Looking for More Big Moves in November: Forex: Looking for More Big Moves in November Dollar Extends Gains on Fed Comments and Good Data GBPUSD Drops to 2 Week Lows AUD: Shrugged Off Stronger Australian and Chinese PMIs CAD: Steep Slide in Oil Prices NZD: Watch for Employment Reports Next Week JPY: Quiet Week for Japan Forex: Looking for More Big Moves in November If you thought this week was a busy one for the foreign exchange market, be prepared because next week should be even more exciting as volatility picks up in the month of November. This week the EUR/USD dropped more than 2%, falling from a high of 1.3817 to a low of 1.3480. This was the largest weekly loss for the currency pair since June 2012 and with EUR/USD now hovering near 1 month lows the burning question on everyone’s minds is if the losses will continue. The sell-off in the EUR/USD this week was triggered by less dovish comments from the Federal Reserve and the hint of the possibility of additional stimulus from the European Central Bank. Next week investors will have the opportunity to hear from ECB President himself and we are certain that reporters will ask whether the central bank is seriously considering another rate cut or Long Term Refinancing Operation. If Mario Draghi suggests that lower rates are possible, the EUR/USD could drop through 1.34 and head towards 1.32 next week. However if the central bank President downplays ECB member Nowotny’s comments or suggests that the drop in inflation will be temporary, the EUR/USD could recover quickly. Given the previous tone of Draghi’s comments, we believe he will err on the side of caution and remind investors that all options remain open. As for the U.S. dollar, we have already seen a significant amount of position adjustments post FOMC and while next week’s non-farm payrolls report is important, we don’t think that it will alter the market’s expectations significantly. Everyone knows that the U.S.’ October economic reports will be distorted by the government shutdown and non-farm payrolls will be weak. Economists are currently looking for job growth to slow from 148k to 125k and even if we get a below 100k print, investors will be surprised but could be quick to discount the report and talk about potential revisions. If the data is strong, there will be still be skepticism. So we believe that a continuation or reversal in the EUR/USD hinges more on the ECB than NFPs. However EUR/USD won’t be the only currency pair on the move next week. With monetary policy decisions from the Bank of England and the Reserve Bank of Australia, U.S. Q3 GDP, employment reports from Australia, Canada and New Zealand along with Chinese non-manufacturing PMI and trade numbers on the calendar, all of the other major currencies should see additional volatility. We’ve got our eye on USD/JPY, which is trading at the top of its 1-month range but unlike the other currency pairs, we expect the moves in USD/JPY to be limited because of the reliability of October U.S. data. Nonetheless the focus will be on fundamentals with relative growth and monetary policy directions driving currency flows, which could mean mixed performance for the greenback. Dollar Extends Gains on Fed Comments and Good Data Investors continued to buy dollars today against all of the major currencies. The recent demand for dollars has been driven by adjustments in expectations for Fed tapering. This morning we heard from 2 Federal Reserve officials who alluded to their desire to taper sooner rather than later. Manufacturing in the U.S. also accelerated in the month of October, creating additional demand for the greenback. The ISM manufacturing index rose to 56.4 from 56.2 this month. The increase was small but economists had been looking for a decline and the fact that it rose at all caught everyone by surprise. The acceleration in manufacturing activity suggests that the U.S. recovery is not as weak as the market had feared, especially since the index rose to its strongest level since April 2011 and this supports the case for earlier tapering by the central bank. Fed President Bullard who is a voting member of the FOMC this year said improvements in the labor market could back the case for QE tapering. While he reminded everyone that the decision to taper is data dependent, he also said the labor market has “clearly improved since September 2012″ and “the odds of QE taper is expected to rise amid labor market gains.” The key question for the central bank is whether these gains are sustainable and between now and the December FOMC meeting, two nonfarm payroll reports will be released. Bullard is clearly worried about the risk of asset bubbles and inflation which suggests that he could be onboard with tapering this year, especially as he believes that a “small cut in QE would still leave monetary policy very stimulative.” Fed President Plosser may not be a voting member of the FOMC in 2013 but he votes starting January and while he thinks there is not much the central bank can do right now, he downplayed the impact of the shutdown on the economy and expressed concerns about inflation down the road. Both policymakers believe that growth will accelerate next year and their optimistic view suggests they favor earlier tapering. This confirms that the central bank on balance is not as dovish as the market had anticipated. Next week, we will hear from even more Federal Reserve Presidents, see the latest GDP, ISM non-manufacturing and employment reports. With all of this U.S. data and other important reports expected from around the world, we may continue to see big moves in currencies. GBPUSD Drops to 2 Week Lows The British pound dropped to a one week low against the U.S. dollar on the back of disappointing manufacturing data. For the second month in a row, U.K. manufacturing activity expanded at a slower pace but what made the report even worse was the fact that the PMI index for the month of September was also revised lower. In October, the PMI index dropped to 56.0 from a revised a 56.3. Sterling performed very well this summer on the belief that the U.K. economy was doing well enough for the Bank of England to start raising interest rates in 2015 instead of 2016. Throughout this period, the central bank warned that the market’s expectations were overly optimistic and misplaced but traders ignored their comments as the positive economic surprises continued to pour in. However with the recent turn in economic data, investors are starting to believe that the momentum in the summer is waning and have adjusted their positions in sterling accordingly. Next week, the Bank of England has a monetary policy announcement, which we believe will be a nonevent for the GBP since no changes are expected. Instead sterling traders will be focused on the PMI Services and Construction sector reports along with industrial production and trade numbers which will tell us whether the weakness seen last month continued this month. We fear that it has which could mean a steeper slide in the GBP/USD below 1.58. AUD: Shrugged Off Stronger Australian and Chinese PMIs The Australian, New Zealand and Canadian dollars traded lower against the greenback despite stronger than expected PMI reports from Asia. In the month of October, manufacturing activity accelerated in Australia and its largest trading partner China, spurring hope for a stronger recovery in the region. Last month HSBC reported an uptick in Chinese manufacturing activity that was confirmed overnight by the government’s official release. The Reserve Bank will be very happy to see improvements in the domestic and global economy especially since the country’s manufacturing sector expanded at its fastest pace in more than 3 years. On top of that producer prices rose by a whopping 1.3% in the third quarter, up from 0.1% in Q2. We believe that the combination of stronger inflation pressures and accelerating manufacturing activity will make the Reserve Bank of Australia less dovish next week and if we are right, this could help the Aussie outperform other major currencies. Aside from the RBA rate decision, the country’s retail sales, PMI services index and employment numbers are also due for release, making for a busy week in the AUD. New Zealand and Canada will also be releasing their own employment reports that could trigger increased volatility for the NZD and CAD. USD/CAD rejected the 1.05 level this past week and but if Canadian data continues to surprise to the downside, we could see this level retested. JPY: Quiet Week for Japan With no major Japanese economic reports released overnight, the Yen traded lower against the U.S., Canadian, Australian and New Zealand dollars and higher against European currencies. This divergence in price action indicates that risk appetite is not behind the moves in the Yen. Instead, Japan’s currency is trading on the performance of other currencies, which is varied based upon the pair. Compared to other major economies, Japan’s economic schedule is extremely light in the coming week. Bank of Japan Governor Kuroda will be speaking on the economy but after hearing from him this week, we already know that the central bank is optimistic about growth and less worried about the negative impact of next year’s sales tax rise. The BoJ is comfortable with the current level of monetary policy and nothing will change their view in the coming week.
Posted on: Sun, 03 Nov 2013 06:48:44 +0000