US Dollar Strength May Be Tempered By Near-Term Resistance

Forex Trading Weekly Forecast

• US Dollar Strength May Be Tempered By Near-Term Resistance
• Euro Forecast Dims on Euro Zone Recession Fears, Dow Tumbles
• Japanese Yen May Rally Through GDP Numbers On Carry Flows
• British Pound Could Forge New Lows As Rate And Growth Outlook Fail
• The Swiss Franc At Major Support Levels, Is A Retrace In Store?
• Canadian Dollar Sinks Further Against US Dollar on S&P Tumbles
• Australian Dollar Looks to G-20 Summit, Risk Trends for Direction Cues
• New Zealand Dollar To Test October Lows As Carry Demand Stalls

US Dollar Strength May Be Tempered By Near-Term Resistance

Fundamental Outlook for US Dollar: Bullish

• Treasury Secretary Paulson announces that Troubled Asset Relief Program (TARP) will not buy troubled assets
• US continuing jobless claims rise to most since December 1982, suggesting unemployment rate will climb even higher
• US retail sales, import prices fall by the most on record during October

For weeks we've been discussing how risk appetite, or the lack of it, has been driving price action throughout the forex markets to the benefit of the lowest yielding major currencies: the US dollar and Japanese yen. The strength of the greenback has been all the more surprising given the dismal status of the US economy, but since the currency has managed to hold on to its status as a "safe haven” asset, fundamentals frankly do not matter at this juncture. Nevertheless, economic indicators are still worth watching since they have been impacting the US stock markets and will likely play into future rate decisions by the Federal Reserve.
Following comments from Fed Chairman Ben Bernanke, who said on Friday that "monetary policy actions have not resolved the ongoing strains in financial markets, including interbank funding markets…Central bankers and other policymakers around the world must continue to work together to address disruptions in credit markets and to promote a vibrant global economy,” Credit Suisse overnight index swaps are fully pricing in a 50bp reduction on December 16. News on November 19 may shake up these forecasts, though, as US CPI and the Federal Open Market Committee (FOMC) meeting minutes from October 29 will both hit the wires. At 8:30 ET, CPI is anticipated to plunge 0.8 percent during the month of October, which would mark the sharpest drop since 1949, while the annual measure is projected to slip to a 5-month low of 4.1 percent. However, the FOMC meeting minutes at 14:00 ET could draw more attention, especially if they highlight the downside risks to growth and declining inflation expectations. Since risk trends have been the primary driver of price action lately, it will likely be best to watch for the stock market's reaction as pessimistic turn in sentiment could lead equities lower, and thus lead the US dollar higher given their negative correlation.
From a technical perspective, the US dollar's trade-weighted index faces heavy resistance at 87.90/88.00, where the 78.6 percent fib of 92.63-70.67 looms. Meanwhile, EUR/USD has had difficultly breaking below 1.2400, suggesting that the US dollar may not be able to make significant headway in the near-term.

Euro Forecast Remains Dim on Euro Zone Recession Concerns

Fundamental Outlook for Euro: Bearish

• US Dollar is Safe Haven of Choice, Rallies against Euro Despite Dismal US Data
• Forex Positioning Proves Prescient in Predicting Euro Recovery, but What's Next?
• View our monthly Euro-US Dollar Exchange Rate Forecast

Euro forecasts against the US Dollar took a turn for the worse on the week, as generally dismal European economic data and further losses in the US Dow Jones Industrials Average led to similar Euro/US Dollar weakness. Official confirmation that the German economy entered a technical recession through the third quarter suggested that the broader Euro Zone finds itself in a similarly weak position - forcing further deterioration in euro fundamental forecasts. Whether or not the Euro may recover against the stubbornly resurgent US Dollar will largely depend on whether global financial market conditions will improve through upcoming trade. The Euro and US Dollar find themselves inextricably linked to broader developments in risky asset classes.
Recent price swings in the Euro/US Dollar exchange rate have been almost purely a function of price action in global equity indices, and we expect that this will continue to be the case in the week ahead. Indeed, forex market reaction to historically market moving economic data has been anything but intuitive; currencies move according to equity market reactions to event risk. It is very difficult to predict how stocks may react to upcoming economic data, and overall bearish momentum suggests we can expect to see the Dow Jones and other major indices drop further through subsequent trade. Further equity market losses could easily lead to further losses in the Euro/US Dollar pair - leaving an overall bearish forecast for the Euro until we see sustained improvement in global risk sentiment.
The Euro may likewise react to any developments out of the much-anticipated G20 meeting over the weekend. Though markets are somewhat unsure of what to expect from the global economic summit, some alarmist forecasters have gone as far to suggest that global leaders could reinstate the Gold standard for currencies for the first time since 1971. Such suggestions seem outlandish to say the least, but we must nonetheless watch for key shifts in global economic policy following the meeting - especially as it relates to exchange rates. We will listen for noteworthy rhetoric from global leaders and take cues from equity market reactions to guide expectations for the Euro/US dollar price action. - DR

Japanese Yen May Rally Through GDP Numbers On Carry Flows

Fundamental Outlook for Japanese Yen: Bullish

• Market Threatens To Revive Carry Unwinding As Recession Fears And Deleveraging Efforts Loom
• Word Of A Chinese Bailout And The US Shifting Focus To The Consumers Can't Quell Fears
• What Should We Expect From The Dollar - Japanese Yen Pair Over The Coming Month?

The vacillation in risk appetite has been constrained for most of November; but the steady rise in volatility and refocus on larger fundamental themes in the currency market promise breakouts and revived trends. Considering its sensitivity to fear and greed in the currency market, the Japanese yen will act as a barometer to market conditions in the week ahead. To start the week off, risk trends will look for any accelerants in the G20 meeting. Over the previous weekend, the group issued a statement that announced they were prepared to act "urgently” to fortify financial markets and global growth. As compelling as this may sound, verbal warnings have little sway over traders who know the market responds to unwavering economic and speculative trends. To turn such a prevalent force - even temporarily - officials will need to offer the market policy steps that show a global effort is genuinely being made to stabilize the worst recession and credit crisis since the Great Depression. Confidence in this event however is low as political barriers are significant while substantial efforts made so far (individual bailout plans, massive liquidity injections and sharp rate cuts) have yielded little so far. Expect promises for fiscal stimulus from all members, collaboration on international regulation and warnings that lending rates will be lowered further.
Should the G20 fall short in their efforts to revive lender and investor confidence, market conditions and the primary fundamental drivers underlying the market will swell. Though carry interest, equity markets and other risk-sensitive assets have stalled since the turn of the month, volatility has moved back towards record highs. Like a breakout in price action, one side of the market must give: congestion or volatility. The better probability is for breakouts to revive the dominate bear trend in yen crosses. The odds are clear when we consider the factors that brought us to this point: forecasts of an economic slump and a surge in risk aversion. Even conservative market regulators forecast a global recession; and data already suggests it will be far worse than a short-lived slump. As for risk trends, returns are naturally depressed when growth stalls and fear will be driven by the knowledge that far too much credit and leverage is still floating around the market.
Also, we should not ignore the top-tier event risk on the economic docket this week - even if it does have little impact on immediate price action. The first reading of 3Q GDP is scheduled for release early Monday morning in Tokyo. While risk aversion naturally diverts capital to the Japanese yen, eventually fear will abate; and when it does, investors will look to reallocate their capital into those economies that have ultimately recovered from the global economic recession first and with the least damage. If economists' expectations prove correct, Japan will be in good form. However, considering the country's dependence on foreign consumers and its long history as a net saver, these is little doubt, Japan will trail the inevitable rebound. The other event to watch will be the BoJ rate decision. There is little chance that the central bank will lower its rates again; but it will be interesting to see any comments made after the event. Unless they come up with a unique policy plan, the market will no doubt label the group effectively impotent in the ongoing crisis. - JK

British Pound Could Forge New Lows As Rate And Growth Outlook Fail

Fundamental Outlook for British Pound: Bearish

• Pound Pushes To A Six Year Low Against Dollar After BoE's King Says He Won't Discount Bringing Rates To Zero
• European Central Banks Face Tumbling Inflation Rates And Recessions By Readying The Markets For Further Rate Cuts
• Read The DailyFX Monthly Forecast For GBPUSD For A Fundamental And Technical Outlook

While most of the currency market was consolidating this past week, the high volatility underlying the market led the fundamentally weak British pound to push new lows. And, considering the outlook for growth and interest rates, the immediate future looks bleak for this once high-flying currency. The first concern for traders as the economic winds pick up next week will be the outlook the interest rates. Up until a few weeks ago, one of the few things the sterling had going for it was the expectations that the global recession would be short-lived and the return of risk appetite to the market would find a relatively high benchmark lending rate in the UK. However, interest rate expectations have quickly turned from boon to burden for this European economy. After the Bank of England surprised the market with a massive 150 basis point rate cut two weeks ago, any hopes that the currency would benefit from a reversal in yield appetite quickly diminished. After BoE Governor Mervyn King acknowledged he would not rule out lowering interest rates to zero to restore order to the economy and markets, speculators recognized the full scope for policy easing going forward.
However, looking to Credit Suisse overnight index swaps, we can see that only 100 basis points of additional easing are priced in over the coming 12 months. This highlights a significant imbalance between what the market is projecting and how aggressive the MPC may actually be should conditions worsen with time. A fundamental divergence of this magnitude opens the pound to significant moves as these split expectations converge into one reality. The minutes scheduled for release on Wednesday will be instrumental in driving forecasts one way or the other. The vote will be of upmost importance. Lowering the benchmark lending rate as aggressively as the BoE did to a 53-year low could not have been made easily and debate over this move's efficacy is expected. Noting the extreme: if all nine MPC members voted for the massive rate cut, it would clear the way for further, aggressive rate cuts going forward.
Aside from the vagaries of rate speculation, the economic calendar will give a more definite read on the factors that policy officials will consider when voting in future meetings. Inflation will take a play a key role in defining the scope for further cuts. Before the BoE was set its recent pace of loosening monetary policy, Governor King ironically quipped that he expected to write a number of letters to Chancellor of the Exchequer Darling explaining why inflation was so high and what would be do to tame it. While statements made by central bankers suggest they have moved on expectations of a collapse in price growth (their primary mandate for policy), they have yet to see confirmation of this yet. Should, CPI (the primary gauge for inflation) drop more sharply than expected in its October reading, it would open the door wide open to further gouges in the benchmark lending rate. The longer-term concern, however, will be in the eventual rebound in economic activity. A drop in the cost of living will help to offset the sharp decline in employment and wages expected for the coming months. And, the rest of the economic calendar will make sure to concentrate fears over growth. Housing, industrial trends, consumer spending and public borrowing readings promise nothing more provide additional confirmation that this evolving recession will be far worse than the slump of 1992. - JK

The Swiss Franc At Major Support Levels, Is A Retrace In Store?

Fundamental Outlook for Swiss Franc: Bearish

• Consumer confidence in Switzerland fell to its lowest level since 2003 at -27 from -17 in July, According to the SECO
• ZEW survey rose to -88.5 from -91.1 as investor confidence rose as central banks stepped in to help the economy.

The Swiss Franc resembled its traditional form to end the week as a bullish spike in equity markets sent the typically safe haven currency lower against the dollar. The move would sent the USD/CHF above the 1.2000 price level for the first time since September, 2007, its high of 1.2002 would have it break the 200-Day SMA. This would be the first time it breached this significant technical level since October 20,2006 and may prove to be a formidable obstacle. Swiss fundamental data typically doesn't impact price action, yet the slight improvement in investor confidence could be a sign of improving global confidence, which could add to Franc weakness, and the historic drop I consume confidence will lower the outlook fro domestic growth.
Swiss retail sales and the trade balance will dot the economic calendar during the week and may provide some event risk as they may give traders a clue to the possible interest rate direction for the SNB. Given that the BoE has begun aggressively cutting interest rates and the ECB is expected to continue easing, we may see the Swiss central bank follow their lead as they did when they surprised markets with their coordinated effort. A decline in consumer consumption and exports would leave the country without any avenues of growth. The export driven nation has seen the impact of the credit crisis weigh on demand for its products which has sent it into a recession along with its European counterparts. Therefore, another rate cut is very likely at their December policy meeting which could extend the Franc's losses against the dollar. If we see a clean break above the technical levels of the 200-Day SMA at 1.1964 and 1.200, that would leave the June 22, 2007 high of 1.2430 as the next level of resistance. -JR

Canadian Dollar Sinks Further Against US Dollar on S&P Tumbles

Fundamental Outlook for Canadian Dollar: Bearish

• Canadian Dollar Loses Luster Despite Jump in Commodities - Why?
• US Dollar/Canadian Dollar Technical Outlook Points Towards 1.3025
• View our monthly US Dollar - Canadian Dollar Exchange Rate Forecast

Subsequent forecasts for the future of the US Dollar/Canadian Dollar exchange rate will largely depend on outlook for commodity prices and global equity indices. Given that oil and other key commodity costs have been trading off of broader financial market risk sentiment, it is perhaps unsurprising to note that the Loonie has remained especially sensitive to equity market declines. As such, we will watch for stock market reactions to key US economic event risk in the week ahead. Wednesday will bring a combination of US housing, inflation, and Federal Reserve Open Market meeting minutes - likely to force noteworthy reactions out of US and Canadian equity indices. Forex traders will likewise watch for noteworthy developments out of the weekend's G20 summit and subsequent reactions out of global risky asset classes.
It remains especially difficult to predict USD/CAD price action through shorter time frames, but overall momentum continues to support US Dollar Strength and Canadian Dollar weakness through longer-term trade. - DR

Australian Dollar Looks to G-20 Summit, Risk Trends for Direction Cues

Fundamental Outlook for Australian Dollar: Bearish

• Business Confidence fell to the lowest in 11 years, says National Australia Bank
• Westpac Consumer Confidence rebounds in November on rate cuts, fiscal boost
• RBA slashes GDP growth forecasts, signals more interest rate cuts

The Australian Dollar will again find itself at the mercy of risk sentiment as a light economic calendar is unlikely to produce a catalyst to derail the priced-in fundamental outlook familiar to forex traders. The Retail Sales reading is expected to see receipts correct a bit to grow 0.4% in the third quarter versus a -0.6% contraction in the three months through June. Still, traders are likely to take the improvement with a grain of salt with the pace of sales growth slower by close to 80% from a year before. Economic slowdown is likely to be equally on display in September's Westpac Leading Index figure. The release matched a 5-year low in August, suggesting the economy was growing at an annualized rate of just 2.5% (as compared to the trend average at 4%). Economists' forecasts suggest the pace of annual growth slowed to a near-standstill reading at 0.4% by the end of the third quarter. Motor Vehicle Sales too is likely to extend loses in October as the shaky economy and limited credit access steers consumers away from big-ticket purchases. On balance, these releases collectively point to substantially more monetary easing ahead for the larger antipodean country (as is sure to be telegraphed in the release of the minutes from the last RBA policy meeting). Looking at overnight index swaps, the markets are pricing in a 0.75 to 1.0 percent rate cut at the RBA's next meeting in December with a total of 150-175 basis points in easing over the next 12 months.
All told, the data docket is set up to add to but not meaningfully alter the established outlook for the Australian economy. The upcoming G-20 summit holds far more market-moving potential. The heads of state from the world's top 20 economies are set to meet in Washington, DC over the weekend to hash out a joint plan for dealing with what the International Monetary Fund is forecasting to be a global recession of a magnitude unseen since the Second World War. A preliminary meeting of the G-20 finance ministers in San Paolo, Brazil last week issued a statement urging countries to use "all their policy flexibility, [including] monetary and fiscal policy.” The action plan (or lack thereof) that will emerge at the beginning of next week will be instrumental in shaping risk appetite going forward: if the markets find the outcome favorable, the Australian Dollar will have room to rise as traders re-establish exposure to risky assets; otherwise, the Aussie will again fall victim to the US Dollar and the Japanese Yen. The technical outlook cautiously favors the former scenario, with AUDUSD showing an inverted Head and Shoulders chart formation and positive divergence with the RSI oscillator.

New Zealand Dollar To Test October Lows As Carry Demand Stalls

Fundamental Outlook For New Zealand Dollar: Bearish

• Retail spending in New Zealand Contracts for Third Consecutive Quarter
• Dour Fundamentals Forecasts Ongoing Weakness in Carry Trades

The New Zealand dollar fell against the greenback for three consecutive sessions this week, and may fall back towards the October lows next week as investors continue to curb their appetite for risk. Tightening demands for carry trades paired with lower commodity prices favors a bearish outlook for the New Zealand dollar, and the kiwi is likely to face increased selling pressures over the coming week as fears of a global recession intensify. Falling commodity prices dragged the Jefferies/Reuters CRB index to its lowest level since 2003, and slowing demands from the global economy suggests that prices will continue to fall lower, which would only stoke increased selling pressures for the commodity bloc over the near-term.
The event risks scheduled for the following week will also play an key role in driving price action for the high-yielding currency as deteriorating fundamentals continues to spur bets that the Reserve Bank of New Zealand will aggressively cut borrowing costs well into the next year in order to avoid a deep and severe recession. RBNZ Governor Alan Bollard reiterated this week that New Zealand is in a 'period of slow growth,' and went on to say that household consumption is likely to deteriorate over the coming months as growth prospects deteriorate. Dr. Bollard noted that the government may establish a fiscal stimulus package in order to 'stabilize the economy throughout the downturn,' which suggests that policymakers are looking to increase their efforts as the downside risks to growth intensify. Moreover, Credit Suisse overnight index swaps continues to reflect a bearish outlook for the New Zealand dollar as market participants raised bets that the RBNZ will lower the benchmark interest rate by at least 175bp over the next 12 months amid expectations for 150bp worth of projected cuts last week.
Meanwhile, the G20 Summit in Washington D.C. scheduled for the weakened could stoke increased volatility in the currency market next week as global leaders meet to respond to the financial crisis, and may help to ease fears of a global meltdown. However, the absence of President-elect Barack Obama suggests that the group is less likely to agree on any long-term commitments at the meeting, and may not reach a sound solution until Senator Obama comes into office next year. As a result, the event may fail to spark volatility in the currency market as the fundamental outlook for the global economy turns increasingly bleak. - DS

DailyFX
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