Monday, 28 April 2014

The Week in Forex, Review and Preview

Ralph Shell, Excel Analyst

While meaningful US economic data was fairly sparse during the past week, this is not the case going forward.  Combine the flurry of reports this coming week, and the geopolitical risks resulting from the Ukrainian crisis - the last week of April promises to be eventful.

The standstill in the Ukraine continues as the Russian Army troops remain assembled at the Ukrainian border, taunting the West with their presence, and the secrecy of their mission.

Excel Markets May 2014 Forex Demo Trading ContestPress reports Friday indicated the private dialogue between the US and Russian leaders has stopped, further unnerving the markets.  President Obama has threatened Putin, not with military might, but reams of documents and regulations - an Obama speciality, designed to impede or obstruct financial transactions. 

The US actions were also given a boost when S & P lowered the rating on Russian debt to BBB, or near junk.  Russia claims this action is merely political, but it has been reported the outflow of capital flight from Russia has been $63.7B this year.  The ruble has been in free-fall, down 8% for the year despite costly intervention by Russia's central bank as it tries to limit the loss.

On Friday, in response to the financial mess, the Russian central bank responded to the massive flight of capital from Russia to safer havens and the consequent run on the ruble.  The Russian central bank again raised the bank rate, this time to 7.5%, in an attempt to slow the run on the ruble.

None of this bodes well for the future of the Russian economy, but does Putin really care?  It is hard to find a script for a quick, happy ending to this conflict.

Forthcoming US Events

Monday. The first high-impact report will be on Monday when US Pending home sales is announced.  Last month, the number was -0.8 but this month it is forecast to go up to a positive 0.7%.  Personally, I think the 0.7% increase may be on the high side.

Tuesday ... will be the first day of the Fed's FOMC Meeting.  Results from the meeting and a press conference with the new Fed leader will follow on Wednesday.  Rates are expected to remain constant and the reduction of the Fed's monthly bond purchases is expected to continue at the rate of $10B per month.

Also on Tuesday we get the monthly Consumer Confidence Report.  The guess for this report is 83.15, up from 82.3 last month.  Should the 83.15 number be achieved, it would be the highest confidence report since January 2008.  Market tops are made when there are too many bulls.

Wednesday ... the ADP Employment Change Report is released.  Supposedly this report is structured to anticipate the US Non-Farm Payroll which follows on Friday.  The ADP Report is estimated to be a positive 206K up from 191K.  This is quite close to the anticipated NFP number of 215K.  The unemployment rate is forecast to be down to 6.6%.  These numbers would confirm the US recovery continues, but at a very modest pace.

We also get the new US GDP number on Wednesday.  The Q/Q annualized growth is being reduced to 1.2% from last month's 2.6%.  The low guess may be a bull set up for any reduction in the GDP rate of less than 1.4% being friendly.

Thursday. The Thursday reports include the weekly new unemployment claimants estimated to be 320K this week, up from 305K last week.  The numbers on Thursday also give us the US PMI Report for manufacturing.  Before dismissing the importance of US manufacturing, this article says the downward drift of US manufacturing has stabilized at about 20% of the global total, about the same as China.  Cheaper energy, because of the shale revolution, is one of the causes for the revival.  Further, the growing US energy production might providing a surprising boost to the US GDP number.

Euro Remains in Trading Range

As we anticipated in a previous note, the euro remained confined to a trading range. Versus the USD, the weekly range was a mere 85 pips.

Click to Enlarge EURUSD Currency Chart

There is concern the elevated level of the euro, during the past year, may be the cause of a move toward deflation in the EU, destructive for the heavily-indebted euro members.  EU central bank President Draghi keeps grumbling about the elevated level of the euro but his actions so far are confined to talk.  This may be because of  the influence of the Bundesbank on the ECB.  If the German economy shows signs of weakness, this would likely be the clarion call for an easier ECB monetary policy.

On Wednesday, the Eurostat/European Central Bank CPI numbers are released.  Last month this number was 0.7% and the current number is estimated to be 1%.  This number has been 1% or less every month since October 2013.  Since Draghi has expressed concerns about the low CPI, this report takes on added significance.  Low EU inflation combined with healthy US economic news would be bearish on the euro versus the USD.

On Friday, there is a French and a German M/M Manufacturing PMI.  The French number is estimated to go up to 50.9 from 50.4, while the German number is expected to be unchanged at 54.2.  Traders will be watching to see if the EU recovery is for real.  The EU unemployment rate is released Friday, and is expected to be unchanged at 11.9%.  With the recovery now five years old, the failure to bring the EU unemployment rate down is a major concern.

Ample Data for the Pound Traders

There has been a flurry of activity in the trade of the British Pound.  In the CME futures market, the open interest in futures, alone without options, was up to 237K during the week.  By comparison the OI in the euro was only 33K more at 270K.  The COT report released Friday afternoon showed the specs continue to hold a long of about 64K.

Reports this week are supposed to offer ample good economic news. 

On Tuesday, the UK Q/Q GDP is released.  Anticipated is 0.9% up from an 0.7%  in the last report.  This will make the yearly number 3.2, up from 2.7% in the last report.  The manufacturing PMI is released on Thursday, anticipated to be 55.4 up a tick from the last report.  On Friday we get the Construction PMI.  This number forecast is down to 62.2 from 62.5 last month.  More significantly this number is up from 46.8 a year ago.

There are some warning signs confronting the UK's economy.  The properties market has benefited from a "help to buy" government program which gave properties demand a big boost.  That program is ending and The Telegraph reports there are now more restrictive lending rules pending:
Tough new mortgage affordability tests could kill off a boom in house prices as lenders reject thousands of borrowers who would previously have been accepted.

Executives within the lending industry and economists have warned that the impact of the new rules, devised and enforced by the new City regulator, the Financial Conduct Authority, could be enough to strangle a nationwide recovery in the property market, which has been driven by demand in the South-East. Prices in London are rising at nearly 18pc a year.
Much of the British recovery has been the result of demand for properties from the Brits, as well as Chinese, Russians, and Arab seeking a safe haven for their money.  It remains to be seen if this market is about to chill.

The weekly chart for the GBPUSD shows an ominous doji just under the 1.68 handle.  Failing some great news in the pound, this pair has the set up for a sell-off.

Click to Enlarge GBPUSD Weekly Currency Chart

The economic news coming from Japan is sparse in the coming week.  We do get some reports on how the Japanese consumers behaved prior to the tax increase, but this has little meaning.  While the big specs remain large shorts in the yen, the trade has dried up.  The total futures open interest last week was down to only 164K, far less than the 232K OI in the pound. 

I have little to add to the note on the yen written the middle of the week, except I recall an old saying, "never sell a quiet market."

Click to Enlarge USDJPY Daily Currency Chart
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