forex markets at an intriguing tipping point as focus remains on the us data

Weekly Outlook

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20th April 2015 by Richard Perry, Market Analyst

Macro Commentary

One look at the yields on Greek debt and it is apparent that the market is getting scared again. The insistence of Yanis

Varoufakis (Greek finance minister) that Greece “is not compromised” by the process of coming to a compromise with its

creditors is driving negotiations to the edge again. Greece owes the IMF €747m on 12th May but the IMF has refused to

grant it an extension to the date. That means that negotiations with Eurozone finance ministers (the Eurogroup) are

critical if it is to avoid a potential move towards an exit from the Eurozone. The next tranche of its bailout is for €7.2bn

and as things stand it looks as though the Eurozone will not grant Greece the money it needs. A series of proposals on

pensions and economic reform have been treated with scorn, just like a teacher marking homework and writing “could

do better”. According to the bond markets the outlook is not good with some analysts suggesting the situation is closer

to a “Grexit” than any time over the past few years. However, the Eurozone and Greece specialise in this economic game

theory. It would appear that Varoufakis has a decent poker face, but he has met his match in Germany’s Schaeuble. In

this union that is more politically motivated than economically, kicking the can down the road has become an art form.

WHEN: Wed,22nd Apr, 0245BST

LAST: 49.6 (final reading)

FORECAST: 49.4

Impact: The deterioration in Chinese growth has

been a significant reason behind commodity price

weakness in recent months. The recent GDP data

showed a drop to 7.0% but according to certain

analysts the true rate could be below 5%. The

falling HSBC flash PMI is not helping expectations,

coming in below the 50 level (i.e. in contraction

mode) for 3 of the past 4 months. This month is

expected to remain below 50 again at 49.4 so

therefore deteriorating further. If this is the case it

could significantly impact on market sentiment

putting pressure on commodities and currencies

such as the Canadian Loonie, the Kiwi and Aussie.

Must watch for: China HSBC Manufacturing PMI

Key Economic Releases

Date Time Country Indicator Consensus Last

Tue 21st Apr 10:00 Eurozone German ZEW Economic Sentiment 55.5 54.8

Wed 22nd Apr 09:30 UK Bank of England Meeting Minutes 0-0-9 0-0-9

Wed 22nd Apr 15:00 US Existing Home Sales 5.05m 4.88m

Wed 22nd Apr 15:30 US Crude Oil Inventories 1.3m

Thu 23rd Apr 02:45 China HSBC Flash Manufacturing PMI 49.4 49.6

Thu 23rd Apr 09:00 Eurozone Flash Manufacturing PMI 52.6 51.9

Thu 23rd Apr 14:45 US Flash Manufacturing PMI 55.5 55.3

Thu 23rd Apr 15:00 US New Home Sales 520k 540k

Fri 24th Apr 09:00 Eurozone German Ifo Business Climate 108.4 107.9

Fri 24th Apr 13:30 US Durable Goods Orders (ex transport) +0.4% -0.4%

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China HSBC Flash Manufacturing PMI

N.B. Please note all times are GMT, data source Reuters

Weekly Outlook 20th April 2015

by Richard Perry, Market Analyst

Foreign Exchange

Ever since the FOMC removed the word “patient” from its statement, the US dollar has been significantly impacted by

the economic data. “Data dependence” has not fared the dollar well in the past week and this has pulled some of the

major pairs up towards some crucial levels. A series of weak data points including retail sales, industrial production, and

the Fed’s own Beige Book have all added to the pressure. However inflation is one of the key factors for the Fed and a

pick up in core CPI turned the tide on Friday. The timing could not have been any better, with pairs such as Cable (around

$1.5000), Dollar/Yen (at 118.30) and the Kiwi/Dollar (at $0.7700) trading around crucial levels which would have

constituted a dollar breakdown. The data for the US continues this week (albeit not tier one data) which could again see

these key levels tested if we see another series of weakness. Interestingly, the euro remains solidly rangebound with

around 300 pips of upside before any really key levels are tested. For now, I still see the dollar bull run remaining intact,

although another week like last week and I may have to start a rethink.

WATCH FOR: Focus remains on the dollar and the US economic data with New Home Sales, Flash

Manufacturing PMI and Durable Goods on the agenda. The China Flash Manufacturing PMI could be a

driver of sentiment for the commodity currencies. MPC meeting minutes will drive sterling.

EUR/USD

Watch for: The selling pressure to resume

between $1.0800/$1.0900.

Outlook: The last week of gains looks to be

dragging the euro back higher again and

should be another chance to sell. The

momentum indicators continue to suggest

that rallies will be sold into. There is a

resistance band of two near to medium term

pivot levels at $1.0800 and $1.0900 and

these resistances could easily be seen as

enough of an opportunity to take some

rebound profits off the table. A decline back

below $1.0700 would confirm the rally has

lost its way.

GBP/USD

Watch for: Another failure to close above

$1.5000 key resistance area

Outlook: Peaks on Cable rallies have all been

coming just under the $1.5000 resistance

band over the past few weeks. Friday saw an

intraday move above this band, but only to

fail (as positive US data came in to support

the dollar) and a sharp reversal has left us

with a shooting star candle which is a

corrective move. The close today needs to

be lower to confirm the move but the profit-

takers seem to have moved in. A failure to

close above $1.5000 will mean that Cable

can never really gain upside traction to

convince. The volatility with the UK General

Election is likely to continue.


FX Outlook

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Indices

Earnings season in the US is always a key driver of market sentiment and this one has started in positive vein. The big

banks have been managing to beat (admittedly significantly lowered) estimates, whilst a return on equity for Goldman

Sachs at 14% is an excellent achievement and suggests a strong recovery business flows. If this trend can be continued

then earnings season will be a positive driver of the S&P 500 once more. It needs it as the market remains stuck

rangebound again last week failing to make a move above the key resistance band 2115/2120. This comes despite the

supportive impact of a breakout on oil prices and also the weaker dollar (the strength of the dollar continues to be cited

as a reason for concerns in outlook statements form multi-national companies such as Johnson & Johnson). The selling

pressure on Friday afternoon on European indices (DAX, CAC and FTSE) came through amid euro strength, with the DAX

specifically negatively correlated to a stronger euro (due to its high weighting in exporters). It will be interesting to see

the extent of the hangover on European markets early this week on the negative sentiment news that a change I

regulations in China will allow fund managers to lend shares to enable short selling.

WATCH FOR: US earnings season will continue to drive Wall Street, whilst the DAX will be driven by

movement on the euro and news of developments for Greece. If euro related news settles down the gains

on commodity prices will have an impact on the FTSE 100.

DAX Xetra

Watch for: Sell-off needs to hold 11,620 key

support to prevent continued correction

Outlook: The sell-off of the past few days

has been remarkable, culminating in a 2.6%

and over 300 point decline on Friday. This is

really starting to impact on the outlook.

Momentum indicators are beginning to fall

sharply and the previously bullish medium

term outlook is on the brink of reversing.

The support of the key reaction low at

11,620 is key near term and a breach of the

support would be the first higher low broken

since the rally began in October. A retreat to

10,950 could be seen on the breakdown.

FTSE 100

Watch for: A close below 6975 would open

the channel lows currently around 6855

Outlook: The FTSE 100 has held up

reasonably well as the DAX has come under

significant selling pressure in recent days.

This continues the old relationship that FTSE

outperforms on the way down, but

underperforms on the way up. A retreat to

the breakout support at 6975 found support

on Friday and this is now a near term key

low. A close below would re-open a retreat

back towards the 4 month uptrend support

currently around 6855. Momentum

indicators suggest bullish configuration but a

near term correction could be due.


INDEX Outlook

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Other Assets: Commodities & Bonds

The breakout on oil has been the big news in the commodity space. The potential for lower supplies after OPEC lowered

its forecast for supplies out of non-OPEC countries to 680,000 barrels per day from the previous 850,000. This has had a

significant impact across both WTI and Brent Crude with a move to a new 2015 high. Lower than expected US oil

inventories have also impacted. Precious metals have become strangely muted in the past week. Previously performing

well against the US dollar, gold, silver and platinum have all been consolidating despite the correction on the dollar.

Greek bond yields are telling a story. As negotiations over Greece’s economic reform plans (sticking points being pension

reform proposals) continue to drag, German finance minister Schaeuble is not confident a deal can be reached. If you are

willing to lend to the Greek government for 2 years you can get around 27% yield for your risk. With a sharply inverted

yield curve the expectations of a default are escalating. Greece could be struggling to make a payment of €747m to the

IMF on 12th May. This could drive yields further higher this week. A Eurogroup meeting in Riga on 24th April could be key.

WATCH FOR: A further look at the US housing market could help to drive Treasury yields, whilst

commodity traders will watch the China flash manufacturing PMI to drive market sentiment

Gold

Watch for: A break of the range between

$1178/$1224 would drive direction

Outlook: The gold price continues to

consolidate. The range has formed

between $178 and $1224 in the past few

weeks and with daily momentum

indicators increasingly neutral the market

has settled into a sideways phase. The

sharp dollar weakness last week was

supportive but could not drive a breakout,

so we continue to wait for a decisive

move. A close below $1178 would re-

open the $1143 low, whilst above $1224

opens resistance at $1236.50.

Brent Crude oil

Watch for: Consolidation above support

band between $60.45/$63.00

Outlook: The outlook has taken a dramatic

improvement in the past couple of days

which has seen the oil price spike higher to a

new high dating back to mid-December. The

move entirely outside the daily Bollinger

Bands suggests stretched volatility and this

could initiate some consolidation in the near

term. With momentum indicators

continuing to improve the next step is to

form a basis of support to work from. The

previous 2015 high at $63.00 is the initial

support with a band of support back to the

gap higher from $60.45.


COMMODITIES & BONDS Outlook

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forex markets at an intriguing tipping point as focus remains on the us data

Economy & Finance