The Fed’s future path still seems more bullish than the European Central Bank. If so, the yiel...
The Forex Trading Week Ahead
04/09/2012 10:35 am EST
Kathleen Brooks and Eric Viloria, CMT, of FOREX.com, explain the important news and data releases for the coming week as well as technical trends impacting major currency pairs.
The release of the FOMC minutes earlier last week and speeches by Fed officials have resulted in markets reducing their expectations of additional easing. However, Friday’s disappointing jobs figures (120K in headline NFP vs. consensus 205K) has brought the speculation of more stimulus back into focus.
To illustrate the extent of the negative surprise in the NFP print, the lowest estimate was for the addition of 175K payrolls out of the 80 economists surveyed by Bloomberg. QE3 chatter is making its rounds again in the markets, and the US dollar has tumbled against most of the majors as heightened speculation weighs on the greenback.
It is unlikely that the Fed will take action based on one disappointing data print. Jobs continue to be added to the economy, and Fed chairman Ben Bernanke has reiterated numerous times that labor conditions remain “far from normal.”
The March employment report is evidence of the Fed chairman’s observation, as the unemployment rate surprisingly declined to 8.2% despite the disappointing change in payrolls. With stimulus still on the table, markets will remain sensitive to US economic data reports and their implications on central bank policy expectations.
Fed speak will remain in focus as officials express their views on policy and present economic assessments. The week ahead will see speeches by Bernanke, Lockhart, Dudley, Yellen, and Raskin, as well as key inflation figures.
Bank of Japan Under Pressure to Ease
The Bank of Japan (BOJ) will meet to announce monetary policy on Tuesday, April 10. The Bank’s target rate is expected to remain at ten basis points, and in our view, the internal debate between board members regarding further easing is likely to have increased, as the external debate has escalated.
We think that the statement may show that board member Miyao may be gaining support to his call for another JPY 5 trillion in asset purchases. Miyao was the sole dissenter at the last meeting on March 13.
Recent data has shown deterioration, with an unexpected monthly decline in February industrial production of -1.2% (consensus +1.3%), a disappointing 1Q Tankan survey, and below-target inflation. Though the national CPI excluding fresh food climbed by +0.1% year-over-year (y/y) in February, it remains well below the 1.0% target that was recently set by the BOJ, and the more timely Tokyo CPI readings continue to show deflation in March.
With soft economic activity and the still-present threat of deflation, politicians have called on the Bank Â to step up easing measures. Members of the DPJ said last week that “proactive monetary policy is necessary to escape from deflation and end the strengthening yen.”
Politicians went as far as to reject BOJ candidate Ryutaro Kono, as his policy stance is similar to Governor Shirakawa in the view that monetary policy alone can’t solve deflation. Currently, there are only seven members of the policy board and two vacancies left to fill out the nine posts. When considering candidates, the DPJ’s Takeshi Miyazaki said “The main priority should be someone who is promoting monetary easing.”
Data released earlier this week also showed Japan’s monetary base contracted by -0.2% y/y in March from the prior +11.3% yearly rise in February. This was the first drop in the BOJ’s liquidity supply in over three years and gives critics more reason to pressure the Bank to take a more aggressive stance in easing.
Moreover, Governor Shirakawa has previously said that the Bank will pursue “powerful easing” until 1% inflation is in sight. The prospect of further easing may weigh on the yen moving forward, and recent JPY strength may provide short opportunities in the week ahead (see key levels below).
No More Support from the ECB
European Central Bank (ECB) President Mario Draghi painted a fairly bleak picture of the Eurozone economy at his monthly press conference last week. Not only did he say that “downside risks to the economic outlook prevail,” but he also said that inflation may be fairly sticky for the rest of this year.
Economic data released so far suggests that the Eurozone fell into recession in the first quarter of this year. The contraction appears fairly broad-based across the currency bloc after extremely weak PMI surveys (the composite survey for March fell to 49.1 from 49.3 in February).
However, there is a risk of deeper and more prolonged contractions in the peripheral economies including Portugal and Spain. But the Bank’s concerns about inflation pressures, especially in Germany, may prevent it from cutting interest rates or using more stimulus measures to try and boost growth.
Although sovereign strains have started to rise again, Draghi reiterated that non-standard monetary policy measures adopted by the ECB are “temporary in nature.” It does not appear that further support from the Bank, either for banks or sovereigns, will be forthcoming.
Instead, Draghi urged banks to “strengthen their resilience further” by retaining earnings, a signal to Europe’s financial sector to limit employee compensation and not to pay dividends. Draghi also urged governments to “restore sound fiscal positions and implement strong structural reforms.”
This was a powerful message to the banks, the sovereigns, and the markets: for now, there will be no more support from the ECB. Thus, the Securities Markets Programme, which has been inactive in recent weeks, is unlikely to be re-started any time soon.
More LTRO loans to the financial sector are also unlikely after Draghi said that the impact of LTRO 1 and 2 is still not known and will need time to feed through to the broader economies in the currency bloc.
But Draghi may have to soften his message if strains in Europe’s troubled periphery get worse. Fitch ratings said that European money market funds (funds that invest in short-term government and blue chip debt securities) have dramatically reduced their exposure to Italian and Spanish debt (along with Greek, Portuguese and Irish bonds) since last summer.
While US money market funds, a critical cog in the US financial system that invest money on behalf of pension funds and individual investors, have scaled back their exposure to sovereign debt, they still have a sizable exposure to European banks. This could be as much as $1 trillion, according to some reports.
Bank across Europe, including some in the UK, have sizable exposures to Spain’s troubled housing market. Thus, if Spanish economic data remains weak and bad loan levels start to rise, money market funds may ditch European bank debt, which could aggravate funding pressures down the road. If this situation arises, then the ECB may have to step back in with further liquidity to ease tensions caused by the sorry state of some European sovereigns.
In a holiday-shortened week, we have little economic data of note. France is issuing debt along with Italy this week, and as we get closer to the French Presidential elections, investor sentiment towards French assets needs to be monitored closely.
Will the UK Avoid Recession?
After positive surprises in the March readings for manufacturing and services sector PMI’s, the question is can the UK avoid a recession after the economy contracted in the fourth quarter of 2011?
We will find out when the first release of Q1 GDP figures are released later this month, but so far, it appears like the UK economy may have narrowly avoided a second quarter of economic contraction.
The British Chambers of Commerce (BCC) expects GDP to expand by 0.3% last quarter, but it also warned that growth is likely to remain fairly lackluster this year, expanding only 0.6% as crucial sectors of the economy like exports still remain weaker than they did before the 2009 recession.
Sterling was a major beneficiary of the positive data surprises out of the UK last week as the strong PMI data has reduced expectations for further QE from the Bank of England (asset purchases by the central bank tend to be currency negative). After announcing no change to rates and asset purchases last week, all eyes now turn to the Bank’s next meeting in May when the latest round of QE announced in February will come to an end.
At its meeting in March, two members of the Monetary Policy Committee voted for more QE. However, other members were concerned about inflation, especially as the price of oil had risen strongly.
The main event in the UK this month will be the release of Q1 GDP, which will be the main determinant of more QE, in our view. Right now, the risks for more stimuli from the BOE remain finely balanced.
Market Moves: Key Levels
The euro had a broad-based decline last week, and EUR/USD fell nearly 2% to the bottom of its recent range after Draghi’s press conference. Although 1.31 held as good support, we continue to believe that further weakness is in store. 1.3050 is the bottom of the daily Ichimoku cloud, and if we get below here, that may make a breach of 1.30 vulnerable. Since this is such a key psychological level, price action could be sticky around here. But if we get a convincing break then 1.2624—the low from January—comes back into focus.
See related: Trading on Clouds: The Art of Ichimoku
EUR/GBP has been very weak in recent days and breached the key 0.83 level. However, we believe further downside for this pair is limited. We believe it will trade in a range between 0.8220 and 0.8365—the top of the daily Ichimoku cloud. The UK also has its economic problems, and the potential for more QE next month could limit sterling gains for now.
Gold broke to the downside last week after falling through the bottom of the Ichimoku cloud at $1,656.70. This is a bearish signal, as anything below the cloud signals a downtrend. Support lies at $1,600 and then $1,550. The bottom of the cloud at $1,656.70 is now important resistance.
USD/JPY looks to be consolidating in a bull flag pattern, which is best seen on daily charts. The sharp drop following the US March employment report saw the pair test flag support around the 100-week simple moving average (SMA). Bull flag resistance is currently around the 21-day SMA, and a break above here is likely to see towards prior highs around 84.00 next.
A move below the 100-week SMA support sees the top of the weekly Ichimoku cloud around 80.75, which is the next downside pivot. We would view pullbacks towards this support level as long opportunities, while a sustained break below here would invalidate our bullish bias.
By Kathleen Brooks and Eric Viloria, CMT, of FOREX.com
Related Articles on FOREX
Trade idea: No guarantees here of course, but maybe it’s a small caution flag for dollar bulls...
As of August 2015, renminbi (RMB) in payments globally accounted for 2.8 percent of the total, the f...
Our favorite horse to ride here for a “correction” lower would be the euro. And we would...