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#Post#: 17--------------------------------------------------
5 Reasons Why Next Week is Big for FX
By: fxvictory Date: September 13, 2014, 10:14 pm
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So far, September has proven to be a big month for currencies.
After consolidating for a large part of 2014, most major
currencies hit multi-month and in some cases multi-year highs
this past week. In almost every scenario, the moves were driven
by the voracious demand for U.S. dollars but negative
developments abroad also increased the attractiveness of the
greenback. What makes the latest moves interesting is that they
came during a relatively quiet week in the financial markets but
perhaps it was the lack of market moving data that gave
investors the perfect opportunity to digest and reassess the
risk of holding other currencies. Next week will be an even
busier one for the forex market because all of the speculation
on what the Federal Reserve, Scotland and Swiss National Bank
will say or do will be determined in the coming days. The
Federal Reserve has one of those key monetary policy
announcements that is followed by a press conference. There’s a
ton of U.K. data on the calendar and the Bank of England will
release the minutes from its last monetary policy meeting. On
Thursday, the European Central Bank will also conduct its
initial Targeted Long Term Refinancing Operations (TLTRO).
Regardless of whether these events exacerbate or reverse
existing trends, we expect the moves to be big because they will
most likely harden or alter existing market sentiment.
Considering that the U.S. dollar dictated most of the flows in
the FX market this month, the Federal Reserve’s meeting will be
one of the most important event risks next week. The Fed is
widely expected to continue tapering asset purchases, sticking
to their plan to end Quantitative Easing in October. However
many questions still need to be answered such as will
reinvestments continue, has the central bank accelerated its
timeline for raising rates and will Yellen downplay the
improvements in the U.S. economy. We know the Fed plans to hold
rates steady for a “considerable time” once QE ends but the
performance of the dollar suggests that investors are hoping for
a more hawkish statement that either involves the central bank
dropping this line from the FOMC statement or Yellen admitting
that rates could rise early next year. The more forward guidance
the Fed provides on rates, the better it will be for the dollar.
Ambiguous and noncommittal comments would be a disappointment
that could erase a large part of the dollar’s gains.
Unfortunately given Yellen’s usual disposition, chances are she
will provide as little guidance as possible and for this reason
we expect the dollar to trade lower on the back of the FOMC
meeting.
In summary, here are the Top 5 events that will make next week a
big one for FX (in order of appearance):
1. Bank of England Monetary Policy Meeting Minutes
2. FOMC Rate Decision and Testimony from Janet Yellen
3. Swiss National Bank Rate Decision
4. ECB TLTRO operation
5. Scotland Referendum
EUR/USD – Poised for a Rebound
Between our expectations for the Fed’s monetary policy
announcement and the initial European Central Bank’s TLTRO, the
euro is poised for a rebound in the coming week. Based on the
currency pair’s recent consolidative price action and the rally
on Friday, it appears that other investors also share our view.
Of course, recovery in the euro is predicated on less
hawkishness by the Fed and benign uptake of the TLTRO. The ECB
made it clear when they cut interest rates earlier this month
that their motivation was to make banks realize that there will
be no further lowering in interest rate and they should not
hesitate to participate in the TLTRO because rates aren’t going
lower. How successful the program is remains to be seen but if
there is a significant uptake at the initial auction, it will be
very positive for the EUR/USD. In contrast, if demand is weak
and the Fed provides more guidance than we anticipate, the
EUR/USD will fall to fresh lows. There may be a number of
Eurozone and U.S. economic reports scheduled for release next
week but these are the only 2 events that matter because they
will set the tone for how the currency pair trades not just in
the coming week but also potentially for the weeks to come.
Meanwhile, the Swiss National Bank’s monetary policy
announcement will receive unusually large attention this quarter
because the central bank could lower interest rates in reaction
to the ECB’s move. We’ll discuss this further in the coming
week.
Brace for Big Moves in Sterling
After dropping to a 10 month low versus the U.S. dollar this
past week, sterling came close to recovering nearly all of its
losses. The erratic price action on a day-to-day basis
represents the uncertainty and anxiety surrounding next week’s
event risks. There is no question that the main focus is the
Scottish referendum but the Bank of England minutes, inflation,
employment and spending reports will also contribute to the
expected volatility in the pair. For the most part, we expect
most of the data and events to be positive for sterling but this
does not rule out the possibility of a surprise upset in the
Scottish referendum with a victory for the Yes camp. The
referendum is scheduled for September 18th with polls open from
7am to 10pm local time (2am to 5pm NY Time). By the early
evening in Scotland we will probably have a good sense of which
way the votes are swinging and sterling will start to react as
soon as there is a sign of a potential majority. In the front of
the week, we expect GBP to remain under pressure but come
Wednesday we should start to see the currency move higher on
profit taking especially if the BoE minutes are less dovish.
Once the election results come in, we’ll start to see a big move
in the British pound.
AUD Drops to 5 Month Lows
All 3 of the commodity currencies were hit hard this past week
but in terms of speed and magnitude, the Australian dollar
experienced the steepest losses. AUD ended the week at a 5
almost 6 month low, which is surprising considering the strength
of job growth and the Reserve Bank of Australia’s neutral
monetary policy stance. However the market’s demand for U.S.
dollars is strong and the fear about a further decline in iron
ore prices weighed heavily on the currency. Whether Aussie
continues to fall next week hinges on the RBA minutes and the
FOMC rate decision. If the tone of the last RBA meeting is
decidedly neutral and the Fed grows less dovish, AUD/USD will
fall easily through 90 cents but if the Fed is elusive, we could
see a much-needed relief rally in the currency. The sell-off in
the Canadian dollar is also misaligned with fundamentals. For
the second day in a row the Canadian dollar fell sharply against
the greenback, driving USD/CAD to its strongest level since
March. While the initial push beyond Thursday’s high was driven
by slower house price growth, this data should not have been
significant enough to trigger such a big move in USD/CAD.
Nonetheless the currency pair is in a new and strong uptrend
whose viability hinges not on Canadian data but Janet Yellen’s
testimony next week. The New Zealand dollar on the other hand
maintained a rather consistent downtrend despite an uptick in
food prices, increase in house prices and rise in the
manufacturing PMI index. This tells us that the moves in the
comm dollars are driven by the market’s appetite for the
greenback.
JPY: Another Day, Another New High for USD/JPY
USD/JPY climbed to a fresh multi-year high every single day this
week and while we are weary of a near term pullback in the
currency following Wednesday’s FOMC announcement, in the long
run we are still looking for USD/JPY to test 110 before the end
of the year. The sharp rise in U.S. rates on Friday confirms
that the primary driver of the uptrend in USD/JPY is the
expectations for higher U.S. rates. If the Fed fans the
speculation, USD/JPY will extend its gains but if they fail to
provide sufficient guidance, a 2 to 3 yen correction in USD/JPY
would not be out of the ordinary. Monetary policy in Japan
hasn’t contributed much to the recent rally. Yes, the Bank of
Japan maintains an ultra easy monetary policy stance and is
engaged in Quantitative Easing, but they have not shown any
desire to increase stimulus. In fact the recent decline in the
Yen reduces the urgency for more action. For this reason, next
week’s Japanese economic reports will be an afterthought in the
context a very busy week in other parts of the world. Instead
how the Yen pairs trade will be determined exclusively by what
happens to the base currency.
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