Latest FX market analysis and trade views: February 2018

Sunday, February 25, 2018

FX weekly outlook Feb 26 - Mar 2

Overall financial market’s sentiment has been positive this past week. There were not much of risk-on rush though, due to several factors to be clarified. First sign for potential faster tightening by ECB came from meeting of EU finance ministers this week. A spanish hawk, mr de Guindos has been nominated as ECB Vice-President. Next several months will show, whether is he going to be first candidate to replace Mario Draghi, ending a long-term era of cheap borrowed funds in Europe.

One more important topic has been discussed on other side of Atlantic. FOMC January Meeting Minutes have not resolved all questions about possible faster hiking path of Federal Reserve this year. This was the last meeting for Yellen as Fed Chairwoman. Next big event for the market is new Chairman, Jerome Powell, testimony on the economy before congressional committees. Equities, bonds and currencies will be looking for direction depending on how hawkish will be his views at the speed of tightening.

US Dollar was recovering during this past week, working out bullish divergences on daily chart. However, this recovery was limited, as sellers were reacting on equities’ bullish rallies. General direction remains the same on long-term perspective. Fundamentally, there is not reason for world reserve currency to appreciate together with strong and sustainable recovery of the world-wide economy. Risk appetite attracts traders to buy high-yield assets, emerging markets are among biggest gainers.

EUR/USD has found a rock solid support at 1.22 level, with huge volume demand at this level and lots of buy orders placed. The only delay for bulls is political risks hedging. There will be elections in Italy and important SPD vote in Germany on March, 4, so we should not expect the pair to appreciate significantly next trading week. But we might see a repetition of weekend gap the same way as it happened in May 2017, right after French elections.

Technically speaking, there is a sideway consolidation range, with resistance to be breached more likely. Levels to watch for long positions: 1.22000 and 1.22500. Key fundamental events to monitor next week: US PCE Deflator, which is used by Federal Reserve to control inflation, and Eurozone Flash Inflation report.

British pound bears failed to push the pair lower than support levels from previous week, despite weaker-than-expected UK GDP Q4 reading, revised down to +1.4% YoY from +1.5% expected. Next week’s UK PMI report is going to show whether BoE would have additional pressure to tighten faster than previously anticipated. 1.40000 resistance looks as important pivot point to breach before sterling performs further strength.

USD/JPY recovered previous losses, testing resistance at 108.00 level this past week. Fundamentally, Japanese economy confirms sustainable growth, and BoJ officials are not interested in further strength of the currency, continuing injecting additional liquidity to the system and intervening verbally. Next week’s Chinese Manufacturing PMI will influence risk appetite from Asian investors. In case of a strong reading and with a condition of bullish equities, USD/JPY might test 109.00 resistance.

USD/CAD bounced from overbought levels last Friday on stronger-than-expected Inflation report. 1.27000 levels looks to be a tough task for bulls, so the pair should pullback down to 1.25000 support in case of fundamental environment will be in favor for BoC to keep hiking interest rates in 2018.

Sunday, February 18, 2018

What is happening with the greenback?

The biggest story of the past trading week on the financial markets was U.S. inflation. Rumors and talks about fast inflation increase caused worldwide equities deep correction a week before, creating a fear that U.S. economy could have a slowdown. But smart money was acting aggressively from the start of the week, buying equities at lower prices comparing to January peaks, and indices showed strong recovery, while Treasuries continued to slide. 10-year Treasury yields (inverse relation to the price) rallied to almost 3% this week, pricing in more tightening from the Federal reserve together with higher inflation.

The main economic report was U.S. CPI on Wednesday, which showed slightly higher-than-expected reading, and the price action was dramatic across the board. Initial reaction was to sell equities, which dropped 1% in minutes, and buy USD, following additional demand for Treasuries. EUR/USD dropped more than 100 pips from the highest rate in early European session. Smart money stepped in, reversing this move and we've seen completely opposite ending of Wednesday trade, with stock indices rallying more than 1.5%, Treasury yields going up sharply and EUR/USD performing bullish run, breaching 1.2500 important level third time this year.

I've been waiting for something like this, observing overreaction of the market players based on nothing but rumors. The explanation of such unexpected for most traders action is very simple. Yes, inflation picks up the momentum, exactly as FOMC predicted in October. Yes, Federal Reserve will be forced to hike, exactly as they told before. But this also tells about U.S. economy strength, confirming wage growth and stable consumption, which has to lift corporate earnings and create additional demand in equities and thus risk-on market investment sentiment. Treasuries, however, lose their attractiveness as mid- and long-term investment assets, covering just inflation and not producing additional profit. Money must work and what is happening at the markets currently is the that huge volume smart money is looking for repositioning to high-yield assets and more attractive markets.

Next question was about talks that Federal Reserve could be forced to hike more aggressively in 2018 due to faster inflation growth. Such scenario could make borrowing costs much more expensive for corporate sector and consumers, slowing down the economy growth. But as the CPI report was not that scary, it did not give any background for such talks. Fears eased, risk-on sentiment came back to the markets. The greenback as world reserve currency loses its’ attraction. There is a huge flow of capital coming back to equities from long-term savings sealed in U.S. Treasuries. Investors are getting out of cash USD, putting funds to work more effectively. This process creates additional demand for other currencies on Forex market, lowering the rate of USD.

You can find below a comparison daily chart of U.S. Dollar index with 10-Year Treasury yields. There is an obvious change of correlation started from December 11 2018.

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EUR/USD perspective for the week ahead

EUR/USD posted 1.2555 local high this week, but retraced on Friday. Some analysts started to talk about EUR/USD reversal, as the pair bounced back down from 100- and 200-months simple moving averages. I do not see any fundamental background for such a reversal scenario. Eurozone economy is strong and there are talks about ECB to lower the Quantitative Easing program and start tightening cycle much faster than it was previously expected. Further bearish slide is possible, but buyers should step-in with huge volume in the range of 1.2250-1.2375, the same way that they were doing three weeks in a row. Next week economic calendar is full of European reports, which might confirm the economy strength and support the pair. Two main releases influencing the pair are FOMC and ECB meeting minutes. If the first one will ease the chances for 4 rate hikes this year in U.S. and if the second will confirm rumors for faster ECB actions, EUR/USD will reach 1.2700 level in very nearest future.

Kiwi and Aussie to strengthen further?

Commodity currencies like AUD and NZD have finished correction. One of the biggest gainers against the greenback last week was kiwi. Strong economy, new RBNZ hawkish governor, expectations of monetary policy tightening were the fundamental factors supporting the pair. In addition, commodity market picked up the momentum on strong equities bullish rally. Aussie was a bit slower, but also gained against the greenback. I expect further appreciation of both NZD/USD and AUD/USD next week in case if there would not be any disappointment from economic calendar, which is rather packed with events from both countries.

Wil the South African Rand keep soaring?

Emerging markets are definitely gainers from the weak U.S. dollar story. One of the best performances past week was shown by South African rand on positive political changes. New President seems to be much more suitable for foreign investors, seeking for high-yield gains. USD/ZAR lost 3% of it's value, breaching very long-term resistance at 11.80 level. Weekly chart tells me about 10.90 as the next target, so the rally should continue in case of no major shocks to the worldwide economy.

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Saturday, February 17, 2018

Weekly FX outlook Feb 12-16

Please note, that this article's date is February 11 and it is a part of weekly analysis for my subscribers.

This past week trading was nervous and volatile at all of the financial markets. Main topic was a dramatic sell-off in U.S. equities, with S&P 500 Index losing almost 10% of its’ peak value. Despite the absence of major economic data releases from U.S., Treasuries continued the slide and 2-Year yields breached 2.8%. This sharp increase in borrowings cost weighs on confidence of homeowners, consumers and businesses, creating uncertainty whether the economy will be able to overcome the end of cheap funds period. As majority of Central Banks worldwide are heading to tightening cycles, we could see a further decline in demand for bonds. At the same time, the biggest question for now is about how deep will stock indices decline further? Have they already found the bottom, or will this technical correction turn into a long-term bearish market?

I bet, there is no analyst or economist in the world, who can answer this question. Some of them say, that it’s a perfect time to buy equities on the long-term basis, as prices eased from peaks and became more attractive. Anyway, there should be a consolidation period before bullish rally, with possible whipsaws on the bearish side and investors have to be convinced by a several weeks recovery before they will put higher stakes on the table.

The best currency to hide from such turmoil is Japanese Yen, as the concerns do not come from Asia. USD/JPY has always been a risk-appetite indicator and safe-haven asset, but the main profits last week came from yen crosses versus weaker currencies, like AUD and GBP. Australian dollar’s correction extended in the beginning of the past week as Retail Sales report disappointed investors. AUD/USD was down 1.05% and AUD/JPY lost 2.53% on weekly basis. But as AUD/USD buyers stepped in on Friday trading, and the pair found a local support on Daily timeframe, AUD/JPY continued to slide. In case if the uncertainty will continue to weigh next week, aussie-yen cross would keep declining further. Daily charts below. Nearest supports: AUD/USD 0.73357, AUD/JPY