for growth or the need to expand quantitative easing down the road could do quite the opposite.
On Thursday, ISM non-manufacturing is anticipated to rise to an 11-month high of 48.0 for the month of August from 46.4. While stronger readings are always a positive, anything below 50 will continue to signal a further contraction in activity and will ultimately highlight the lack of consumer spending growth in the US.
On Friday, the US non-farm payroll (NFP) report is forecasted to show job losses for the twentieth straight month in August, though the rate of decline is anticipated to slow further. Bloomberg News is currently calling for NFPs to decline by 227,000, which would be the smallest drop in a year. Meanwhile, the unemployment rate is projected to edge up to 9.5 percent from 9.4 percent, but ultimately, the NFP result will be the event to watch as it is extremely volatile and is one of the sole reports that impacts the US dollar from a pure fundamental point of view.
EUR: Fresh 2009 Highs Possible If Data Supports End of Euro Zone Recession
Summary of Past Week’s Events
- Euro fails to hold gains despite fourth straight German IFO improvement
- German Consumer Price Index report boosts fears of deflation
- Consumer confidence data nonetheless boosts fundamental forecasts
- Pullback in risk assets could boost USD , drop EUR, which tends to trade in opposite direction
Summary Table of Key EUR Events
The Euro saw yet another week of incredibly choppy trade, finishing the week almost exactly unchanged despite surging near year-to-date highs against the US Dollar. The last week of summer trading produced brief moments of sharp price moves and uneventful price action at moments in between. Relatively wide bid/ask spreads on major currency pairs underlined that market conditions remained illiquid—making short-term currency forecasts all but impossible. We expect that market conditions will improve through the first week of September trading, and it will be important to watch whether the Euro and US Dollar embark on new trends to start the trading year.
Coming Main Economic Events
The vaunted “September effect” typically stipulates that stock markets typically fare worst through September, and a fall in risky assets would likely benefit the safe-haven US Dollar. In the past 10 years, the US S&P 500 has lost an average of approximately 30 points through September—by far its worst tally in any month of the year. Past performance is hardly a guarantee of future results, but it will nonetheless be important to watch for a turnaround in recently high-flying risky asset classes.
The very fact that the S&P 500 has set fresh year-to-date highs through end of week trade by itself helps set up a possible noteworthy pullback, and this may be one of the most important FX market themes in the week ahead. A busy week of European economic event risk likewise promises eventful price action through the coming days.
The combination of European and US employment figures could finally provide clear impetus for sustained Euro/US Dollar moves. German and EU officials report on regional unemployment on Tuesday the 1st of September—setting the tone for the subsequent month of fundamental data. Both are expected to show continued deterioration in unemployment rates and underline downside risks to economic growth. Subsequent Euro Zone Gross Domestic Product revisions are expected to show a modest downgrade to second quarter expansion numbers, but the true fireworks will likely come on the following day’s European Central Bank interest rate decision.
The ECB is very widely expected to leave interest rates unchanged—ostensibly leaving little risk for major volatility. Yet markets will be paying close attention to any shifts in rhetoric from the regional central bank. Officials will likewise release their new economic outlooks for the Euro Zone, and any surprises could likewise produce reactions in the Euro itself.
Finally, traders should keep a lookout for US Nonfarm Payroll results on Friday. Continued improvements in US employment numbers leave economists expecting a slowdown in job losses. Yet any surprises could easily cause substantial Euro/US dollar moves.
JPY: Like the USD, Ready to Benefit from a Drop in Risk Appetite.
- How long will risk appetite ignore fundamentals?
- Unemployment hits a record low through July, deferring the timing of an economic recovery
- Will the rest of the yen crosses follow GBPJPY’s plunge this past week?
While other majors’ economic calendars have a full week ahead, there are comparatively few Japanese economic indicators due for release next week. However, that doesn’t mean the yen will be relegated to tight ranges.
The light docket belies the heavy event risk that is looming for the single currency. This weekend, the nation will go to the polls to vote in the first general election since 2005. Such a political episode is always market moving; but the fundamental implications in this election run especially deep as the world’s second largest economy is struggles to recovery from its worst recession in history and opinion polls suggest a change in power (and therefore policy approach) may be in the cards. And, if this wasn’t enough for market participants to worry about, there is always the high correlation to market sentiment to worry about. Tight ranges and stalled rallies should concern rather than pacify the astute trader.
Main JPY Economic Events
First and foremost on the table is the general election that is to take place on Sunday the 30th. All 480 seats of the House of Representatives are open to the ballot – and for those unfamiliar with the Japanese political system, the house designates the Prime Minister. Clearly, there is at lot at stake from the traders stand point in this event risk. Whoever has control over the government will set vital policies that will steer the economy’s recovery from its worst recession since WWII. The uncertainty surrounding the event alone is enough to shake what confidence is still inherent in the yen. Even before the recent financial and economic crisis, Japan was mired in what is popularly coined a ‘lost decade’ of feeble growth, deflation, high savings and weak domestic investment trends.
What makes it even more interesting is that early opinion polls suggest the ruling coalition of the Liberal Democratic Party (LDP) will be unseated for the first time in nearly half a century by the opposition Democratic Party of Japan (DPJ). Admittedly, both their economic policy outlines are similar and spotty; but the desire to make an immediate impression and take control of the recession would likely see more immediate reaction should the DPJ win.
Beyond the immediate volatility following the market open after the election is decided, the outcome of this political shuffle will have a lasting impact on the Japanese economy and currency. Yet much of its influence will be subtle.
In contrast, general risk appetite trends could cause severe waves for the yen over the coming week. Over the past few weeks, bullish sentiment has stalled. The S&P 500 has stalled below 9,635; crude has failed to surmount $75/barrel; and carry trade has tested the same 10-month high through all of August. Either these markets will have to push through or retrace; and with the progress of these speculative markets, we will see sentiment unfold.
Supporting an ongoing bull wave, there is still immense amounts of side-lined capital that can find its way into the market. However, even if there is another leg of the now five month advance, it will likely be short-lived. Sentiment is waging a heavy premium over what fundamentals suggest the recovery can support and the lack of investment turn over can produce in returns.
See Part I & III for Continuation & Conclusions & Suggestions
Disclosure and Disclaimer: The opinions expressed herein are not necessarily those of AVA FX. The author holds positions in the above mentioned instruments.