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Like a forest fire that has consumed the immediate landscape, the US Dollar’s extraordinary rally through the second half of 2014 has burned through much of the fundamental and technical potential it was previously harboring. Further gains are certainly likely – and even probable – but sustaining the drive and its incredible pace will require more robust and directed fundamental reinforcement. The United States relatively robust pace of economic growth and the Federal Reserve’s progress towards its first rate hike will be the most accessible founts moving forward. However, for untapped potential, a seismic shift in the global investors’ confidence in low volatility conditions and passive returns can drive important pairs like EURUSD through critical plateaus.
Relative Strength May Compensate for Slow Fed
Value in the FX markets is relative. That principle was the backbone of the Dow Jones FXCM Dollar’s (ticker = USDollar) rally this past year to more than five year highs. Without the context of weaker counterparts, the country’s uneven economic recovery and the central bank’s decision to hold rates at a record low 0.25 percent while its balance sheet stabilizes at record levels wouldn’t look particularly flattering. Instead, we find global giants like the Eurozone and Japan are falling deeper into stagnation and their own monetary policy regimes are ballooning. That Dollar-reinforcing fundamental gap will likely widen even further in Q1 of 2015 as the ECB considers an upgrade to full-scale QE with recession looming and Japan redoubles its economic support amid an economic contraction and election.
While the depreciation of the Dollar’s most liquid counterparts can be an important source of progress for the currency in the coming months, its bearings will not be totally derivative. Further improvement or degeneration of the Greenback’s own backdrop will set a focal point for pairs like EURUSD, USDJPY and other ‘majors’. From a growth perspective, no economy is an island. If the world’s largest economic players continue to suffer from the malaise they found themselves in the second half of 2014, the United States will likely see the ill-effect bleed through. Though, perhaps more fluid is the monetary policy regime. The Dollar has taken on an almost ‘carry-like’ appeal as it is positioned to be one of the first major central banks to return to rate hikes. As we close in on the ‘mid-2015’ time frame the FOMC has maintained, we should expect the language to intensify and draw out the bulls. That said, the pace of the hawkish regime is more important than the first move, and an over-zealous forecast based on the initial shift could be prone to moderation.
A Particular Kind of Safe Haven
Given the United States’ comparatively robust economic performance and its advantage on the monetary policy spectrum, the Dollar seems to exude some of the favorable qualities of a high-return / high-potential currency. In a financial setting where the masses continue to operate on a ‘reach for yield’ and ‘complacency’ basis, bulls can exploit this favorable bearing. However, could that same alignment to ‘risk’ pose a problem should sentiment falter? That depends on how intense and systemic the swing in mood is.
In the graph above, we can see that volatility (often considered a gauge of ‘fear’) in the FX market has been trending higher since mid-2014. That same sense of fear is not evenly distributed across the financial system though. This is a kind of twilight scenario where certain asset classes – FX, emerging markets, high-yield fixed income – are showing a rise of uncertainty that leverages favor for liquidity. The search for a haven that also produces a competitive return generates few results. Yet, should this peripheral sense of fear intensify and spread, a need to unwind any and all over-leveraged positions may quickly find the long-Dollar position under pressure – particularly with pairs like USDJPY. That said, should the financial system devolve even further into a scene of panic; an absolute need for liquidity will override the ‘return’ element completely and expose the Greenback’s essential appeal as a global safe harbor.
Technicals: Trouble at 11600-11700
USDOLLAR Weekly Chart – Created Using FXCM Marketscope 2.0
Last quarter, we presented “a longer term target zone at 11324/52. This zone is defined by where the advance from the 2011 low would consist of 2 equal legs and the head and shoulders objective that formed from October 2010 to February 2013.” That target wasn’t bullish enough as the index is pressing 11500 now. Where now? The index is approaching possible channel resistance. The channel intersects the 2005 high at 11598 during the first week of 2015 and the 2008 high at 11681 in April. The rally from the June low would consist of 2 equal legs at 11698, which is in line with the 2008 high.
What about possible support? Watch the parallel that extends off of the January 2014 high (it cuts through the middle of the October consolidation) for possible support. That line intersects with the September high at 11143 in mid-January. It may seem crazy to think that the USDOLLAR could drop to that level in a month (3% from 11500) but extreme corrections are part of extreme trends.
Bottom line, look for resistance at the upper channel line and support at the mid line to turn bullish again. We’ll note a long term target with equality of waves from the 2011 low at 12050 but Q1 focus will likely be on identifying support and ‘resetting’ the market for a run at this level later in 2015.
John Kicklighter and Jamie Saettele, Senior Currency Strategists for DailyFX.com
The Japanese Yen finishes the fourth quarter and the year as one of the worst-performing major currencies of the world, and there is little reason to believe that the first quarter of the New Year will bring relief. A hyperactive Bank of Japan represents the most important risk to the JPY as central bank policy diverges versus key G10 counterparts. Indeed it was unexpected easing from the BoJ which sparked a sharp Yen tumble.
There is little evidence to suggest that further action is imminent through Q1, 2015, but political uncertainties as well as broader macroeconomic factors suggest the Japanese Yen could trade yet lower versus major FX counterparts.
Bank of Japan’s Printing Press Biggest Threat to Yen
The Bank of Japan surprised markets as it decided to boost its Quantitative Easing measures at its October 31 meeting, and its current pace of asset purchases signals that we may continue to expect Yen weakness over the coming months and year. If it leaves policy as-is—unlikely in our view—its total balance sheet will be worth more than half of total Japanese Gross Domestic Product by the end of 2015. By way of comparison, the US Federal Reserve ended its QE program through October and left its total balance sheet at approximately 25 percent of US GDP.
Given that QE purchases effectively amount to printing money, we expect that the increased supply of Yen in circulation will force depreciation versus the US Dollar and other counterparts. It is further worth noting that QE keeps interest rates low and has tended to boost asset prices. In effect this puts more capital in domestic investors’ portfolios and encourages Japanese earners to trade their Yen for higher-yielding currencies across the globe.
Lack of Government Reform Hurts Growth Prospects
The Japanese Prime Minister Abe’s Liberal Democratic Party seemed almost certain to gain further political power in the December 14 elections for the parliament’s lower house and likely maintain a super-majority. Central to LDP policy is “Abenomics”—a combination of monetary easing, fiscal stimulus, and structural reforms.
If the LDP does indeed remain in power, we can expect that the Bank of Japan will retain their mandate for Quantitative Easing and fiscal policy will remain quite accommodative. Yet structural reforms remain elusive as Abe and the LDP have shown little appetite for politically costly changes.
A resounding LDP win would thus dim outlook for the domestic currency for three reasons: 1. Accommodative BoJ policy forces Yen depreciation. 2. Japanese government fiscal excesses decrease the attractiveness of domestic investment. 3. Timidity in structural reforms may make a more lasting economic recovery increasingly difficult. None of this guarantees that the Yen will trade lower through the short term, but a difficult fundamental backdrop may make it a tough quarter for the Japanese currency.
Technical Analysis: USD/JPY Nears Critical Resistance
The ferocity of the Japanese Yen selloff has been nothing short of remarkable. USD/JPY appears to have overcome the structural long-term down trend established from August 1998 and is now working on its sixth consecutive month of gains. A key resistance cluster looms ahead however, warning that upward momentum may at least give way to a period of consolidation if not outright reversal.
The 121.80-124.13 area is marked by three separate layers of technical significance: the top if a rising channel guiding prices higher from the late-2011 to early 2012 lows; the 76.4% Fibonacci expansion implied by that trend; and the June 2007 swing high. Aggressively over-extended RSI readings warn that – if nothing else – the pace of recent gains is highly unusual based on historical USD/JPY price action.
Importantly, none of this suggests that the USD/JPY rally can’t continue. On the contrary, the mere presence of resistance in no way means that it must necessarily hold. Indeed, if that were the case, markets would be permanently range-bound and never trend at all. With that said, current technical positioning argues against jumping into long positions with reckless abandon, warning that if a reversal were to come, this is a logical place to see it.
Written by David Rodriguez and Ilya Spivak, Currency Strategists for DailyFX.com
After an extended bout of congestion, Gold reverted back to its broader trend this past quarter and dipped to fresh four-year lows. Yet as remarkable as these levels are on a historical basis, there remains a notable lack of conviction to the metal’s pace. Controlled swings between multi-year lows and failed recoveries will likely continue to plague investors until one of the commodity’s major fundamental currents is resuscitated. As it happens, circumstances are converging in such a way that the opening months of 2015 will likely rouse all of its principal roles: alternative store of wealth, safe haven and portfolio diversification…but not necessarily in a beneficial way.
Through the height of Gold’s incredible run from 2007 to 2011, there was a perfect storm of fundamental support found via the aforementioned themes. In the midst of a global financial and economic crisis, investors were scrambling for eminent havens. Monetary policy officials responded by dramatically decreasing global interest rates (which removed a considerable hurdle for an asset that provides no yield) and soon graduating to unorthodox policy like stimulus that devalued ‘fiat’ assets. Moving into 2015, we are revisiting these themes; but the mix is substantially different. As it happens, the US Dollar is motivated by the same set of elements but benefits under different circumstances. That said, these two benchmarks will likely continue carving out divergent paths ahead.
Chart Created by John Kicklighter using data from Bloomberg and FXCM Marketscope 2.0
In 2015, the market will focus more sharply on monetary policy efforts in terms of effectiveness for maintaining stable economic and market conditions as well as its implications for currency devaluation (what some have taken to calling ‘currency war’). Both the ECB and BoJ have made exceptional efforts to increase their respective balance sheets which in turn has driven the Euro and Yen dramatically lower. That trend is likely to continue; but this time around, gold is not positioned as a last resort. The Dollar is an appealing and liquid substitute. What’s more, the US (alongside the UK) is closing in on its return to a policy tightening regime. Currency and commodity will not present a perfect mirror to each other though. In the event of an overdue, global deleveraging of risky assets in 1Q, gold would likely find a bid alongside the Greenback. Yet, the market would soon show a USD preference for either its depth or carry.
Technicals: Facing Critical Support and Limited Ambitions
Chart Created by John Kicklighter using data from Bloomberg and FXCM Marketscope 2.0
Gold prices are down roughly 1% quarter-to-date after recovering off a key threshold in early November trade. Last quarter we noted support targets at the, “2013 lows at $1179 – a barrier that was defended twice last year – and a critical Fibonacci confluence in the $1137-1155 region. Short exposure into this threshold is at risk…” Indeed gold achieved our target at this key support region, trading as deep as $1130 before rebounding back into the $1200 region. Note that a 2005 trendline support also converges on this region with a break below needed to for the next leg down to materialize. While the broader fundamental picture for gold remains weighted to the short-side, heading into the start of 2015 this region will remain paramount with ongoing divergence in the momentum signature warns of possible exhaustion in the medium-term.
That said, be on the lookout for a rally heading into first quarter to offer more favorable short entries with a break below the $1137/55 barrier targeting support objectives at $1100, the 2010 low at $1044 and $975/749. Interim resistance stands at $1236 with only a breach above August 2013 trendline resistance invalidating our broader bearish outlook. Such a scenario would look to target more critical resistance at $1384/97. Bottom line: looking for a rally to sell TL resistance with a break below $1137 needed to keep the short-bias in focus.
Written by John Kicklighter and Michael Boutros, Currency Strategists for DailyFX.com
British Pound Vulnerable on Fading Rate Hike Outlook
The British Pound could claim the most hawkish central bank policy outlook in the G10 FX space until relatively recently. Those days appear to have passed, with priced-in Bank of England (BOE) rate hike expectations swiftly unraveling since July. The shift in investors’ outlook appears to have coincided with a darkening of the Eurozone’s economic fortunes. Indeed, a plunge in the expected size of on-coming UK tightening (as reflected in OIS pricing) played out alongside a downturn in manufacturing- and service-sector activity in the currency bloc. A survey of economists polled by Bloomberg reveals a dramatic downward revision in 2015 Eurozone GDP growth bets that occurred in tandem.
This is not altogether surprising. The Eurozone is the UK’s largest trading partner: the share of total exports headed for markets on the Continent has been on the rise and is now hovering near a two-year high of 48 percent. That means that even as the UK economy has recovered from the 2008-09 recession, its sensitivity to headwinds from the Eurozone has increased.
For its part, the European Central Bank (ECB) has introduced a medley of stimulus measures in 2014 in an attempt to bolster growth and reverse a slide toward deflation. However, with negative deposit rates in place, one TLTRO allotment done and covered bond purchases underway, the results have proven lackluster. The central bank’s balance sheet has barely budged following a sluggish bounce from three-year lows recorded in mid-September.
Looking ahead, more ECB stimulus expansion seems unlikely in the near term. ABS purchases have not begun and one more TLTRO allotment is due in December. ECB officials will want time to monitor the entire scheme’s performance before they can sell taking the next step – “sovereign QE” – to opposing member states (notably Germany). In fact, ECB President Mario Draghi and Vice President Vitor Constancio have signaled that any decision on expanding stimulus will come after the first quarter.
This means a respite from Eurozone-induced pain on UK economic growth is not in the cards in the near term. That opens the door for investors to continue trimming their BOE rate hike forecasts, keeping the Pound firmly under pressure.
Technical Analysis: GBP/USD Bearish Outlook Undermined by Extreme RSI Reading
Weekly Chart – Created Using FXCM Marketscope, Prepared by David Song
Even though the Bank of England (BoE) remains on course to normalize monetary policy next year, the bearish trend in GBP/USD may continue to take shape during the first-quarter as market participants anticipate the Fed to lead its U.K. counterpart. Expectations for a Fed rate hike in mid-2015 should largely keep the downward trending channel intact, and GBP/USD remains vulnerable to a further decline should the Relative Strength Index (RSI) push deeper into oversold territory.
At the same time, the extreme reading on the RSI raises the risk of seeing a larger correction in GBP/USD as the oscillator turns around ahead of the lowest reading since 2008, and the lack of momentum to break below the Fibonacci overlap around 1.5550-80 may highlight a near-term bottoming process in GBP/USD as price continue to press against channel resistance. Nevertheless, the broader outlook for pound-dollar remains tilted to the downside amid the ongoing series of lower-highs, and the pair may continue to give back the advance from July 2013 especially as we see a growing number of Fed officials show a greater willingness to move away from the zero-interest rate policy (ZIRP).
Written by Ilya Spivak and David Song, Currency Strategists for DailyFX.com
- US Dollar surges into year-end, likely to hit fresh peaks
- Forex volatility prices have tumbled but point to big moves in 2015
- Trading looks risky in low liquidity conditions, cutting positions in week ahead
The US Dollar is poised to hit fresh highs in the week and year ahead. Forex volatility prices may have tumbled, but expectations point to big moves in 2015.
See the video above for the full rundown and the chart and table below for currency-specific outlook.
Forex Volatility Prices T
Data source: Bloomberg, DailyFX Calculations
DailyFX Individual Currency Pair Conditions and Trading Strategy Bias
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— Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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Volatility Percentile – The higher the number, the more likely we are to see strong movements in price. This number tells us where current implied volatility levels stand in relation to the past 90 days of trading. We have found that implied volatilities tend to remain very high or very low for extended periods of time. As such, it is helpful to know where the current implied volatility level stands in relation to its medium-term range.
Trend – This indicator measures trend intensity by telling us where price stands in relation to its 90 trading-day range. A very low number tells us that price is currently at or near 90-day lows, while a higher number tells us that we are near the highs. A value at or near 50 percent tells us that we are at the middle of the currency pair’s 90-day range.
Range High – 90-day closing high.
Range Low – 90-day closing low.
Last – Current market price.
Bias – Based on the above criteria, we assign the more likely profitable strategy for any given currency pair. A highly volatile currency pair (Volatility Percentile very high) suggests that we should look to use Breakout strategies. More moderate volatility levels and strong Trend values make Momentum trades more attractive, while the lowest Vol Percentile and Trend indicator figures make Range Trading the more attractive strategy.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES IS MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION.
OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
Any opinions, news, research, analyses, prices, or other information contained on this website is provided as general market commentary, and does not constitute investment advice. The FXCM group will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance contained in the trading signals, or in any accompanying chart analyses.
- New Zealand Dollar Down on Soft 4Q Westpac Consumer Confidence Data
- Risk Appetite Firms in Overnight Trade, Driving the Aussie Dollar Upward
- US Dollar May Rise as Home Sales Data Amplifies Fed Rate Hike Outlook
The New Zealand Dollar underperformed in overnight trade, falling as much 0.5 percent on average against its leading counterparts. The move played out against a backdrop of disappointing economic data after the Westpac Consumer Confidence gauge sank to 114.8 in the fourth quarter, the lowest level since the three months through March 2013.
The Australian Dollar rose as much as 0.4 percent against the majors. The move appeared to reflect the supportive influence of risk appetite on the sentiment linked currency. Indeed, the Aussie’s move higher tracked a parallel advance in Australia’s benchmark S&P/ASX 200 stock index.
Looking ahead, a quiet economic calendar in European trading hours is likely to see investors looking ahead to US news-flow, where November’s Existing Home Sales report headlines the docket. A mild moderation is expected with a print at 5.20 million compared with a 16-month high at 5.26 million in the prior month.
Realized US data outcomes have increasingly outperformed relative to consensus forecasts over the past month however. This opens the door for an upside surprise, which may boost Federal Reserve interest rate hike expectations and offer a lift to the US Dollar.
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— Written by Ilya Spivak, Currency Strategist for DailyFX.com
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