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    The Week Ahead: Week of March 23, 2015


    Technical Developments to Watch:

    • Will the EUR/USD downtrend resume after last week’s short squeeze?
    • GBP/USD bias remains lower beneath 1.50 psychological resistance
    • USD/JPY still coiling below its 7.5-year high at 121.80
    • EUR/GBP in play, bounce toward converging resistance at .7400 possible


    * Bias determined by the relationship between price and various EMAs. The following hierarchy determines bias (numbers represent how many EMAs the price closed the week above): 0 – Strongly Bearish, 1 – Slightly Bearish, 2 – Neutral, 3 – Slightly Bullish, 4 – Strongly Bullish.

    ** All data and comments in this report as of Friday’s European session close ** 



    • EURUSD exploded higher after Wednesday’s Fed meeting, but rolled over Thursday
    • Slow Stochastics have now bounced out of oversold territory
    • Bias remains lower under after last week’s shakeout

    Catch your breath yet? EURUSD’s price action last week resembled a rollercoaster ride, except instead of a gradual rise to a peak, EURUSD skyrocketed higher in the wake of the Fed’s less-hawkish-than-expected statement and press conference on Wednesday. At one point, the world’s most widely traded currency pair rose a staggering 200 pips in less than three minutes! However, dollar bulls regained their footing on Thursday, suggesting that the short squeeze may be short-lived. Now that the Slow Stochastics have bounced from oversold territory, bears could look to press EURUSD back down toward previous support at 1.0460 or the 1.0400 handle this week.





    • GBPUSD also rallied sharply on Wednesday before reversing back lower on Thursday
    • MACD continues to show strongly bearish momentum
    • Next support is the 161.8% Fibonacci extension at 1.4580

    Much like its mainland rival, the British pound rallied sharply against the US dollar Wednesday, but the gains were completely unwound by the end of Thursday’s trade. With previous long-term support in the 1.48-1.50 zone now holding as resistance, more weakness is favored in the coming days; both the downward-trending MACD and slight bounce in Slow Stochastics support the bearish case as well. To the downside, sellers may look to target the 161.8% Fibonacci extension of the Q1 bounce at 1.4580 next.





    • USDJPY dipped briefly to its bullish trend line under 120.00 before bouncing back
    • MACD and Slow Stochastics show balanced, two-way trade
    • Resistance at the 7.5-year high (121.80) still looms over rates

    After a mind-numbingly slow start to the week, USDJPY dipped to bullish trend line support Wednesday before bouncing back above 120.00. Meanwhile, both the MACD and Slow Stochastics are showing balanced, two-way trade. In our view, the technical outlook for USD/JPY is the same as it’s been for weeks: the near-term outlook is neutral below the 7.5-year high at 121.80, though traders may want to fade any pullbacks to bullish trend line support near 1.20 this week.





    • EUR/GBP rallied consistently throughout last week
    • MACD turning conclusively higher for the first time this year
    • Break of bearish trend line suggests larger rally possible this week

    EURGBP is our currency pair in play this week due to a number of high-impact economic reports out of both the Eurozone and UK (see “Data Highlights” below for more). Last week, EURGBP rallied consistently, breaking above its 3-month bearish trend line in the mid-.7100s. Looking to the secondary indicators, the MACD has turned higher for the first time this year, suggesting a shift toward bullish momentum, while the Slow Stochastics indicator is at its highest level in four months. Therefore, we could see a more substantial bounce in EURGBP this week, with bulls potentially eyeing the 38.2% Fibonacci retracement and previous-support-turned-resistance at .7400.



    Last week we saw one of the worst weeks for the USD in months. A perfect storm hit the buck: Janet Yellen and co. at the Federal Reserve scaled back their expectations for rate hikes this year, the market had become increasingly long dollars and, as we have pointed out recently, the economic data in the US has started to stall.

    The dollar may have made a comeback a mere 24 hours after the FOMC meeting. It fell to a low of just over 1.09 versus the EUR last Wednesday before clawing back some losses to close at 1.0660 on Thursday. However, we think that the dollar could become increasingly at risk from sell-offs in the coming weeks, and bulls need to get used to the dollar no longer moving higher in a more-or-less straight-line fashion.

    We have three reasons for this view:

    1) Positioning: The market has moved to an extremely long dollar position. When this happens it can be negative for diehard dollar bulls for two reasons: firstly, people start to take profit before their luck runs out, and secondly, contrarians may move towards the exit, which could be a precursor of the rush.

    2) Economic data: In the next few weeks we will get a clearer picture of Q1 growth and the impact of some very bad weather. In the first quarter of 2014 the US economy contracted due to bad winter weather, which caused the dollar to falter and the Fed to maintain its accommodative stance for most of last year. This time, we may have seen labor market data hold up, however other indicators including construction, retail sales, industrial production and consumer confidence have all deteriorated in the first couple of months of this year. Q1 GDP forecasts have been cut to 2% and below in some cases, but there is a chance that growth may have stalled in the first quarter, which could weigh on the economic outlook for the rest of the year, further delay Fed rate hikes and hurt the dollar.

    3) The debt ceiling: Last week the US hit its debt ceiling. Although the Treasury has enough money to cover itself until October, a weakening economic outlook could bring the US’s debt situation front and center, which could dent sentiment towards the dollar.

    As you can see, there are some solid fundamental reasons to be cautious when it comes to the dollar rally as we move towards the end of the first quarter. However, there is still one glaringly obvious factor in the buck’s favor: yield. Even if the Fed is stepping back from hiking rates, it is unlikely to add more QE to the economy anytime soon, while the ECB has just embarked on its first ever QE program. This still makes the dollar attractive from a yield perspective.

    As you can see in the chart below, the dollar index continues to benefit from a strong yield differential with Germany. In this yield-starved environment, this differential is one chief benefits of holding the dollar. However, this could also be the buck’s biggest weakness. Such a strong differential may not last forever, so when this yield spread starts to head south, that could be the time when the dollar bulls start to rush to the exits.



    The pound was a weak performer in the G10 last week, and even after the Fed was less hawkish than expected, GBPUSD could not maintain gains above 1.50; it appears that cable may be starting to get comfortable below this important psychological level.

    While the key driver of pound weakness so far has been dollar strength, some domestic factors could start to take hold: most importantly, the Bank of England and the pace of rate hikes. After the February Quarterly Inflation report, the market aggressively re-priced the prospect of a rate hike sooner than had previously been expected, with some looking for a hike as early as Q3 this year. However, the market may have been too hasty. Last week’s minutes of the BOE’s March meeting showed that the Bank is relatively happy with the economic outlook, but maybe not happy enough to raise interest rates due to extremely low inflation pressure, weak business investment and a potential future slowing of labor market growth.

    Although job growth in the UK has been stellar in recent months, the wage data for the start of the year was extremely weak. Wages are a key indicator looked at by the BOE, and at 1.8% growth per annum they are unlikely to pressure the BOE into raising rates any time soon.

    The market may have got overexcited about a potential rate rise from the BOE hot on the heels of the Federal Reserve. While we don’t expect the UK’s economic outlook to deteriorate so far that the BOE has to consider pumping more stimulus into the economy, the market may have to recalibrate its UK rate expectations once more, and this time it could be GBP negative. Combined with a potential contentious election coming up in less than two months’ time, the pound may continue to struggle as we start another week.

    This week saw the FTSE make back all of the losses suffered in the prior week before edging to a fresh record high on Friday. Most of its gains came on Wednesday, a day when we heard some surprisingly dovish remarks from the Federal Reserve and as UK Chancellor, George Osborne, announced new measures to boost investment in the North Sea oil sector. As oil prices also bounced back during this week, energy stocks found strong demand which helped to fuel a rally on the FTSE.

    Overall, the stock market sentiment remains bullish thanks mainly to the recently announced bond-buying stimulus program from the ECB and the extremely accommodative monetary policies of most other major central banks. But it is no secret that the FTSE has underperformed its European peers so far this year, not least the flying German DAX index which is hovering around the 12,000 mark. As well as the ECB giving the European markets a shot in the arm, the commodity-heavy FTSE index has been held back by the slump in commodity prices which has weighed heavily on the share prices of energy and mining companies. The relatively small number of technology stocks – a sector which has given the US markets a major boost recently – has also held back the UK index.

    Nevertheless, we think that the record-low rates combined with a much weaker oil price will spur economic growth in the Eurozone – the UK’s largest trading partner – and help push the FTSE to much higher levels in the coming months. We also think that oil prices may bottom out around the middle of 2015 as US shale producers are forced to cut back production due to oil prices remaining weak for a prolonged period of time. This could be good news for the commodity-heavy FTSE 100. But the ongoing uncertainty surrounding the UK election is likely to hold some investors back for the time being. Once the elections are out of the way, and depending on its outcome, investors may decide it is time to pile back into the markets. That said, the FTSE is comprised of large multinational corporations and as such the outcome of the election may not have a big or lasting impact on the FTSE, though certain stocks or sectors could be affected nonetheless.

    The FTSE’s technical outlook appears more constructive after the buyers recently managed to hold their ground above the 200-day moving average and the bullish trend line around 6690 (point E on the chart). The index also held above the prior low of 6715 on a closing basis. Consequently, it went on to break through the 6860-6900 resistance area once again before rallying towards 7000. At the time of this writing on Friday, the FTSE was just a few points off this psychological barrier and was threatening to break higher. Meanwhile the 50 day moving average has recently risen above the 200, thereby creating a so-called “Golden Crossover.” But things could change quickly and another break below the aforementioned range could lead to the breakdown of the bullish trend line and cause a more profound correction. However, as things stand, the chances are the FTSE may continue pushing further higher next week, for the reasons stated above. From a purely technical point of view, the fact that the index has spent nearly two years trying to break through the 6900 resistance level means there are probably plenty of fresh would-be buyers who may decide now is the time to come into the market. As such, the FTSE could be gearing up for a major breakout soon. As the FTSE is trading in unchartered territories there are no prior price reference points for traders to keep an eye on. This is where Fibonacci extension levels come handy. On the chart we have plotted the Fibonacci extension levels of the last three notable price swings, from point X to A, B to C, and D to E. These extension levels could potentially turn into resistance as some speculators would use them as their long profit targets or short entry points.


    Source: Please note this product is not available to US clients

    The price of crude oil surged higher in the second half of the week, having initially dropped to a fresh six-year low on the back of another big jump in crude oil stocks. Undoubtedly the biggest catalyst behind the oil rally was the dollar. The US currency plummeted after the Federal Reserve produced a surprisingly dovish statement on Wednesday in which the central bank implicitly said that it remains patient when it comes to future rate rises even though it dropped the word “patient” itself. As the dollar plunged, every buck-denominated asset – and U.S. equities – rallied. WTI jumped back above the January low of $43.55 that was only taken out earlier in the week, which must have triggered a cluster of buy stop orders above this level. This undoubtedly exacerbated the short-squeeze rally. As the week comes to a close the US oil contract is finding itself hovering around the $47 area after the prior support at $47.35 turned into resistance. Short-term bearish speculators may be concerned about WTI’s potential false breakdown at $43.35, although there is an argument that the corresponding rally from there could prove to be a bull trap. As such it is vital to keep an eye on the key technical levels going forward. If US oil goes on to break through the abovementioned $47.35 resistance level then it will pave the way for a potential rally towards the 61.8% Fibonacci retracement level at $49.55. Unless it goes on to break through the prior high around $54.20, we will remain skeptical about this latest bounce back. Meanwhile the previous resistance levels at $46.75, $44.80 and $43.55 may now turn into support. However, if they don’t, then this should be viewed as a bearish sign.

    In fact, this counter-trend move may have provided the bears another opportunity to expand their bets, for the fundamental outlook on oil remains anything but bullish. The latest build in US stockpiles of 9.6 million barrels, for example, has pushed inventories to another record high. Not only was this once again significantly more than expected (4.1 million) but it was also the tenth consecutive weekly increase. What’s more, Cushing stocks surged to another record high of 54.4 million barrels, this time with an increase of 2.9 million barrels. Evidently, US oil producers are still undeterred by the significantly weaker prices as they continue to fend off competition for market share from the OPEC. This therefore argues against a more profound price recovery in the short term. But by around the middle of the year, the growth in US crude production may dwindle a little which could put an end to the rout once and for all.


    Source: Please note this product is not available to US clients

    Monday, March 16, 2015

    No notable economic data releases.

    Tuesday, March 17, 2015

    1:45 GMT             HSBC Chinese Flash Manufacturing PMI (March)

    In a bit of good news out of China, last month’s HSBC Manufacturing PMI edged back above the 50 level which demarcates growth from contraction. The previous two months were in contraction territory which was adding to the doom and gloom seeking for the Asian Giant. Expectations are for this figure to maintain growth, but not too aggressively; consensus is merely at 50.4. If it falls back below the 50 line watch for weakness in the periphery currencies like AUD and NZD as the week starts.

    4:50 GMT             Reserve Bank of Australia’s Assistant Governor Malcolm Edey Speech

    The usual RBA member to move his currency is Governor Glenn Stevens, who gave a speech last week. Stevens didn’t really say too much about the value of the AUD and mainly commented on slower Chinese growth, the broad effect of Federal Reserve tightening, and his confidence in the strength of the Australian economy. That leaves potential talk of the currency to Edey who may try to talk it down, particularly after witnessing the strength in it after the Fed’s meeting this past week.

    9:00 GMT             Markit Eurozone Flash Manufacturing, Services, and Composite PMIs (March)

    While it may appear that Europe is having a slow-motion car wreck with all the Grexit talk, Quantitative Easing, and abnormally high unemployment, many of the other economic metrics really aren’t all that bad. PMIs in particular have been steadily rising with Manufacturing moving higher off of the 50 level and Services approaching the mid-50s. If that momentum can be sustained perhaps a pause in EUR selling could be seen, and we will have to wait a bit longer for the much anticipated run to parity in the EUR/USD.

    9:30 GMT             UK Consumer Price Index (February)

    The GBP has been punished severely of late thanks to some correlation with the EUR and perhaps some outsized expectations from the consensus, but lack of inflation has been a contributing factor as well. Since mid-2014, CPI has been on a steady decline from around 2% and fell all the way to 0.3% last month. This month isn’t expected to help matters with a 0.1% consensus print, but we may be on the threshold of flipping the switch of expectations. Since UK data hasn’t been living up to the hype lately, consensus tends to under shoot as they expect less, which can lead to surprise beats. Considering inflation has been better in a variety of other regions (including Canada this past week), perhaps that momentum could carry over to the British Isles.

    12:30 GMT          US Consumer Price Index (February)

    As mentioned in the previous paragraph, Canadian CPI was surprisingly strong this past week and there is a potential for that same effect to carry over to the US version of the metric. It has been pretty brutal in the inflation department for the US of late with last month’s -0.1% being the first time the yearly figure has fallen in to negative territory since October 2009. Back then, the next month shot back up to nearly 2%, but that isn’t expected to happen this time around. If it can get back to positive, the Fed may be more encouraged and could help set the stage for a data-driven increase in rates at the June meeting.

    21:45 GMT          New Zealand Trade Balance (February)

    After spending the previous six releases in deficit, NZ trade turned back to surplus last month. Admittedly, it wasn’t that extreme with only a 56M read, but this time around it is expected to be 355M. If that is achieved, it would be the best result since early last year and would help explain the recent increases in milk prices as demand for the important NZ product has increased.

    Wednesday, March 18, 2015

    9:00 GMT             German IFO – Expectations, Business Climate, and Currency Assessment (March)

    The weakening EUR has made it a bit easier for German industry to make a profit and that seems to be leaking over to the confidence that they have for the future. As much as policymakers fought the introduction of QE, it appears to be benefitting the nation greatly. That being the case, confidence is expected to continue to rise which really wouldn’t be that surprising of an outcome. If it were to miss on the grounds of Grexit concern, there may be another QE assisted move lower for the EUR in store.

    12:30 GMT          US Durable Goods Orders (February)

    This is one of our favorite secondary indicators to follow simply based on the inability to predict it. Typically, an event of this magnitude would barely cause a ripple in the markets, but often times, the breadth of which it either misses or beats consensus makes it stick out like a sore thumb and demands to be noticed. While this did return back to positive last month for the first time in five months with a 0.3% increase, it failed to live up to expectations for the fifth consecutive month. Since it has been so depressed of late, there is the chance of a snap back to good as pent up orders get processed, so watch for an abnormally large figure with this release.

    Thursday, March 19, 2015

    9:30 GMT             UK Retail Sales (February)

    There is a strange coincidence happening with this release this month that needs to be pointed out, even if it means absolutely nothing in the grand scheme of things. Back in October 2014, this release was expected to come out at -0.1%, but it disappointed by printing at -0.3% and the previous release was 0.4%. Last month, this release was expected to come out at -0.1%, but it disappointed by printing at -0.3% and the previous release was 0.4%. Notice that those two lines are exactly the same. Eerie, right? Well, the next month after the October 2014 miss, it was expected to come out at 0.4%; care to take a guess where forecasts are for this release? If you guessed 0.4%, then you are right on target. If this weird chimera-ism continues, watch for a beat of 0.8% on this release because, well, that happened in November 2014.

    13:30 GMT          Bank of Canada’s Steven Poloz Speech

    The last time we heard a speech from Poloz that wasn’t after a BoC rate decision, he was explaining how the rate cut they had made needed time to have an impact on the market. Essentially, he was saying that the BoC was willing to wait and see what was going to happen before his institution made any more changes to monetary policy, and he followed that up with a decision to maintain in the meeting. There may not be too much to read in to with this speech since there presumably hasn’t been enough time to change his mind about things quite yet, but watch for him to be a bit more hawkish than many investors expect which would help USD/CAD stay in its 1.24-1.28 range.

    23:30 GMT          Japanese Household Spending (February)

    This release has been pretty dismal over the past year as it has strung together ten straight declining months in a row. Ever since the tax increase of last year went in to effect, the Japanese public has been spending less and less, and it isn’t expected to stop this time around. Consensus is calling for a 3.1% decline which would be pretty much in line with what it has been over those last 10 depressing releases. If it continues the streak, the Bank of Japan’s outlook for the future might get a little more dim which would open the possibility of more stimulus and a return to broad JPY devaluation.

    Friday, March 20, 2015

    12:30 GMT          US Final Gross Domestic Product (Q4)

    This will be the final say on how growth for Q4 came out despite there being two other indications of how it fared, and it is expected to be slightly better than the second release. Typically, the final GDP figure doesn’t garner too much fanfare, but since the Q3 figure was revised so strongly from the 1st to the 3rd releases, all eyes will be trained on this release to see if something similar will happen. More than likely, it will be much ado about nothing as not much revision is needed, but a negative revision could push investors in to thinking the Fed will wait longer than anticipated to finally raise interest rates.


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