Latest FX market analysis and trade views: 2017-OCT-22 weekly FX outlook

Please note, that this article comes from my archive. Check the actual date in the header.

The Greenback decline over the first half of last week we see as being caused by the continuation of geopolitical tensions and continued rumors about who will serve as new Fed Chairman. This was followed by a prompt recovery at the end of the week on positive news from Congress and Wall Street. The ‘propped up’ USD story overall remained intact after hawkish Janet Yellen’s most recent press conference.

The question on the mind of trader’s now is will there be a breakout of the range? Will we see stronger US dollar heading to the end of the calendar year? These are the big questions for hedge funds and retail traders alike.

Some analysts believe that the greenback is will continue its and recover much of the losses it sustained in the first half of the year against the Euro and CAD specifically. The SS FX Management team remains to be convinced and our contrarian data shows clearly that large players in the market also are doubtful about the sustainability of a dollar ‘bounce’.

Yes, Fed chairwoman Yellen was hawkish and she continues to push verbally to support the USD. Yes, the odds for the rate hike in December are strong at the moment. Yes, the US budget approval is a positive factor and tax cut talks are also adding support. Yes, healthy earnings posted by Goldman Sachs and IBM on Friday helped push the DJIA index to a record high above 23,000. It’s difficult to argue this is not USD positive. The key point heading into this week is the market has already priced this in. The 800 pound gorilla in the room for the USD is that inflation is still soft, last employment figures for last month weren’t just weak, they were NEGATIVE. Regarding this USD bounce we’re observing, a key question the SS Forex Management team has is why is the greenback not rising moving sharply? Why so slow? Just have a look at the the USD Index weekly chart below and compare the highlighted periods of 12 weeks (bars) in 2016 versus 2017 and the comparable ‘steepness’ of the rise of each of those periods. To the naked eye first period looks like the established formation of an uptrend and second looks like a retracement.

There is one thing that most of the analysts avoid to talk about. US budget and trade balance deficits. Both continue to expand. Trillions of dollars. Twelve zeros. Moreover, the tax cut project suggests enlarging the figures. And we ask: how are they going to fill these holes? The answer is obvious: by expanding another hole: external debt. This sheds light on why Yellen has become so hawkish and lost sight of her cautiousness about weak inflation. This is also why we see US treasuries and bonds yields are going up. The FED has somewhat artifiicially boosted demand for US government debt, which in turn caused additional support for the greenback. Our view is that once the big story of the next rate hike and budget is finished, once the holes are filled by fresh flow of dollars from abroad, this temporary support for the greenback will dry out and it will continue to slide. That is our medium term view. For the moment, let’s come back to this week.

The economic calendar was light this past week. The majority of data was coming out of the United Kingdom. CPI started the week in line with expectations, Average Earnings added optimism, however Retail Sales disappointed the GBP bulls. As the result, GBPUSD has tested the SMA89 on the daily chart (1.3087). Following positive news on tax cuts from the US on Friday, GBPUSD bounced a hundred pips back up to 1.3190 supported by Japanese speculative flows. Mr. Carney, Bank of England Governor, does not have a strong hand to keep betting on a hawkish scenario. We will see a pull back in his comments about a tightening cycle most likely and would keep GBPUSD positions light until we see get more clarity from the BOE.

Technically, GBPUSD has a mixed picture on daily chart, with downside risks more likely. The price failed to break above 1.3600 and pulled back to SMA89 support slightly below 1.3100. There is a very little MACD bullish divergence, while fast RSI oscillator is bearish. We might see a spike of RSI14 up to 50% level and a sharp decline after that. So we’ll be looking for levels to short the sterling next week the SS FX Management team will keep you updated on our positioning over the phone as well as in our daily signals.

Fundamental risks next week are sure to come from both sides of the Atlantic: UK GDP (Tuesday) and US GDP (Friday) are scheduled for release. Estimates and expectations are not adding support for the GBPUSD so far.

For the high volatility seekers among our clients, there is completely different picture in GBPJPY. We see the daily chart below as bullish. The last five daily candles volatility shows a strong support level. The Ichimoku cloud ‘span’ enlarged the bullish range. The red formation we highlighted looks like a widening northward formation. And the daily close prices are above resistance line. These four technical signs outweigh three bearish patterns: Dragon Fly Doji on October 12 indicates a support level being reached rather than bearish reversal; the ‘Dark Cloud Cover’ on October 19 does not have bearish continuation; the Ichimoku line cross is not confirmed by the span narrowing.

Traders - it’s important to remember that the main driver of GBPJPY fundamentally is it’s big cousin - USDJPY. Good news from the US were also supported by strong economic reports from world second largest economy - China. Chinese CPI, PPI, Industrial Production and Retail Sales have beaten the forecasts, adding risk appetite to speculators and pushing dollar yen above 113.00 figure. The past week’s events supported yen crosses as well. We would not be surprised to see USDJPY above 114 and EURJPY to reach our October target of 136.00 this trading week.

The headliner of this week is the European Central Bank meeting of course. Political uncertainty from Spain and mixed German elections on one hand and strong economic reports on the other, will force ECB Head Mario Draghi to face his usual dilemma. Is he going to lower the amount of ECB asset purchases by 20B EUR or more? Would he express his concerns about possible EURUSD rates above 1.20 as the result of such a decision? Or will we see him as a dove, avoiding the fight and postponing the decision which market players have been waiting for now for a while. We will try to find these answers together with technical pictures in our special Deep EUR Outlook coming out tomorrow.

A final asset to look closely at this week is USDCAD. The ‘Loonie’ could not find any support from the Crude Oil prices bounce after profit taking in the first half of the week. War in Northern Iraq, a rich oil region, lowered the quantity of oil output production and caused upside movement in black gold prices. There was also disappointment came from Canadian economic reports on Friday: Monthly CPI 0.2% vs 0.3% expected and Core Retail Sales -0.7% vs 0.3% expected in August. So USDCAD bears had to limit their appetite for now. Moreover, the pair closed the past week above 1.26 figure, supported by positive sentiment from the US. The next big event is the Bank of Canada rate decision on Wednesday followed by BoC Governor Poloz press-conference. Market participants expect interest rates to remain unchanged combined with more cautious comments from officials. Such a scenario together with continuation of positive news from US could push USDCAD above 1.2780 August highs by the end of the week.

Technically, we see a possible bullish reversal ‘head-and-shoulders’ pattern on daily chart with 1.3024 as first potential target. This possible technical reversal must have a strong confirmation from fundamental events. So we would stay away from trading this pair until Wednesday. The main reason is a possible hawkish surprise from the BOC. They have already made unexpected hawkish decisions two times in a row this year. And there is one more fundamental factor: the BoC cautiousness is not about the economy, which is posting stronger-than-expected reports. It’s more about a possible bubble in the Canadian housing sector. The BOC need higher interest rates in order to have a room for maneuver in the worst-case scenario for the inflated housing market. Stay tuned for this week’s two Deep Outlooks.