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September FOMC Outlook
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Non-Farm Payrolls April 2018 Outlook
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AUD/NZD Outlook
Chart Of The DayOur AUD/NZD trade has moved against us but fundamentally the trade is sound and technically it is testing key support levels. This past week we learned that the Reserve Banks of New Zealand and Australia are thinking about lowering interest rates with a potential cut coming as quickly as August. The RBNZ was the most explicit. In their “special” economic assessment, they said it is “likely that further policy easing will be required” because the strong currency is driving inflation lower and holding down tradable goods. In response to these comments, economists have rushed to lower their rate forecasts with some now calling for easing in August AND November. In contrast, the RBA simply said they may “make any adjustment to the stance of policy that may be appropriate depending on data.” The language used by the RBNZ was far stronger than the RBA.
Technically, AUD/NZD has pulled back sharply and the decline has taken to a major support level above 1.06 (our stop is below this level). Between 1.0600 and 1.0650, we have the first standard deviation Bollinger Band, former breakout level, the 23.6% Fib retracement of the 2015 rally and the 61.8% Fib retracement of the 2015 to 2016 decline. If 1.0600 (or more specifically 1.0580) is broken the next stop for AUD/NZD will be 1.0500 but if it holds this level, AUD/NZD should trade back above 1.0700.
GBP/USD Outlook
Chart Of The DayGBP/USD Outlook
After trading as high as 1.3338, GBP/USD dropped more than 200 pips as sellers returned. The reversal in GBP on Tuesday was driven by misplaced expectations – economists are looking for a 25bp rate cut, investors felt they were wrong and bid up sterling on the hope that GBP will spike if the BoE left rates unchanged. Today, they resumed selling because they realized that regardless of whether its tomorrow or August, rates are coming down and even if the BoE passes on a move Thursday, they’ll prepare everyone for easing later this year. Unless Prime Minister Theresa May decides not to invoke Article 50, the outlook for the U.K. economy and sterling is grim. As for the Bank of England, they have plenty to worry about. Economic data is expected to worsen in the coming months with business and consumer investment expected to freeze up. The Bank of England is trying to preempt the slowdown and avoid recession by being proactive but they still need more information before pulling the trigger. So far stocks have held up well and the decline in sterling along with the drop in Gilt yields is positive for the economy, which means they can wait until their economic forecasts are updated. Major policy changes tend to coincide with the release of the BoE Quarterly Inflation Report (the report is generally used to telegraph the changes) and the next report will be released in less than a month. If sterling rises because the Bank of England left interest rates unchanged and some part of the market was disappointed, the rally should be sold. If it falls because of Carney’s dovishness, traders may find it fruitful to join the move quickly.
Technically, if GBPUSD drops below the June 27th low of 1.3120, it is likely to be headed to 1.3000. If it rises back above 1.3200 it is headed to 1.33 and possibly even 1.3350.
AUD/USD Outlook
Chart Of The DayAUD/USD Outlook
The Australian dollar has done a decent job of holding above 0.7180 but there’s a lot of data scheduled for release next week and if the Chinese economy slows further or Australian GDP surprises to the downside, support could break. The rallies have been shallow with the divergence between Australian and U.S. monetary policy keeping AUD/USD under pressure. The market is still looking for another rate cut from the RBA this year and the Fed is expected to raise interest rates as early as the summer. However given how well AUD has held 72 cents, if Chinese data improves and growth in Australia accelerates, AUD/USD could find its way back to 73 cents.
Technically AUD/USD has held below its 200-day SMA for the past week – that’s the key level to watch. If the currency breaks above the SMA at 0.7252 it is likely headed to the 100-day SMA at 0.7340. If it breaks below the May low of 0.7145, its headed for 71 cents and possibly even 70 cents.
USD/JPY Outlook and Levels
Chart Of The DayUSD/JPY Outlook and Levels
USD/JPY is under pressure because of the risk aversion created by the Greek debt crisis. We are long the currency pair and it is trading below our entry levels. While there’s no doubt that Greece’s problems will worsen before they improve and this could trigger more liquidation out of Yen pairs, we believe that the decline in USD/JPY will be limited. Federal Reserve officials like Dudley continue to favor raising rates in September and even though the Greek debt crisis could delay a rate hike, unless U.S. stocks fall by 10% or more, it is unlikely to do so. The Fed could push out tightening to December but we are still looking for rates to rise this year and as long as that remains the case, we are bullish dollars. In fact, we believe that the crisis in Greece, China and Puerto Rico only makes U.S. assets more attractive.
USD/JPY has fallen 385 pips off its high and in the past 2 years we have not seen a retracement exceed 500 pips. While we have no desire to see USD/JPY decline more than it has, if it falls another 115 pips it would trigger our second entry at 121.27, giving us a better average price. 122 is also a technically significant support level because it was former resistance in March. If this level breaks, the psychologically significant 120 level should hold. If USD/JPY recaptures 123, the next stop should be 124.35.
