Sunday, November 22, 2009

WEEKLY GLOBAL MARKETS & FX OUTLOOK 11/23-27: Ominous Bearish Double Tops Still Forming on S&P 500, EUR/USD, Others

Because global stocks tend to lead global asset markets, and these markets are so tightly integrated, a weekly preview of major forex pairs and commodities demands that we first look at equities.


As always, we begin our weekly preview of global markets with a look at the S&P 500 stock index. International forex and commodity markets tend to move according to stocks, and no single index provides a better single picture of overall market sentiment than the bellwether S&P 500. Just note how similar most other major international stock or commodity daily charts are to that of the S&P 500 in both trend direction and magnitude of moves, although there can be short term deviations and at times even longer term exceptions, such as gold's current burst higher (more on that below).

That the S&P 500 is arguably the best single snapshot of global risk sentiment is not news to experienced traders, but for the benefit of all others, this idea can't be repeated enough – it's truly the One Chart To Rule Them All.

Here is a daily chart of the S&P 500 as of last Sunday.


S&P 500 Daily Chart With Volume With 10 Day Moving Average for Volume

04 Nov 15

We said:

the key points to note about the chart:

  • The possible formation of a bearish double-top pattern forming around the 1100 level
  • The relatively low volume on the rallies to this level compared to the much higher volume at the tops and on the pullbacks since the beginning of September until now. The red line on the volume histogram is a 10 day Simple Moving Average of Volume that clarifies how volume is relatively low on the rallies and higher on the pullbacks.

For perspective on the significance of the 1100 level, we zoom back to a weekly chart of the S&P 500 for the past 5 years. Note how this level has served as minor multi-week support resistance. Thus if the past is any guide, the rally will need to pass the 1100 within the next few weeks or risk losing credibility. If that happens, then risk assets are likely to either consolidate in a horizontal range or stage a long awaited normal pullback. Note that a drop of 100-300 points would be a perfectly normal retracement and markets would still be in a firm overall uptrend.


S&P 500 5 Year Weekly Chart with 10 Week Moving Average for Volume

06 Nov 15

Again, note the declining overall volume of the rally since April, suggesting a lack of believers in this rally. The bright side is that there may be a lot of cash still available to fuel further rally if the recovery becomes more convincing. The downside of this low volume rally is that it suggests they buyers were short term hot money that will be inclined to sell if the recovery falters. That in turn will depend on whether economies can begin to hold up without massive new stimulus, and if they can't, whether governments will be able to continue providing it, and for how much longer.

If one can answer those questions correctly, then they'll know whether to be long or short these markets and virtually every asset traded.

Here's the update chart as of 11/22, with the past week's trading marked off by the cursor highlighting Monday 11/16.


Daily Chart S&P 500 as of 11/22 (image 01 Nov 22)

Monday's gains were wiped out by a combination of end of week profit taking and signs that the ECB is beginning to end its stimulus and moving closer to raising interest rates. The key point to note is that after moving decisively higher Monday on decent volume, the market turned indecisive for two days and pulled back to close the week with a slight loss. The 1100 resistance level bent but didn't break.

Meaning? We're back where we were last week, both literally and figuratively – waiting to see if the markets are going to range trade or begin a more serious drop to test support. While another move higher can't be ruled out, the extent of the rally since March, it's questionable underlying fundamentals, and usual year end selling make for a clear flat to lower bias. Gold's meteoric rise over the past 3 weeks makes gold also vulnerable to at least some kind of support test which could push the USD higher and thus also weigh further on the S&P.

Do not be lulled into thinking that a Thanksgiving holiday induced low liquidity Wednesday-Friday means necessarily means quiet trading. As Kathy Lien pointed out recently, in fact, the third week in November is usually even more volatile than the average throughout the year. She notes:

Over the last five years, the average weekly volatility in currencies (measured by the difference between the weeks high and low) has been about 270 pips in EUR/USD. This figure jumps to 372 pips when examining the pound. However, the average volatility over the last five years on Thanksgiving week is more volatile at 340 pips in EUR/USD and 433 pips in GBP/USD. In fact, on only one occasion, in 2005, did holiday volatility fall below that of the overall average.

At first glance, these figures are pretty shocking, but it makes sense considering that Thanksgiving is only an American holiday. The loss in traders adds to the illiquidity of the market place, magnifying the severity of the moves. In addition, most funds are still trying to satisfy better than expected year end results, and might prefer to relax during Christmas rather than Thanksgiving. Looking at the week itself, volatility does dry up on Thanksgiving day, but is actually rather high on the day after. In any event, keep in mind that like seasonality studies these patterns do not hold 100% of the time. Just keep in mind that opportunities do not cease to exist just because it is a holiday week.

KEY COMMODITIES: Oil Slipping & Red Hot Gold

Commodity prices rose across the board with Reuters/Jefferies CRB Index gaining +2% last week. However, while precious metals and certain base metals continued with strong upward momentum, rallies in other commodities began to lose steam, most notably crude oil. We believe it's because investors' risk appetite is declining. If the above S&P chart wasn't enough evidence of growing risk aversion, and it usually is, recent macroeconomic data displayed a mixed picture on global economic conditions. In fact, the VIX, an index measuring the stock market's degree of fear, fell for the third consecutive week, by -5%, to 22.19 last week, indicating investors have become risk- averse.


Crude Oil

WTI crude oil fell after recovering to 78.61 Friday. The benchmark contract settled at 77.47, climbed +1.5% for the week. Despite the gain, price movements in recent weeks suggest that a temporary top was formed at 82 in mid-October. Look at the weekly chart, crude oil price rose and dropped on alternate weeks, with declines more than offsetting increases.

After breaking above the range of 65-75 in mid-October, crude oil appears to have formed a new trading range from $73 -- $82/bbl. Despite attempts to push price above 80, selling pressures appear to be quite strong there. Unless the S&P 500 moves higher we doubt there will be enough speculative bulls to push oil higher, and any move higher for now will be from shorter term traders. Supply/demand fundamentals show plenty of supply, arguably more than is being reported, for the near term.

OPEC members are satisfied with oil price at 75-78. Angolan oil minister even said that 80/bbl is 'not too high'. Some analysts have gone so far as to speculate that the Saudis are considering upping production and driving oil down in order to give Iran's economy and regime a not so gentle shove.

Hurricane Ida curtailed US imports and suspended operations of oil facilities. Therefore, declines in inventories were more than expected last week. Crude inventory drew -0.89 mmb to 336.8 mmb in the week ended November 13 as led by decline in the Gulf Coast as attack of Hurricane Ida suspended oil imports and productions. However, builds were seen in the East Coast, West Coast and the Midwest.

Natural Gas

Gas price movement continued to be volatile over the week. After rebounding +7.8% to 4.734 Tuesday from the low in the prior week, gas price tumbled to as low as 4.22 Thursday amid disappointing gas storage report. Price then bounced back again and closed at 4.424 Friday. On weekly basis, gas price added +0.7%.

Gas storage climbed +20 bcf to 3833 bcf in the week ended November 13. The increase slightly widened the difference from 5-year average to 12.3%.

Meteorologist forecast weather in coming weeks will still be warmer than historical average and this will be a bad news for natural gas demand which should remain threatened. We double gas storage will rise further in coming few weeks and this should continue to depress price.

Precious Metals – Has Demand Truly Increased?

Buying remained strong in gold and other precious metals. Last week, gold rallied +2.75 to 1146.8 and the new record high was set Wednesday at 1153.4.

There's a growing belief in a new fundamental factor -- that underlying demand for gold has increased due to central bank buying. After the Reserve Bank of India, the Bank of Mauritius bought 2 metric tons of gold from the IMF at market price on November 11. Compared with India's 200 metric tons, Mauritius' purchase was insignificant. However, same as the deal with India, the implications radiate far beyond the size of the deal itself.

Earlier this year, the IMF announced its plan to sell a total of 403.3 metric tons of gold to bolster its finances. The news weighed on market sentiment as investors worried about at how much and to whom the gold would be sold. Now, more than half of the planned amount has been sold to official sectors at market prices, sentiment appears to have shifted from concern over overhanging supply to disappearing supply as large exporter central banks and sovereign wealth funds seek to convert depreciating dollar holdings into gold. Right or wrong, that is the sentiment at this time, and it's been strong enough to send gold soaring while crude and stocks have been stalling out. Impressive relative strength that has won many believers and convinced markets that any pullback will not be pronounced or long. Consider:

  • In April, China, the biggest gold producer in the world, increased reserves by +76% to 154 metric tons since 2003. The market anticipates China will be another big buyer of IMF's gold.
  • Since the beginning of 2009, gold price has rallied almost +30%. Also, after breaching 2008-high at 1033.9, the yellow metal's rise has accelerated, jumping more than 100 dollars in a month. the long-term uptrend is not likely to end soon.
  • Apart from government buying, new private gold funds should give a further boost to robust investment demands. John Paulson announced his plan to launch a new gold fund next year with as much as $250M of his money. Large gold ETFs or funds usually have holdings that are comparable to central banks. For instance, SPDR Gold Shares, the world's largest gold ETF, is the world's 5th largest bullion owner just below France and above China.

In short, it's not just increasing gold demand, but demand from big buyers.

In coming weeks, gold price should continue to be very much directed by USD's movement. However, the inverse relationship between gold and the dollar should not be taken for granted. For instance, in the 90s, the yellow metal's supply was so abundant that its price plummeted. In 2005, gold price surged due to tightness in the market. Therefore, some analysts hold that gold price may continue to rise given the reduction in gold production and increase in central bank demand, despite a possible rebound in USD early next year.



Range Trading Likely For the US Dollar


US Dollar: Bullish/Neutral

- Key Events: Monday-Existing Home Sales m/m, Tuesday-GDP q/q, Consumer Confidence, Personal Consumption, House Price Purchase Index q/q, Fed Minutes of Nov 3-4 Meeting, Wed. Personal Spending, Income, Durable Goods Orders, New Home Sales m/m

- Ben Bernanke calls for strong US Dollar, but Greenback fails to hold gains

- Crowd sentiment accurately calls for US Dollar bounce

- US Dollar surges as traders sell risk following Dell earnings report


The US Dollar ended the week higher against all major currencies except the Japanese Yen, but failed to break key range highs against the Euro and other important counterparts. Forex markets remained highly indecisive and traders were seemingly unwilling to bust the Euro/US Dollar exchange rate from its multi-week range. Volatility is near its lowest levels of the year, and it seems FX Options traders are pricing in similar range trading for the holiday-shortened trading week ahead.

The indecision isn't surprising. As we've noted repeatedly, to achieve a sustained reversal, the USD will need either:

  1. A sustained period of at least consolidation if not reversal in global stocks and other risk assets that drives up demand for safe haven currencies as carry trades unwind. The S&P 500 has twice backed off from the 1100 level. Failure to break through soon could lead to at least a consolidation period if not outright reversal.
  2. A fundamental improvement in the US economy that brings recovery in the critical jobs, banking, and housing areas, quite possibly in that order, that provides reason for markets to believe USD interest rates will rise sooner than currently expected and thus lift the dollar out of its current status as a prime funding currency for carry trades.
  3. A selloff in the EUR, because for every 3 Euros bought, a USD is sold, thus any selloff on one automatically helps the other. Since March, this relationship has been a key driver of the EUR's rally.

The first possibility is the most likely, but as yet stocks have made only modest pullbacks, the second and third have not happened. In sum, there is still no major reason to buy dollars unless risk appetite turns into nausea and dollar shorts unwind.


Although the North American Thanksgiving holiday means that markets will likely become illiquid through later-week trade, earlier-week price action could produce big US Dollar moves on several important reports, especially given the nervousness across key asset classes.

The first is the admittedly unpredictable Existing Home Sales report, which often goes unnoticed but occasionally produces great equity market volatility. The next day brings the second release for Q3 Gross Domestic Product figures, Conference Board Consumer Confidence survey results, and the minutes from the Federal Open Market Committee’s most recent policy meeting. All three events have been known to force considerable moves in the S&P 500 and US Dollar, and it remains important to watch for surprises from each.

Fed Chairman Ben Bernanke recently shook US Dollar markets when he said that the Fed was paying close attention to exchange rate moves. Markets will pay very close attention to any and all references to the US Dollar through the Fed’s discussions—especially because it trades near significant lows versus the Euro and other key counterparts. We doubt there will be any explicit mention of the US Dollar in the Fed minutes, but such low expectations could make for extensive volatility if in fact the Fed starts talking the dollar higher. Thus traders should be watching for post-Fed financial market price moves. Personal Income and Spending, Durable Goods Orders, and New Home Sales reports finish the week of significant US Dollar event risk. Any one of these releases could cause big moves—especially in the relatively illiquid trading session before the US holiday.

The US Dollar remains in a trading range against major counterparts, and very low volatility expectations suggest that it may remain restricted through the week ahead. We've often noted that extremely one-sided FX Futures and Options positioning meant that a substantive US Dollar correction was inevitable. We have indeed seen the dollar bounce off of range lows, but positioning has lately been correcting and does not necessarily point to further Dollar gains. This suggests that we may need to wait for a large shock across financial markets to force substantive shifts in trends. However low volatility expectations, as reflected in fx options, suggest further range trading for the coming week.


Euro To Breakout Against the Dollar This Week?


Euro Outlook: Bearish

- Key Events: Monday PMI Mfg, Services, Composite, Tuesday-Industrial Orders m/m, German GDP q/q, Wednesday German Gfk Consumer Confidence, Thursday-CPI y/y, Fri. Consumer Confidence

- European Central Bank takes another small step in unwinding stimulus by upping collateral standards

- The pace of Euro Zone inflation improves, but the annual figure is still contracting

- Are technical indicators leaning towards a EURUSD breakout that spurs reversal or trend continuation?

- EUR/USD likely to follow equities, but news could play a role if no major risk sentiment shifts.


For the coming weeks euro traders need to consider the following developments.

  • In the background, stimulus reduction that is starting to build momentum, developing both interest rate expectations and concerns that the Euro-zone economy will falter as government spending slows and exposes a weaker economy.
  • Of more immediate concern, there's a series of weighty economic indicators that will offer some volatility.
  • However, the main threat of an impending break in recent trends comes from intangible fundamental dynamics like liquidity and the influence of a domineering US dollar.

Risk appetite is the main catalyst and fuel for the financial markets. After an eight-month trend founded based on the need to reinvest funds and take advantage of an historical rally; confidence may now be turning into a hesitation that will be well reflected in the EURUSD.

While the overall rising trend of higher lows from March remains; the past few weeks have turned to chop that is starting to develop an ominous bias, similar to that of the S&P 500. Given the unusual market conditions that back this liquid pair up, the possibility of a reversal in trend shift is more pronounced. The US markets, the single largest source of liquidity in the world, begin an extended holiday weekend starting Thursday, and in turn, a full-week of notable economic releases gets condensed into just a few days. A combination of event risk and shallow market depth may be the final ingredients for a breakout.


The Euro event calendar is stocked with significant market-movers of its own. At the start of the week (before US liquidity drains), we get a complete take on sentiment and growth.

The German GfK consumer and IFO business confidence readings will define growth expectations into the months ahead. The former will be particularly important considering the German Finance Ministry recently suggested fourth quarter regional growth would slow from the strong third quarter showing owing to consumers’ efforts to retrench themselves as jobs and wages recede.

Perhaps the most significant, the second (final) reading of 3Q GDP will offer much needed detail on the health of the various sectors. It is important to weigh how much of the recovery is from German citizens, businesses, trade and government.

More timely data comes from the first measurements of the November PMI figures, which provide a good gauge for broader growth. After the US markets shut down early, euro traders will still have the noteworthy German CPI and Euro Zone confidence readings to consider.

The above mix of event risk and low late week liquidity leaves potential for volatility in general and thus certainly in the EURUSD, by itself about a third of all forex trade. It will likely reflect what we've said above about global stocks, so EURUSD traders must always be watching the bellwether S&P 500.


Yen Breakout Threatens in Thin, Risk-Driven Trade, Quiet Event Calendar


Yen Outlook: Bullish

- Key Events: Tues. Merchandise Trade Balance, BoJ Monthly Report, Wed.-BoJ Monthly Policy Meeting Minutes, Thurs.-Jobless Rate, Unemployment, CPI y/y

- Japan’s Economy Expanded Most in Over Two Years in Q3

- BOJ Keeps Rates Unchanged, Conflict with MOF Continues

- Growing signs of deflation, which helped cause Japan's "lost decade", could undermine the yen


The Japanese Yen outperformed last week as risk aversion and ensuing unwinding carry trades drove demand higher. A bland domestic economic calendar and thin liquidity conditions around the Thanksgiving holiday in the US leave the chance for coming volatility. Growing signs of deflation could undermine JPY, especially if there's no stock pullback to stoke demand for safe haven currencies.


Although there's adequate scheduled event risk on next week’s docket, the market-moving potential of upcoming releases is limited.

  • The Bank of Japan’s monthly report is unlikely to yield much more clarity than the most recent interest rate decision.
  • An up-tick in the jobless rate after three consecutive months of moderation coupled with parallel declines in retail trade and household spending will reflect now-familiar concerns about the ebbing effects of fiscal stimulus, not surprising given the central bank’s steady warnings about a weak consumption outlook.
  • Similarly, another negative annual consumer price index print is expected after both monetary and fiscal authorities acknowledged the economy has fallen back into deflationary territory last week, with the BoJ adding that rising oil prices will offer help in that regard in the months to come.

The trend of risk assets seems likely to be a far more likely catalyst for price action. Although the earnings season is winding down, the early-week US calendar offers a healthy dose of market-moving releases that could shake things up on Wall St and translate into Yen volatility. In particular,

  • The second revision of US third-quarter GDP is expected to be trimmed to 2.9% from the 3.5% initially reported, and should show lower personal consumption levels.
  • Consumer confidence, new home sales, and durable goods orders data is also on tap.
  • Thursday’s Thanksgiving holiday means thin liquidity conditions that make a move over key support and resistance levels more likely.

This is especially important for USDJPY, where prices are flirting with trend-defining double bottom support around 87.09-88.23.


Pound Forecast Still Bearish Ahead of UK GDP Revisions


Pound Outlook: Bearish

- Key Events: Tues.-Total Business Investment q/q, Wed.-GDP q/q, CBI Distributive Trades q/q

- UK CPI rose more than expected in October to 1.5% from 1.1%

- The BOE’s meeting minutes showed that the MPC voted 7-1-1 to expand the APF by £25B

- The OECD suggested the BOE keep rates at a record low until 2011

- Threat of further QE, stock pullback could further pressure GBP


The Sterling lost 1 % against the US dollar and nearly 2 % vs. the yen over the past week as the minutes from the Bank of England’s November meeting led the markets to price in fewer rate increases over the next 12 months. The vote showed that seven Monetary Policy Committee members voted to expand the Asset Purchase Facility (APF) by £25 billion to £200 billion, but one voted for no change while another voted to increase the APF by £40 billion. This suggests that the BOE may be open to expanding the APF later on, and belief in this possibility will increase on more disappointing news.


The potential for bad news is there.

Tuesday’s data is expected to show that total business investment fell for the fifth straight period in the third quarter, this time at a rate of 3.9 percent. Companies that aren’t investing aren’t likely to be experiencing improved activity or hiring workers. While the BBA’s measure of loans approved for house purchases is projected to rise for the seventh straight month in October to 44,000 from 42,088, , it's hard to be optimistic about spending when growth and employment are still struggling.

On Wednesday, the second reading of UK GDP for the third quarter is anticipated to be revised slightly higher to a quarterly rate of -0.3 percent from -0.4 percent, and an annual rate of -5.1 percent from -5.2 percent. This will continue to reflect the sixth straight quarter of contraction, and the only way the British pound is likely to respond in a positive way is if quarterly GDP surprises and rises.

With US markets will be closed on Thursday for the Thanksgiving holiday and closing early on Friday, volumes will be lower than usual, which may contribute to either flat price movements or extremely choppy trade. The latter may dominate, though, because US event risk will be high. Also, from a technical view, GBPUSD could be in for further declines, as the pair’s break below a rising trend line drawn from the October 13 lows and bearish weekly candle chart formation suggests a bearish outlook on GBPUSD.


Swiss Franc Could Break Higher As Fear Rises Despite the SNB's Efforts


Swiss Franc Outlook: Neutral/Positive

- Key Events: UBS Consumption Indicator, Unemployment y/y, KOF Nov. Leading Indicator

- Swiss Monthly Retail Sales Down Again, By 1.6%

- October trade balance surplus up to 2.46 billion from 1.91 billion as exports gained 0.1%

- Moving with risk sentiment, if stock pullback deepens even SNB intervention my not prevent a rise


The Swiss Franc trended lower during the past week against the dollar showing potential to break from its current range but hit resistance at the 50-Day SMA at 1.0217. Price movements have stayed below this level since August 12 and a break above would suggest upside potential. Traders worried that current valuations have outpaced underlying fundamentals have generated safe-haven flows and support for the USD/CHF. Weak Swiss fundamental data added to the bearish franc sentiment as retail sales dropped by 1.6%, reducing hopes for domestic growth, as consumers battling rising unemployment continue to retrench. A 0.1% rise in exports was encouraging but not enough to offset weakness generated by falling equity markets.

The OECD raised its GDP forecast for the economy, predicting growth by the end of 2009 offsetting earlier weakness for a net decline of 1.9%. Momentum is expected to carry into 2010 and 2011 which are expected to see gains of 0.9% and 1.9% respectively. SNB Chairman Jean-Pierre Roth said on Tuesday that 2010 will still be difficult for the Swiss economy, which will not recover quickly. He went on to say that "we have the have the necessary means to withdraw liquidity from markets.” The comments take on more significance with ECB president Trichet signaling that it is time to start withdrawing some stimulus that supported the financial system through the credit crunch. Swiss policy makers aren’t expected to alter monetary policy in the near-term because they're still concerned about deflation as the rising Franc continues to depress import prices. Additionally, policy makers are determined to defend the Swissie against appreciation in order to support demand for exports.


If fears grow that a double dip in growth is ahead we could see traders look to lock in profits in front of the long weekend sending equities lower and pushing up the Franc against higher risk currencies. The prevailing uncertainty could see markets quiet leaving the USD/CHF within its current range between 1.0050-1.0200.

The weeks' calendar has potential to influence price action with consumption, employment and growth data coming. The UBS consumption indicator remains near a six year low and considering the sharp decline in retail sales we could see continued weakness in demand. As anywhere, quarterly employment figures may have the most market moving potential as rising unemployment has crippled domestic growth. The only positive report might be the KOF leading index which continues to point toward an improving economy and last month rose to its highest level since 02/08.


Canadian Dollar Tracking Oil & Stocks Lower


Canadian Dollar Outlook: Bearish

- Key Events: Mon.-Retail Sales m/m, Fri.-Current Account

- Consumer inflation turns positive, but BoC officials caution against calling an economic recovery

- The slowing pace in USDCAD matches a similar dip in crude, but is this still a tradable correlation?

- Can USDCAD continue its rise to a real reversal or will the pair flop back into a range?

- More risk downside than upside because it behaves as risk currency yet lacks the higher yield


Despite lacking the higher rates of a carry currency; the loonie has long moved with the high-yielding Australian and New Zealand dollar, because oil moved on the same growth story as these other commodity currency, and oil drives the loonie. Thus it's no shock to see the CAD drop with oil and stocks while the AUD and NZD also fall on risk aversion. However, a special bond to the US dollar as well as uncertain monetary policy can complicate these correlations.

As usual, Canadian dollar will follow general risk trends as these play out through its relation to oil and equities. Though its lending rates are near zero) and the economy’s recovery is still in progress; it has enjoyed all the tangible benefits of a carry currency like the Australian or New Zealand dollar due to the primacy of oil exports. Thus if we see a significant drop in risk appetite, the Canadian dollar is likely to fall with it.

Aside from risk appetite, the assessment of the loonie’s fundamental strength lies in the same fundamentals (growth, interest rates, monetary policy)to which every other currency responds. Compared to the much higher yielding AUD and NZD, the CAD has little carry trade appeal, and its safe-haven low rates are not likely to rise soon. This past week, BoC Governor Carney reiterated his intention to maintain rates at 0.25 percent as long as inflation stayed low. Backing the policy authority up, the OECD recommended in its semi-annual economic assessment that the bank keep rates near zero until June of next year and perhaps longer.

The OECD offered a modest outlook on economic activity, saying a recovery began in the summer and was gaining traction; but the jobless rate would continue to rise into 2010, thus restraining expansion. Carney was more bearish, saying it was too early to call a recovery and that the CAD was stronger than what fundamentals supported, thus undermining a more robust recovery.


Stalling With Risk Appetite, Vulnerable To Interest Rate Expectation Disappointments


Australian Dollar Outlook: Neutral/Bearish

- Key Events: Monday-Conference Bd. Leading Indicators, Tues.-DEWR Skilled Vacancies m/m, Construction Work Done Q3, Wed.-Private Capital Expenditure Q3

- RBA Policy Outlook Remains “Open Question”

- Westpac Leading Index Improves For Fourth Month

- Wage Growth Slows In Third Quarter

- Vulnerable to stock pullback, possible interest rate increase disappointment


The Australian dollar rose to yet another yearly high of 0.9408 earlier this week following the rise in risk appetite however; it may have topped in November as investors scale back expectations for higher interest rates in the $1T economy. However, because the rally remains near the 50-Day SMA at 0.9015, we may see the AUD/USD retrace the four-day decline over the following week if markets stick to range trading.

The Reserve Bank of Australia meeting minutes fed speculation that the central bank may hold a neutral policy going into the following year and slow the pace of rate increases and the drop in the interest rate outlook may pressure the AUD. Credit Suisse overnight index swaps shows investors are pricing a 62% chance for a 25bp rate hike next month, down from 83% in the prior week, while traders believe the central bank will raise borrowing costs by nearly 140bp over the next 12-months as policy makers maintain their dual mandate to ensure price stability while fostering full-employment.

The RBA said “business and consumer confidence could prove fragile” over the coming year and saw a risk for a protracted recovery as the government stimulus begins to taper off, and went on to say that the direction for monetary policy “remained an open question” as the board aims to balance the risks for the economy. In addition, the central bank repeated its concern that the appreciation in the Australian dollar is likely to “constrain output and dampen inflationary pressure” going forward, but simultaneously, the RBA argued that “a lengthy period with interest rates at a very low level carried its own risk” as the economy skirts the global recession.

Meanwhile, the Organization for Economic Cooperation and Development raised its economic outlook for the region and expects the growth to increase at a yearly rate of 2.4% after an initial forecast for a 1.2% rise in June, and the group expects to see “a gradual tightening of monetary policy” going forward as growth prospects improve.


As a result, the Aussie calendar for the following week could feed increased volatility in the exchange rate as economists predict business spending will rise 1.0% in the third-quarter after expanding 3.3% during the previous three-month period, while construction outputs are anticipated to hold flat after falling 0.1% in the second quarter.


New Zealand Dollar Vulnerable Due To RBNZ Independence Threats


New Zealand Dollar Outlook: Bearish

- Key Events: Wed.-NBNZ Business Confidence, Thurs. Trade Balance Survey

- New Zealand dollar tumbles, hobbled by interest rate expectations, waning risk appetite

- Debate over RBNZ mandates also pressure the NZD

- Worst performing G10 currency last week, vulnerable to stock market corrections, trade balance disappointment could fuel debate over central bank policy and further damage the NZD


Easily the worst performing G10 currency, the NZD fell against all major counterparts to end the week’s trade. It faded with the rest of the risky asset classes, while fairly bearish interest rate developments compounded NZD losses. New Zealand’s opposition Labour Party leader withdrew his party’s support for an incredibly important facet of Reserve Bank of New Zealand policy. Increased discontent with New Zealand dollar appreciation has led many politicians to question the RBNZ’s inflation-targeting policies—calling for the central bank to control exchange rate fluctuations. While the opposition party currently trails the ruling National Party in opinion polls, this is nonetheless a legitimate threat to RBNZ independence and could hurt confidence in the domestic currency.


Barring major market shocks, a light economic calendar in the week ahead could keep traders focused on political developments, and it remains critical to monitor the ongoing debate on the RBNZ. Thursday’s Trade Balance result is a key exception, and could influence the ongoing RBNZ controversy. Forecasts call for a sizeable NZ$480 million deficit for the month of October—the second-worst result for the past year. New Zealand exporters have been hurt by the strong exchange rate, and a large deficit could embolden the opposition against RBNZ inflation targeting. Traders should watch markets’ reaction to the data.

The New Zealand Dollar appears likely to remain volatile in the week ahead—especially as it remains near significant peaks against the USD. It is easy to forget that the NZDUSD had rallied by nearly 60 percent off its lows, and such incredible strength leaves it vulnerable to a large correction. It is now only 5 percent off of its 2009 highs, but any further news to suggest the RBNZ will target the New Zealand Dollar exchange rate could easily force a much larger drop.


  1. If the S&P 500 remains in a flat range, expect most other asset classes to behave likewise.
  2. If it dives, that will favor the safe haven JPY, USD, and CHF in that order, against the higher yielding and commodity currencies, as well as against the EUR, which typically moves opposite the USD. Short other risk assets like stocks, oil, and possibly gold. As always, wait for some confirmation of the downtrend.
  3. If it breaks past the 1100 resistance level, long risk assets and currencies, short the JPY, USD, and CHF.

Because the S&P remains at a possible trend reversal level given that it is still near 1100 resistance and still may be forming a bearish double top formation, traders and investors should be cautious about opening new positions until we have a clearer picture of overall market direction, and have stop loss orders in place to protect profits when not able to actively watch markets.

DISCLOSURE: The author has no open positions in the above instruments. Opinions expressed are not necessarily those of avafx.

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