focus returns to interest rate differentials this week

Weekly Outlook

Forex and CFDs are high risk leveraged products that can result in losses greater than your initial deposit and you should therefore only speculate with money you can afford to lose. FX and CFD trading are not suitable for everyone. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions. You should first carefully consider your investment objectives, level of experience, and risk appetite and only invest funds you are prepared to lose entirely. For our full risk warning, please go to the end of this report

20th July 2015 by Richard Perry, Market Analyst

Macro Commentary

With Greece off the critical list, focus will return to interest rate differentials, the key forex story of the second half of the

year. Recent comments from Janet Yellen have heightened expectation of a Federal Reserve rate hike in 2015 once more.

After a slightly dovish June FOMC meeting and a disappointing Non-farm Payrolls, the potential for a September rate hike

took a hit. However in her Congressional testimony, Janet Yellen very deliberately guided markets towards the possibility

of a rate hike in 2015, noting that if the economy continues to progress as expected then a 2015 rate hike will be

appropriate. According to the CME FedWatch which studies the Fed Funds futures, there is now a 17% chance of a

September hike (significantly higher than 10% just a couple of weeks ago), whilst the chances of a December hike have

shot higher from less than 50% prior to Yellen’s comments to stand now at 57% (i.e. a rate hike is now more than likely

this year). The US dollar has benefitted strongly against major currencies, however there has been one major that has

held up against the Greenback. With Bank of England Governor Mark Carney on a similar line to Yellen, a UK rate hike

apparently could be seen around the turn of the year. Expect Cable volatility to be a feature of the run up to Christmas.

. WHEN: Fri, 24th July, 0245BST

LAST: 49.6

FORECAST: 49.7

Impact: On a quiet week for economic

announcements, there will be keen attention on

how the world’s second largest economy is

progressing. The HSBC data is unofficial but seen

by many as a strong indication of the development

of the grassroots economy. Last month the reading

rebounded from a 13 month low, however

remains in contraction (the data has been

contracting for 6 of the past 7 months). A beat of

the 49.7 forecast and a move above 50 would be

welcome for risk appetite. This would benefit the

Aussie and Kiwi dollars especially amongst the

forex majors and should help equity markets.

Must watch for: China Flash Manufacturing PMI

Key Economic Releases

Date Time Country Indicator Consensus Last

Tue 21st Jul 09:30 Australia RBA meeting minutes

Wed 22nd Jul 02:30 Australia CPI +1.7% +1.3%

Wed 22nd Jul 09:30 UK BoE meeting minutes 0-0-9 0-0-9

Wed 22nd Jul 15:00 US Existing Home Sales 5.40m 5.35m

Wed 22nd Jul 15:30 US Crude Oil Inventories -4.35m

Wed 22nd Jul 22:00 New Zealand RBNZ monetary policy 3.13% 3.25%

Thu 23rd Jul 09:30 UK Retail Sales (YoY ex fuel) +5.0% +4.4%

Fri 24th Jul 02:45 China HSBC Flash Manufacturing PMI 49.8 49.6

Fri 24th Jul 14:45 US Flash Manufacturing PMI 53.7 53.4

Fri 24th Jul 15:00 US New Home Sales 0.0% +2.2%

Trust Through Transparency T: +44 (0) 20 7036 0850 │ E: [email protected] │ W: hantecfx.com

1

China HSBC flash Manufacturing PMI

N.B. Please note all times are BST (GMT+1), data source Reuters

Weekly Outlook 20th July 2015

by Richard Perry, Market Analyst

Foreign Exchange

The euro has been significantly dragged lower as the prospect of an immediate Grexit has been removed. This may seem

rather counter intuitive that the euro would not strengthen on the back of a such news, however traders will now get

back to playing the interest rate differentials. In this environment, the euro becomes a carry trade. Traders borrow in

euros and use them to buy riskier assets, which puts downward pressure on the euro. Hence why after about half an

hour of a rally last Monday morning, the euro has been selling off consistently ever since. This has driven the Dollar Index

(.DXY) to levels not seen since April and should allow the Greenback to ride the wave higher. The major currencies are

under pressure now, with the commodity currencies (Aussie, Kiwi and Canadian Loonie) continuing to push for multi-year

lows against the dollar. With an unexpected rate cut from the Bank of Canada, the question will now be whether the

Reserve Bank of New Zealand will follow suit this week (Reuters consensus suggests a small cut). All of these currencies

now look to be set up to find traders using rallies as a classic opportunity to sell.

WATCH FOR: The dollar will be driven by housing data through the week, whilst Sterling traders will be

pouring over the BoE meeting minutes in the wake of Mark Carney’s hawkish comments. Could the RBNZ

put more pressure on the Kiwi with a rate cut?

EUR/USD

Watch for: Further pressure on the key May

low at $1.0818 with rallies a chance to sell

Outlook: The reaction on the euro to the

Greek crisis being put on hold has meant

downside pressure on EUR/USD once more.

This has dragged the pair lower and well

within range of a test of the key May low at

$1.0818. I continue to see the euro trading

below the $1.1050 pivot level to be negative

on a medium term outlook and the

deterioration in the momentum indicators

suggests that the May low will be tested this

week. A breach would open $1.0658 and the

critical low March at $1.0456.

USD/CAD

Watch for: Any support forming around the

breakout to be used as a chance to buy

Outlook: The resistance of a 6 month range

has been broken following the surprise rate

cut by the BoC. This means that traders will

now need to reassess their expectations

which should ensure further gains on the

pair. That should result in old resistance

being seen as new support between

1.2800/1.2830. Momentum indicators are

increasingly positive and corrections will

now be seen as a chance to buy. The March

2009 high at 1.3060 is the immediate hurdle

but above that, the pair is back at levels not

seen since August 2004.


FX Outlook

2



Indices

With US earnings season getting off to a decent start, the impact has bee positive on Wall Street, with the tech heavy

NASDAQ breaking into new all time high ground and the S&P 500 less than 1% away having rallied sharply in the past

week. This is exactly what the Wall Street bulls need. To draw the focus back on domestic issues, but also with the

prospect of Janet Yellen guiding the market towards a potential December rate hike, a positive earnings season that

shows decent earnings growth will be very welcome. The DAX flew higher on the back of the deal for Greece. Perhaps it is

open to a touch of near term profit-taking, but the bulls will be looking before the near term fluctuations, and back

towards what the deal means for the Eurozone. There is a negative correlation between the euro and the DAX and with

economic fundamentals in the Eurozone picking up the prospects for a medium return of the bulls will be high for a

market backed indirectly by the ECB’s QE. The carry trade on the euro will benefit the DAX, whilst a similar story can be

said for the French CAC 40. The FTSE 100 will be the laggard (once again) in this environment. Looking at the percentage

gains for the year makes grim reading for the UK, with the DAX adding c. 19%, the CAC 40 adding c. 20%, whilst the FTSE

100 has barely mustered over 3% gains.

WATCH FOR: US traders will continue to focus on the nascent earnings season to help drive sentiment.

Eurozone markets will still keep an eye on developments with Greece.

DAX Xetra

Watch for: The bulls to ride any wave of

profit-taking

Outlook: At its peak the DAX had rallied 10%

in just over a week, before a slight bout of

profit-taking set in on Friday. However, I

would expect this just to be a near term

unwinding of the recent run higher. There is

a good band of support between 11,437 (the

23.6% Fib retracement of the 8355/12,389

rally) and the old June high of 11,636. The

RSI at a 3 month high adds to conviction of

the upside breakout, whilst moving averages

are all turning positive again. Once the dust

settles the bulls are now in control.

FTSE 100

Watch for: The bulls still need to breach

6873 to feel confident in the recovery

Outlook: The FTSE 100 is over 5% off its key

lows but there is a sense that more needs to

be done to suggest that the bull run is

sustainable. In the sense that a bear market

is defined technically as a series of lower

highs and lower lows, the FTSE still is

afflicted by this. Therefore the key

resistance at 6873 needs to be overcome to

really give confidence that the bulls are in

control. Trading below the longer moving

averages is also a problem still. Initial

support holding around 6700 will help this

week.


INDEX Outlook

3



Other Assets: Commodities & Bonds

The strength of the dollar is really putting the pressure on commodities now. On Friday we saw gold fall to its lowest

since April 2010, with silver closing at its lowest level since August 2009 (a move exacerbated by selling pressure on

Monday). The resolved (of sorts) Greek crisis has seen safe haven trades dwindle, but add a negative correlation to a

stronger dollar and ongoing lack of demand there is serious bear pressure on precious metals. With the resolution also of

the Iranian sanctions, China slowing and a stronger US dollar, oil is also under falling away. On Friday the price of WTI fell

to its lowest since early April, and although Brent is yet to make the downside break the threat is certainly there.

Eurozone yield spreads continue to narrow as the threat of contagion from a Grexit steadily recede. The Greek 10 year

has fallen from a peak of c. 19% back to c.11%, whilst the 10 year yields on countries such as Portugal, Spain and Italy are

now topping out as the focus returns to that big buyer in the market, the ECB. Mario Draghi and the ECB remain content

with the progress of the €60bn of monthly asset purchases. Safe haven yields (US, Germany, UK) are consolidating.

WATCH FOR: On a week light of data, the technical traders could dominate, however the US housing data

and flash PMI will move Treasuries. Further developments on Greece will also impact on Eurozone yields.

Gold

Watch for: The gold price remaining

under pressure

Outlook: After a week of continuous

downside pressure on gold, two key

support levels have been breached. The

loss of the key March low at $1142.85

started a flood of selling pressure which

has seen $1131.85 blown out of the water

and the lowest level since March 2010.

Momentum indicators are very bearish

and although the RSI is now c. 20 there is

little suggestion that rallies will be seen as

anything other than a chance to sell. Old

support becomes new resistance this

week between $1132/$1143.

WTI Oil

Watch for: A closing break below $56.50

still implies $49.50

Outlook: The downside target of $49.50

from a breakdown of the range

$56.50/62.60 is now within sight as a short

term consolidation is breaking lower again.

The outlook for WTI continues to

deteriorate with the price trading under all

the moving averages and momentum

indicators all in bearish configuration (RSI

and Stochastics are especially weak). Any

rallies will now be seen as a chance to sell.

The next support comes in at $47 but it will

not be long before I have to start talking

about a full retracement back to the March

low at $42.


COMMODITIES & BONDS Outlook

4

T: +44 (0) 20 7036 0850 │ F: +44 (0) 20 7036 0899 │ E: [email protected] │ W: hantecfx.com

Risk Warning for Financial Promotions

This report is issued by Hantec Markets Limited, who is authorised and regulated by the Financial Conduct Authority (FCA) in the UK, No. 502635. The report is prepared and distributed for information purposes only. Trading in Foreign Exchange (FX), Bullion and Contracts for Differences (CFDs) is not be suitable for all investors due to the high risk nature of these products. Forex, Bullion and CFDs are leveraged products that can result in losses greater than your initial deposit. The value of an FX, Bullion or CFD position may be affected by a variety of factors, including but not limited to, price volatility, market volume, foreign exchange rates and liquidity. You may lose your entire initial stake and you may be required to make additional payments. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions. Before deciding to enter into FX, Bullion and/or CFD trading, you should carefully consider your investment objectives, level of experience, and risk appetite. You should only invest in FX, Bullion and/or CFD trading with funds you are prepared to lose entirely. Therefore, only your excess funds should be placed at risk and anyone who does not have such excess funds should completely refrain from engaging in FX and/or CFD trading. Do not rely on past performance figures. If you are in any doubt, please seek further independent advice. This report does not constitute personal investment advice, nor does it take into account the individual financial circumstances or objectives of the clients who receive it. All information and research produced by Hantec Markets is intended to be general in nature; it does not constitute a recommendation or offer for the purchase or sale of any financial instrument, nor should it be construed as such. All of the views or suggestions within this report are those solely and exclusively of the author, and accurately reflect his personal views about any and all of the subject instruments and are presented to the best of the author’s knowledge. Any person relying on this report to undertake trading does so entirely at his/her own risk and Hantec Markets does not accept any liability.

Trust Through Transparency

Hantec House, 12-14 Wilfred Street, London SW1E 6PL

T: +44 (0) 20 7036 0850

F: +44 (0) 20 7036 0899

E: [email protected]

W: hantecfx.com



focus returns to interest rate differentials this week

Economy & Finance