Sunday, September 27, 2009

Global Markets Outlook Sept 27-Oct.2 Part II: Judgment Day, Judgment Week?



Continued Erosion Against All Majors As Fundamentals Worsen, Reduce Its Risk Asset Appeal

Fundamental Forecast for British Pound: Bearish


--BoE Mervyn King Undermines GBP saying the weak pound “will be helpful” in supporting a feeble recovery

--Upcoming spending cuts and speculation of a cut in the deposit rate means the BoE is running out of options

--The Bank of England minutes show a unanimous vote to keep the bond purchasing program at 175 billion pounds


The British pound was down hard against all majors. Prominent breakouts are starting to look the establishment of new trends as the struggling fundamental health of the United Kingdom begins to override the appeal the currency once held as a source for high yields. The next few weeks could be critical in clarifying where the pound is going and how it fits into the market.

Of course, risk trends will have an impact on what kind of direction and pace the GBP takes. However, it will likely start to be more of a one sided influence. Should risk tumble in the wake of the G-20 meeting as investors worry the capital markets can’t support their own weight without a government safety net, the pound will likely tumble. There is still a latent build up of risk appetite behind this currency that was fed by the belief that the recovery in the global economy and markets would be exceptionally beneficial for the United Kingdom which is generally considered to be among the weakest industrialized nations. As the outlook for a speedy recovery and fades, so too does the picture of London retaking its title of financial center of the world. Yet, what happens should sentiment actually improve? Even then, the pound may well lag or even continue to fade despite the positive turn.
Over the past weeks and months, it has become blatantly clear that Europe’s second largest economy is struggling to pull itself out of its deep recession; and the time frame for a return to growth is being continuously pushed back. Not only did the 2Q GDP numbers tell us that the slump was more intense than initially though; but we have also seen that policy officials are running out of options to support an orderly recovery.

This past week, the minutes seemed to have a positive tilt in that there was a unanimous vote to keep the bond purchasing program at 175 billion pounds (whereas in the previous vote, the was minority dissention headed by Governor Mervyn King for a greater amount).

Nonetheless, the central bank kept open the possibility of further expansion of this unorthodox policy. Another step that was speculated to under consideration was a cut to the deposit rate paid to banks that hold their capital with the BoE. This too was written off; but commentary by King and other MPC members continues to stoke speculation that either or both is still a considerable possibility. Without doubt, the central bank is running out of options to jump start the economy. The further the policy authority extends itself without a commensurate response from financial health or economic activity, the more dire the nation’s condition. Considering the government will have to follow through on a serious round of spending cuts in the near future (expected to be the biggest reduction in over three decades), time is certainly working against policy officials.


A meaningful improvement in the outlook will come with time and a wide array of indicators, though in the near term economic data is vital at this point to stabilize the GBP. There is an abundance of them this week – some perhaps significant enough to help ignite optimism. Most prominent, but least likely to surprise, is the final reading of the 2Q GDP numbers. There is rarely a meaningful adjustment in this last recalculation of the data; but the new current account numbers, some spending adjustments or capital investment alterations would be notable. Among the other notable figures, mortgage approvals, net consumer credit and the money supply are important gauges for financial health. The BoE home equity withdrawal figure and PMI factory and construction data is growth focused


Nearing Intervention Levels vs. the EUR

Fundamental Forecast for Swiss Franc: Bearish


- Barring SNB intervention threats, moving with risk appetite

- Swiss Franc rallies on optimistic Swiss National Bank

- Hitting annual highs against the USD, but SNB more focused on the EUR


The Swiss Franc traded to fresh yearly highs against the US Dollar and near multi-month peaks against the Euro on a broad flight to safety across key financial markets. Relatively hawkish rhetoric from the Swiss National Bank gave skittish investors little reason to fear central bank intervention, and indeed there was seemingly little in the way of further CHF appreciation. Yet the Euro/Swiss Franc exchange rate finished dangerously close to the key 1.5000 mark. The Swiss National Bank has twice defended said level through aggressive forex market intervention, and any further EUR/CHF declines would certainly test the bank’s resolve. A busy Swiss economic calendar promises no shortage of volatility across CHF pairs, and the coming week may prove pivotal in determining trajectory in the USD/CHF and EUR/CHF.
Recent price action has emphasized that the Swiss Franc remains quite sensitive to moves in key risky asset classes, and traders should primarily watch moves in the US S&P 500 and similarly significant risk barometers in the days ahead.


Markets will keep an eye on upcoming KOF Leading Indicator data and the following day’s SVME Purchasing Managers Index report. The Swiss State Secretariat of Economic Affairs (SECO) recently upgraded its forecasts for domestic economic growth through the medium term—likely leading to similarly bullish calls for upcoming financial economic data. Indeed, consensus forecasts ahead of the often market-moving Swiss KOF report calls for the first positive reading in 12 months. Suffice it to say, a disappointing result could easily hurt the recent wave of optimism for the domestic economy. The following SVME Purchasing Managers Index is likewise expected to improve to its strongest levels in over a year, and disappointments could similarly limit further CHF advances.
Watch for further EUR/CHF declines in the week ahead—especially if the pair nears the contentious 1.5000 mark.


Tracking Crude Oil Down, Looking to Hold Trading Range, Awaiting Policy News

Fundamental Forecast for Canadian Dollar: Bearish


- Tracking Oil First, Stocks Second

- Retail Sales in Canada Unexpectedly Falters in July

- International Investors Increase Purchases of Canadian Securities

- USD/CAD SSI Points to Further Losses


The Canadian dollar weakened against the USD, with the exchange rate pushing above the 50-Day moving average for the first time since July to reach a fresh monthly high of 1.0984, and the USD/CAD is likely to hold its broad range over the following week as investors weigh the outlook for future policy. The Bank of Canada announced it will extend the C$ 125B mortgage purchase program to “at least the end of January 2010” earlier this week in order to strengthen the banking sector, but said that two of the three emergency programs will be concluded at the end of October as the central bank sees “lower market-based funding costs and the lack of coverage in recent auctions for temporary liquidity facilities.” Moreover, Governor Mark Carney warned businesses will need further “restructuring” as he expects trade conditions to remain subdued over the next 18 months, and went onto say that it will take some time before “we are really going to see true growth, self-sustaining private sector growth” as the government stimulus begins to taper off.
Meanwhile, Prime Minister Stephen Harper said that the recovery remains “extremely fragile” and expects the downturn in the labor market to weigh on economic activity going forward, and the cautious outlook held by policy makers may continue to hamper long-term expectations for higher interest rates in Canada as the BoC pledges to hold borrowing costs at the record-low going into the following year as long as inflation remains muted.

At the same time, Governor Carney continued to see a risk for a slower recovery following the marked appreciation in the exchange rate, and said that the rise may become an increased concern “if the currency appears to move away from fundamentals.” Nevertheless, the central bank head stated that it will be “absolutely essential” for the board to meet its medium-term target for inflation and remained willing to “provide additional stimulus” as the BoC maintains its dual mandate to ensure price stability and to promote full-employment, and went onto say that the board maintains the flexibility to adopt “unconventional policies” if conditions warrant.


However, as the economic docket for the following is expected to show the monthly GDP reading to improve for the second consecutive month in July, while producer prices are expected to rise 0.4% in August, the data may spur increased demands for the Canadian dollar as policy makers anticipate economic activity to pick up throughout the second half of the year. Thus if risk appetite revives, the USD/CAD may retrace the three-day advance over the following week to push back below the 50-Day SMA at 1.0858 however, the rebound in risk aversion may lead the pair to test the 100-Day SMA (1.1116) for near-term resistance over the following week.

We expect the CAD to move first with oil, second with risk appetite as depicted in stocks, and finally with news events.


Like All Commodity Currencies, Tracking Risk, Especially As Depicted by S&P 500

Fundamental Outlook for Australian Dollar: Bearish


- Moving With Risk, A Big News Week For Market Moving News, Climaxing in US NFP

- New Home Sales Surge, Matching Record Gain in August

- RBA Says Financial System Resilient But Risks Remain


The Australian Dollar is likely to look past the local economic calendar and track risk sentiment as traders digest the outcome of the G20 summit in Pittsburg and a slew of high-profile releases from the US. The communiqué released following the meeting was unsurprisingly vague: leaders committed to come up with new bank capital requirements by the end of next year and put them in place by 2013, agreed to reform compensation practices to align risk-taking with bonuses, and said they will reform the International Monetary Fund to give greater say to emerging economies like China. Concrete policy details on these proposals were naturally scarce, leaving the markets to wonder how countries will put them into practice. The first hints of that will come from a post-G20 meeting of European Union finance ministers taking place over the weekend, with the outcome likely to have implications beyond the currency bloc to shape risk appetite at the beginning of next week.

Further ahead, the US economic calendar is packed with scheduled event risk, leaving the door open for volatility as traders continue to look to Wall St to set the pace of global equities and with them risk sentiment at large. Finally, while the G20 vowed to keep stimulus measures in place until a global recovery is firmly in place, clear signs of scaling back expansionary policy are already emerging from the US Federal Reserve and the Treasury Department. FDIC Chairman Sheila Bair added fuel to speculation that US policymakers are starting to back-track on expansionary policies, urging to end bailouts for large banks on Friday. These forces could spur the long-awaited downward correction in risky assets in the week ahead, taking the closely correlated Australian Dollar long for the ride.


On the economic data front, Private Sector Credit is set to show that lending to businesses and households grew just 2.7% in the year to August, the slowest pace on record, hinting at mounting headwinds for the buoyant Australian economy. Coupled with unemployment at a six-year high of 5.8% and expected to continue steeply higher into 2010, this outcome bodes ill for consumption and thereby overall economic growth as Australians are unable to earn or borrow to finance their spending. A shallow rebound in Retail Sales will offer little solace: receipts are expected to rise 0.5% from the previous month in August; this puts the annual growth rate at about 5.3%, a hair above July’s five-month low of 5.2%. September’s AiG Performance of Manufacturing report may prove interesting: the metric showed that the industrial sector expanded for the first in 14 months in August, and traders will be keen to see if the trend continues, though markets may be getting desensitized to improvements on this front amid constant chatter about global rebuilding of inventories in the financial media. Finally, the annual growth rate in Building Approval is set to turn positive for the first time in 14 months, but this too may pass without little fanfare after last week’s jump in new home sales was chalked up to the effect of the government’s first-time home buyer credit.


Higher Still? Possibly, If Risk Sentiment Holds Steady


Fundamental Forecast for New Zealand Dollar: Bullish

- Fundamentals Good, But Risk Sentiment Key, Kiwi Could Be Bigger Beneficiary of Good NFP Report than the USD

- New Zealand Trade Balance Deficit Widened in August to -725M, On Declining Exports

- Gross Domestic Product 2Q Unexpectedly Rose by 0.1%,Versus forecast of -0.2%

- Westpac Consumer Confidence Rose to 120.3, Highest Since March,2005


The New Zealand Dollar set another fresh yearly high of 0.7313 this past week, which was the highest level since 8/4/08. An unexpected return to growth for the economy was the catalyst along with prevailing risk appetite. The second quarter GDP reading rose 0.1% versus the median forecast of -0.2% on a pick-up in consumer spending and a rise in exports. Indeed, the improving global economy saw demand from abroad increase especially for dairy and logs some of the country’s main exports. However, the trade balance deficit shrunk in August as exports slowed by 23% the lowest level in two years, which could be a sign that demand is waning as once depleted inventories have been restored. The domestic outlook improved as consumer confidence rose to 120.3 from 106.0 in the third quarter which is the highest level since the first quarter of 2005. Nevertheless, the New Zealand economy is reliant on exports and if we start to see demand level off, then the diminishing growth outlook could start to weigh on the “kiwi”.
The recent G-20 summit saw global leaders to pledge to maintain stimulus efforts until obvious signs of growth emerge. There are still concerns that rising unemployment will keep consumer retrenched and put banks at risk for future credit defaults.


The economic docket holds very little event risk with only building permits and business confidence readings on tap. They both will speak to the stat of the domestic economy. However, all eyes will be on the U.S. labor report which is expected to show the lowest job loss since August, 2008. A better than expected print could trigger about if risk appetite and support for the high yielding New Zealand Dollar. Conversely, a sharp rise in employment could sink the “kiwi” especially after its recent run and with technical indicators showing it at oversold levels. We saw weakness to end the week and it appears that a test of support at 0.7006-20-Day SMA is a possibility.  However, the next level of resistance for the pair is not until 0.7765-7/15/08 high and a move back above the yearly high could see it targeted.


This week could well be the most volatile we’ve seen in a month or more, with risks to the downside even more pronounced, traders and investors should have plans in place for when and how to deal with a possible pullback in risk assets and rise in safe haven ones, particularly safe haven currencies. USD shorts remain near 12 month highs, so a pullback in stocks could send a lot of short USD traders rushing towards the exits.

DISCLOSURE/DISCLAIMER: Opinions expressed are not necessarily those of AVAFX. The author has positions in the above instruments.

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