BI 160 x 600 Feb copy (2)
BI 160 x 600 Feb copy (2)

Category Archives: Analysis

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Looming bond market crisis set to improve gold demand

 

Historically low bond yields across both the private and government sectors are reducing the margin for error when it comes to the ability of financial markets to withstand a bond market shock.

Global quantitative easing (QE) has seen bond yields driven to low and often sub-zero levels in many economies. The European Central Bank is currently undertaking a EUR60 billion a month eurozone bond buying programme, this is expected to last at least until September 2016. In the past Japan, U.K . and the U.S. have been very active when it comes to QE to stimulate their economies and create inflation with the bond market being a key asset.

Why would investors essentially pay good money to lend out their own money? Well, one reason an investor would do this is if they expect to see a decline in prices such, as in a deflationary environment when negative yields can in fact be higher than other variable yields offered. Another reason is an investor wants to store their wealth in what they believe to be a safe asset. Investors often like to park their money in German and U.S. government bonds in times of uncertainty, both are considered by many to be safe-have assets.

It is however risky for any investors to invest in long term fixed income with low or sub-zero returns. It certainly is not the safe bet that many investors think, nor should these low rates of returns be considered the new normal. At the other end of the scale and what is even more risky are junk bonds and bonds such as those offered by troubled governments such as Venezuela and Greece. In the current low yield environment too many investors are chasing higher yields without considering the significant consequences, the attraction of double digit yields blinds them to the risk. This is a similar thought process, or lack of thought process that in hindsight we saw before the GFC when the price of risk was often undersold or not properly priced in. It will only take one or two high profile defaults from these high yielding investments and we can expect to see investor expectations shift and potentially cause a run on bonds as investors head for the door.

While banks and financial firms in the U.S. have reduced their exposure to the more questionable grade bonds due to new regulations, what we have seen in the past 6 years is that insurance firms, mutual funds and other institutions are taking up the slack. This would see the reach of any crisis spread beyond ‘Wall Street’ and into other sectors of the economy. Restricting financial firms also has the unintended consequence of reducing liquidity, should we see investors move quickly out of bonds in search of higher returns (something entirely possible with the Fed set to lift rates soon), or we see general bond market jitters then do not be surprised to see investors scramble to be first to get to the exit door, no one wants to be last out. This scenario could see prices dive in a short period, not helped by the lack of support and buying from financial firms as they are restricted on what and how much they can purchase. A number of financial market experts such as JP Morgan Chase CEO Jamie Dimon and billionaire investor Jeffrey Gundlach have expressed concerns around the lack of liquidity in the bond market.

The big losers from a bond market crisis will be governments, corporations, pension holders and funds, money managers and other institutions. This would be significant as most, if not all investors would be touched in some way by a bond market crisis, just as all investors were when the GFC hit.

The big winners from a bond market crisis are those investors holding gold and other precious metals, just as we saw following the GFC.

Adding to the concerns around financial markets is the fact that equity markets in key markets such as the U.S. and Germany have reached fresh new highs, highs not even seen before the GFC. Investors need to be wary about investing in the bonds or equities as we are moving closer to a crisis, it is not going to take much for financial markets to tip over with bonds often of questionable grades potentially being the match that starts the fire. It was the subprime crisis that sparked the GFC and it could be a bond crisis that sparks the next global financial crisis.

The closer we move to a new financial crisis, the more funds investors should be allocating to precious metals. Investors should currently be looking to position their portfolios to withstand a crisis by re-weighting their portfolios to include approximately 20-25% of their funds in gold.

Courtesy of Bullion Index .

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Gold Trading Week Ahead 20th April 2015

 

Gold Trading Week Ahead – 20 April 2015

Gold treaded water last week with gold finishing the week almost identical to where it closed the previous week. Last week was all about CPI data while this week we have a number of economic, political and cultural factors that will drive sentiment.

European indices have seen sentiment begin to turn after the initial enthusiasm for Mario Dragi’s QE. Greece is also back in the spotlight, the Eurozone has a crucial meeting later this week regarding Greece. A Greek default is certainly figuring in traders’ minds, with this increased concerns I expect demand for gold to increase.

Demand from both India and China has been weak in recent trading sessions, not entirely surprising given the recent strength of the U.S. dollar and the fact that many Indian buyers have been awaiting Akshaya Tritiya which is Tuesday 21st April. I expect Indian demand will increase this week as Akshaya Tritiya is considered auspicious for starting new businesses, investments and the like.

This week is packed with economic data that could set the direction for precious metals.

Monday the Chicago Federal Reserve National Activity Index data for March is released.

Tuesday sees the Reserve Bank of Australia (RBA) meeting minutes released, if the RBA signals that is moving closer to a rate cut then we may see gold in AUD edge higher.

Wednesday will see the release of the Bank of England (BoE) minutes, Australian CPI, US Existing Home Sales and Crude Oil Inventories.

Thursday is full of economic data with Manufacturing PMI data out for Japan and China, UK Retail Sales, US New Home Sales and importantly US Jobless Claims. Westpac is forecasting a drop in Jobless Claims to 286,000, down from 294,000 as at the last reading.

Friday the Eurozone will meet to discuss Greece and its further reforms that it needs to provide by Friday. The odds of a Greek default are certainly shortening with Friday being the next critical hurdle for Greece and the Eurozone. US Durable Goods Order data is also out later on Friday, the market is expecting a rise of 0.6%.

This week also sees the release of a number of key US company announcements which will give investors a better understanding of the strength of these key companies. The companies with announcements include Wal-Mart, Yahoo, IBM, Morgan Stanley, AT&T, Boeing, Coca-Cola, Facebook, Microsoft, 3M, Procter & Gamble, Costco and Starbucks.

It could be a volatile week across all markets this week, with gold set to benefit, I expect to see gold test the US$1,220/oz resistance level, a level gold needs to consolidate above this level before moving higher.

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Courtesy of:  www.bullionindex.com.au

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Gold bulls are thanking the Fed

 

Bullion Index report that, leading into the Federal Reserve March monetary policy meeting last week investors dumped gold sending it to a 4 month low, while at the same time trades went long dollars on expectation the Fed would suggest it will move as early as June on raising interest rates. While the Fed dropped the highly anticipated word ‘patient’ from their statement following the meeting, the statement however contained a number of surprises which have sent gold higher and the US dollar lower since its release. The Fed statement saw it lower the GDP growth forecast and importantly also lower its forecast for inflation. This is important to financial markets as the Fed has said it will look to tighten rates when it is “reasonably confident” that inflation will hit its 2% objective over the medium term. With the lowering of its inflation forecast this will see it take even longer to get back to its 2% inflation objective. The Fed now sees inflation running at between 0.6-0.7% for 2015 and between 1.6-1.7% in 2016, still materially lower than the 2% figure the Fed has said it needs to be confident of hitting before it pulls the trigger on rates.

 

 

Export growth in the U.S. is also weakening according to the Fed which is an acknowledgement by the Fed of the recent strength of the US dollar. Even taking into account the dollars biggest weekly fall since 2011 the dollar is still strong by any standard. According to the Bloomberg Dollar Index, a measure against a basket of 10 currencies, the US dollar is trading near its highest level in at least 10 years. The dollar strength is something that is coming into consideration by the Fed, traditionally it steers clear of commenting on the dollar. Any rate increase by the Fed is expected to send the dollar even higher. The strong dollar is making imports cheaper, reducing inflationary pressures, something the Fed is trying to lift, while at the same time making exports more expensive which puts pressure on GDP growth. A high dollar should be of a concern to the Fed.

 

The consensus in financial markets suggests the Fed is on track to raise rates in 2015, however it now seems the market is expecting rates to move later (e.g. September instead of June) and possible not hit the high levels previously expected.  Leading Banks such as Bank of America Merrill Lynch and Deutsche Bank suggest the Fed will increase rates in September, while a recent Reuters poll of top Wall Street banks also favour a September rate increase. I still believe we will not see a US rate increase in 2015 and even more so after the Fed statement and continuing weak data that seems to be coming out of the US such as the recent worse than expected durable goods data. The Fed noted in its statement that “economic growth has moderated somewhat” since its January meeting, that is not a foundation for a near term rate increase. Federal Reserve Bank of Chicago President and a voting member of the Federal Open Market Committee Charles Evans said in a speech this week that he thinks “economic conditions are likely to evolve in a way such that it will be appropriate to hold off on raising short-term rates until 2016”. He suggests that inflation will not hit the 2% target until 2018 and that inflation is currently “uncomfortably low”.

 

The Fed’s monetary policy is very much driven by data flow and what is expected and what is actually delivered and at the moment most of the data coming out is not setting the markets alight. The longer the Fed holds off moving on rates the better it will be for gold demand given it reduces the opportunity cost between holding non-interest bearing gold and investing in interest bearing assets or term deposits. Gold also performs well in times of uncertainty so with the increased confusion as to when and by how much the Fed will increase rates, it is only going to add support to the price of gold.

 

With weak data coming out of the US along with exceptionally low inflation rates, well below the Fed’s target of 2%, the Fed would be reckless to move on rates until they see solid evidence of underlying economic growth, positive wage growth and inflation heading to 2%. I do see that happening in 2015. The risks on moving too soon on rate hikes are too significant while the benefits remain relatively low which leads me to believe the Fed will be very conservative and hold off on raising rates until 2016. In the meantime while interest rates remain low and uncertainty is at the forefront of investors’ minds gold demand is going to increase.

 

Now that gold has broken through US$1,200/oz, the next upside target to watch is US$1,208/oz which is the 100 day simple moving average followed by US$1,22o/oz the 50 day simple moving average.

 

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Courtesy of: http://www.bullionindex.com.au/

ANZ FXC Image

ANZ buy spot gold on dips to US$1180

 

ANZ, the Australian Bank saying while they see no clear impetus to push gold significantly higher or lower in the near-term they suggest to clients to ‘buy spot gold on dips to USD1,1180/oz’. They expect gold to trade over the next 12 months in the USD1,150/oz to USD1,300/oz noting that gold has a tendency to trough well before the USD peaks suggesting we may have seen the bottom of the gold price in this current cycle.

Source: ANZ

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Euro Issues Will Underpin Gold Prices

 

Bullion Index report that Euro issues will continue to prop up the price of gold. They note the Greek Eurozone creditors that have been keeping Greece afloat since 2010 have extended the country’s bailout by four months however it is only the beginning from what we see as a number of key flash points facing the Eurozone which will in turn support the price of gold over the next 12 months.

The ‘extend and pretend’ charade Greece and the Eurozone have been playing can only go on for so long. Greeks have shown that they want to remain within the European Monetary Union (EMU) and want to stay with the euro currency, however they are strongly opposed to the anti-austerity measures in place which is going to come to a head at some point. What Greeks also haven’t taken too kindly to in the past two weeks is what they see is a lack of respect or understanding from key Eurozone creditors and personal. The veteran German Finance Minster Wolfgang Schauble patronizingly said after the extension agreement that ‘the Greeks certainly will have a difficult time explaining the deal to their voters’, while also noting of the Greek Syriza party that ‘being in government is a date with reality, and reality is often not as nice as a dream’. The hostility between Greece and its creditors, in particularly Germany, is palpable and it really is only just the beginning of what will be tense negotiations throughout this year.

Many economic experts are suggesting that Germany is managing Greece out of the EMU, having decided that as far back as 2012 when they reduced their banks exposure to Greek debt.

In getting an extension, Greece had to stick with the basic terms of their original bailout package, something the Greek prime minster Alexis Tsipras has said he would ditch altogether. This has put him at odds with his own election promises, already he has been forced to abandon or water down his commitments to the Greek people in order to win an extension. It will not be long before Tsipras feels the heat from both those inside the Syriza party and voters. Tsipras has begun the near impossible task of selling the extension to voters, noting in a speech that “we won the battle but not the war as the difficulties, the real difficulties, not only those related to the discussions and the relationships with our partners, are ahead of us’. We do not see how Tsipras is going to get any significant austerity measures required by creditors through the parliament, which may lead to a snap election causing more uncertainty and instability in Europe.

The extension agreement must be understood for what it is, just an extension. Greece still needs to play its high stakes poker game with the Eurozone and so far it really has just kicked the can down the road by extending the bailout. Greece will need more cash to save itself from default when the bailout extension expires in June. Greece also faces €6.7 billion of bond redemptions in July and August this year which will require more cash and more negotiations no doubt. This has not been a focus however it needs to be on the radar of investors.

At what point will we see the Greek creditors turn-off the credit lines to Greece? We do not see extension after extension being given to Greece as the Eurozone cannot continue on the same path it is currently on. They will not continue to provide billions of euros in loans to Greece given it really needs significant structural reforms to boost growth, not tighter German-led austerity measures which are not working in reducing the levels of debt.

It is not just Greece who will be keeping the Eurozone in the headlines, we are bound to hear more and more rumblings out of other Euro countries over the next 24 months with key elections in both Spain and France. Spain is holding elections later this year with the focus on the anti-austerity Podemos party which runs on a similar platform to the Syriza party in Greece. While the Podemos party in Spain is less than a year old it is increasing its prominence. Podemos leader Pablo Iglesias campaigned for the Syriza party in before the Greek elections last month saying “a wind of change is blowing in Europe”. In France the far-right anti-euro National Front party is gaining traction with mainstream voters, the party advocates France exiting the euro and going back to the franc. France has general elections in 2017. Populist parties from all sides of government are growing in voice across Europe and this is expected to continue.

The chances of a ‘Grexit’ are in our view still very high, if a ‘Grexit’ happens this would create damaging volatility and turmoil for global financial markets. We see significant instability and headwinds for the Eurozone over the next 12 to 24 months and expect this to provide a solid foundation for the price of gold. We are suggesting to clients to add to their gold holdings on price dips such as the one we are experiencing right now.

For more information please visit Bullion Index .

ANZ FXC Image

Gold downside support at $1,260

 

A strong US jobless claims number on Friday has seen the market factor in a quicker than expected tightening in US monetary policy. This has put a dampener on safe haven assets prices such as gold and silver.

Bullion Index notes “we see the downside support on gold sitting at $1,260. If this level can hold then we look for gold to climb back to $1,275. If $1,260 however is broken we could see the $1,250 level tested in the short term”.

(Source: Bullion Index)

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RBA still on its way to cut rates

 

SwissQuote report that “given the potential headwinds on the Australian economy, we suspect that the RBA will downgrade its inflation outlook and remove its neutral rate bias during its February meeting. Such revisions would strongly hint for a rate cut in March in order to protect the economic recovery and further weigh on the Australian dollar. However, the RBA could be less patient as mentioned by a close RBA watcher, which had some reliable
sources from RBA’s senior staff in the past. Even if the RBA has to respect a media “black-out” in the week before policy meeting, AUD/USD made new lows on the news”.

(Source: SwissQuote)

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EUR/CHF to be choppy on the upside

 

SwissQuote report the “EUR/CHF’s spike above 1.05 at Swiss open fueled speculations that the SNB might be behind the move. The money markets show limited reaction, we see no particular stress on euroswiss interest rate futures. As EUR/CHF tops, real money names and business owners will increasingly be tempted to sell EUR verse CHF on futures and derivatives markets to set FX hedges vis-à-vis the risky EUR. Therefore we expect choppy upside at 1.05/1.10 area.

The impact of EUR/CHF debasing is heavily felt in Swiss everyday life. The grocery shops, supermarkets, furniture, clothing shops give sensibly high discounts in order to prevent clients from buying across borders. This being said, the labor market is now under important contraction pressures. In the canton of Geneva, the negotiations for 50% unemployment are already on the wire. We expect significant price adjustment in the real market over the months ahead, which in turn should cool-off buying pressure in franc”.

(Source: SwissQuote)

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BNP Paribas forex trade – Go short EURAUD

 

BNP Paribas recommend to client to take a short EURAUD trade. They report “we see opportunity to short EUR vs high yielders amid a positive risk-taking environment. AUD is resilient to falling commodity prices and our positioning
indicator suggests further scope for EURAUD shorts.

We initiate a short EURAUD trade recommendation at 1.4260 targeting 1.3805 with a stop loss at 1.4490.

We expect EURAUD to trade lower during periods of improving risk appetite. While the Fed’s QE3 progamme has now officially come to a close, we expect increasingly aggressive easing programmes from the ECB and BoJ to provide
offsetting support for markets. Combined monetary base growth for the major central banks is likely to continue through 2015. We continue to favour long positions in risk-sensitive currencies funded in EUR and JPY and are now initiating a short EURAUD trade recommendation at 1.4260 targeting 1.3805 with a stop loss at 1.4490″.

bnp paribas euraud nov14

(Source: BNP Paribas)

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A technical take on precious metals – SwissQuote

 

 

Long-term technical structures call for further weakness on precious metals reports SwissQuote.

Looking at long-term price configurations of precious metals, three (gold, silver, platinum) out of four have validated multi-months distributive patterns since September. The duration of these bearish patterns and the implied downside risks suggest that a bottom in this commodity segment has likely not been made yet. Palladium has also declined sharply since September but the long-term succession of higher lows remains intact, as can be seen by the rising trendline. However, a break of the resistance at $811 is needed to alleviate concerns of an upcoming second leg lower.

Gold likely to decline towards $1045
The bearish breakout at $1181 in gold has validated a 16-month declining triangle formation, calling for a decline towards the key support area between $1045 (05/02/2010 low) and $1027 (29/10/2009 low). In the shorter term, the recent rebound has thus far been unimpressive. As a result, the resistance at $1194 (given by the 50% retracement from the October high at $1255) is likely to curb any prices appreciation.

Monitor the short-term price action of Platinum
The short-term technical configuration of Platinum is worth monitoring as prices are challenging the key support at $1190 (06/10/2014 low). A decisive break lower would confirm the downside risk at $1072 implied by the recent validation of its multi-months distributive pattern. It would also not bode well for the short-term performance of gold and silver.

swissquote gold nov14

(Source: SwissQuote)

 

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Hong Kong employment data set for release Monday morning

 

Shortly before the markets open in the US on Monday, midway through the Asian session, the Census and statistics department will report the latest unemployment data out of Hong Kong.

Capital Trust Markets reports “we’ve had some better-than-expected data out of Hong Kong recently, but concerns that the Chinese slowdown will have a collateral damage effect on the nation has markets on edge – and any key releases such as the upcoming employment figure can have a considerable impact on the value of the Hong Kong dollar versus its major counterparts. With this in mind, what are the levels to keep an eye on as we head into the release and what does consensus forecasts the figure to be? Here is what you need to know.

First, let’s take a quick look at what is happening in Hong Kong at the moment. The recent protests – pro democratic – effectively brought Hong Kong to a standstill last month, and this has had a hampering effect on the nation’s growth. The Hong Kong government suggests that growth during 2014 will come out at 2.2%, falling at the lower end of the 2 to 3% target issued by the Hong Kong government earlier this year. Business sentiment is relatively weak as a result of the aforementioned protests, and both exports and industrial production are down on a quarter over quarter basis. However, the nation’s financial sector remains strong and – unlike numerous other countries across the globe – expansion is effectively a certainty for this year and the next. So, what are the levels to keep an eye on as we head into the upcoming employment release? Take a look at the chart below.

HKD

As the chart shows, we’ve seen a large amount of volatility in the USDHKD over the past couple of weeks. After a large and sharp decline early on Friday morning, 7.7530 and 7.7560 are the levels to keep an eye on – serving as in term support and resistance respectively. Consensus forecasts the upcoming employment release at 3.3% – unchanged on the previous figure. With this in mind, look for anything above 3.3% to weaken the Hong Kong dollar and test in term resistance in the USDHKD. Conversely, strong data (i.e. anything below 3.3%) would likely catalyze a break below in term support and validate 7.7515 longer-term”.

(Source: Capital Trust Markets)

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Soc Gen go short EURNZD on improved risk sentiment

In a note to clients Societe Generale go EURNZD. Here are the details:

Going short euro amid improving risk sentiment

We also initiated a tactical short EUR/NZD trade today predicated on improving global risk sentiment into year-end. EUR/NZD has a good positive correlation with the VIX Index, and a rebound in risk assets over the coming weeks will see the cross slide lower. EUR/NZD also comes with a 3.5% annualised positive carry. An alternative trade is to sell EUR/NOK as it struggles against the 8.50 resistance level

Forex Chart

BNP Paribas join JPM in looking at EURUSD shorts

With EUR/USD eyeing the October 3 low of 1.2501, BNP Paribas look at EURUSD shorts.

We are entering a strategic short EURUSD position at 1.2520, targeting a move down to 1.18, with our stop set at 1.2800. We expect a significant dovish signal from the ECB next week which should allow EURUSD to take out its September low, overshoot our year-end 2015 target of 1.25 and begin to define a new range below 1.25 heading into 2015.
Policy divergence has been and will likely remain a key theme as we head into the final months of 2014. The market scaled back its expectations for Fed policy tightening in October, but US data has remained solid enough to support our expectation for a tightening by the middle of next year.
Moreover, there are two sides to a policy divergence equation. The Bank of Japan and Swedish Riksbank both surprised with aggressive policy easings this past week. Our economists think the ECB will be next. We now expect a significant increase in asset purchases from December, with next week’s meeting likely to see a strong signal to that effect. Success in reviving inflation expectations would help move real rate differentials further against the EUR and should see a reacceleration in EUR weakness. For more, please see our article in the latest Global FX Plus weekly and the Desknote from our economists published Friday.
Chart

FXC Notes Image

JP looking for downside in EURUSD

JP Morgan go short EURUSD at 1.2521. Here are the details:

For the ECB, the upcoming meeting is likely to deliver additional measures enhancing its TLTRO program including the removal of the 10bp spread charge for borrowing, an increase of the multiples on the net lending improvement for 2015 and later TLTROs, and an extension of the maturity of the TLTROs to four years. We also think the ECB will also increase the allowance in the first two auctions from 7% of the non-mortgage loan book to 10% (Fine-tuning the Euro area growth forecast and adding more ECB measures to our baseline). In addition, the ECB is likely to follow this up (not necessarily next week) with expanding its purchases into nonfinancial corporate bonds at some point in the coming months. The combination of all these measures should result in an incremental increase in ECB’s balance and be supportive of a lower EUR/USD. The lower strike on the seagull now seems too conservative in view of Fed developments, so we are adding exposure to a more extensive decline in EUR/USD through a cash trade.

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Australian property market data set for release shortly

 

Shortly after the markets close in the US on Wednesday evening, property market data is scheduled to be released out of Australia.

Capital Trust Markets reports “the data will offer insight into the nation’s property market. The Australian dollar is relatively weak compared to the majority of its counterparts at present, and this is boosting the economy for the time being, but many leading economists suggest that this cannot persist and we may see some decline in the near future. One of the key components of Australia’s growth over the past two years has been the property market, and the upcoming HIA new home sales figure will reveal whether this sector remains buoyant, or whether we could see signs of trouble. So, with this in mind, what are the levels to keep an eye on as we head into the release – and how can we draw profit from anything unexpected? Here’s what you need to know.

First, what are the likely factors that will drive the bias inferred by the release? Well, the answer mainly lies in Australia’s relationship with China. Australia is heavily reliant on Chinese demand for its natural resource exports. Over the past six months or so, the Chinese economy is cooling and this demand has weakened. In response, the Australian government has attempted to rebalance its economy by shifting dependency from its mining sector to the housing market. This has been achieved by keeping interest rates low. Looking longer-term, the Australian property market seems to be in something of a bubble, with house prices in major cities rising more than 15% year-to-date, and across the nation more than 10%. This could lead to a potential bursting when the reserve bank of Australia (RBA) decides to raise rates, but as mentioned, this is more the long-term prospects. Short-term, markets will be looking for strong new  home sales data to suggest the Australian economy is waning and that we could get aforementioned interest rate hike near-term. So what are the levels to keep an eye on in the Aussie? Take a look at the chart below.

Aussie

As the chart shows, we’ve seen considerable volatility in the AUD USD as late. Recent range action was broken earlier this week and we are now trading above the 200 SMA on the four hour chart with in term support at 0.8815 and resistance at 0.8896. These are the levels to keep an eye on as we head into the release. While there is no forecast released for the figure, we can use its inference to form a bias. What I mean by this is that if we get a positive figure, i.e. anything above 0.0%, this can be taken as positive for the Australian dollar. In such a scenario, look for a break above 0.8896 to validate 0.8989 to the upside longer-term. Conversely, look for a negative figure to catalyze a break towards aforementioned in term support, with a close below this level bringing 0.8728 into play longer-term”.

(Source: Capital Trust Markets)

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FX recommendation – AUDUSD buy on dips

 

Capital Trust Markets reports “after a couple of soft releases on Monday, U.S. Dollar bulls found themselves in dire need of positive data today. Unfortunately for them, Durable Goods decreased again this month, pushing the greenback lower against all major counterparts.

Technical Analysis

AUDUSD28thoctober

After four long weeks of choppy price action behavior within an increasingly tighter range, Aussie appears ready to correct some of the losses incurred throughout September against the U.S. Dollar. Today’s rally broke above several lower highs formed in October, triggering a stop avalanche as AUD/USD short positions were shaken out of the market.

Spot is currently trading around 0.8865 as the 28th/10 European trading session draws to an end. Since AUD/USD is above 200 Simple Moving Average on 4H timeframe, traders will now systematically target the largest resistance levels in this area. First resistance is located close by at 0.8890 – 0.8900, marked by 9thOctober high and a proven pivot zone. If price breaks above this line, round psychological level of 0.9000 will follow soon afterwards.

The preferred strategy is to buy dips and bullish breakouts above resistance levels, as AUD/USD should maintain a bullish swing configuration of Higher Highs and Higher Lows for the time being. Immediate dips should be capped at 0.8820/30, where stop losses from long positions are likely to begin accumulating”.

(Source: Capital Trust Markets)

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RBS – The week ahead in FX

 

The Week Ahead in Bullets

 

United States • One of the primary reasons for the recent pause in the USD rally has been a reassessment of FOMC expectations. While real activity data has yet to show signs of meaningful slowing, renewed global growth concerns, higher asset market volatility, and individual FOMC members’ commentary about the strength of the USD have raised concern that the Fed will change its tone about risks to the outlook and future monetary tightening. The October FOMC meeting next week will indicate how the FOMC consensus view has changed, if at all. Next Wednesday’s decision does not include new forecasts or a press conference, perhaps limiting the scope of changes the FOMC will be willing to make – we expect tapering will be completed, and the “considerable time” and “significant underutilization of labor resources” language will be maintained. Few notable changes in the statement language may imply that the FOMC’s broader view of the outlook has not shifted significantly relative to September, consistent with comments Chair Yellen reportedly made at a private event two weeks ago, which could lift the USD. 3Q GDP growth above 3.0% q/q annualized and a lack of meaningful slowdown in the PCE deflator, similar to the September CPI report, may also prove supportive. • FOMC statement key phrases: With the QE taper extremely likely to be completed next week, as scheduled, the forward guidance phrase “…it will likely be appropriate to maintain the current target range for the Fed Funds rate for a considerable time after the asset purchase program ends…” will need to change, at least slightly. We expect the “considerable time” language will be retained – the FOMC can merely remove the words “after the asset purchase program ends” and maintain the same message. Debate over the need for the phrase highlighting a “significant underutilization of labor resources” will be notable as well – we expect it to be retained as well.
Euro-area • Global disinflationary pressure stemming from lower commodity prices provides plenty of dovish policy flexibility for G10 central banks. But for the ECB, which faces both falling inflation expectations and headline inflation dangerously close to deflation,
This is not Independent Research, as defined by the Financial Conduct Authority. Not intended for Retail Client distribution. This material should be regarded as a marketing communication and may have been produced in conjunction with the RBS trading desks that trade as principal in the instruments mentioned herein. All data is accurate as of the report date, unless otherwise specified.

 

Next Week in FX disinflationary pressure adds to an already challenging policy mix. Mixed-to-stronger PMIs this week help, but a further decline in CPI inflation in October may increase downside pressure on the EUR. • The reported discussions within the ECB about potentially adding corporate bond purchases to their asset purchase program speak to their unanimous commitment to use additional non-standard measures to anchor inflation expectations. As media sources continue to suggest a rift within the ECB and potential political hurdles to sovereign bond QE, the revelations also push back against fears that its toolkit of available options to ease policy is shrinking, or empty. The ECB speaker calendar is light next week, but any commentary about corporate bond purchases would be notable. • Over the weekend, the ECB will release the official results of the AQR. Bloomberg has reported that 25 of the 130 lenders are set to fail based on a preliminary assessment.
UK • September mortgage approvals and October home prices data highlight an otherwise quiet event week in the UK. Since peaking in January 2014, mortgage approvals have slipped – a decline in approvals keeps the trend of moderating UK growth data in place. The Bank of England (BoE) will likely also be mindful of the impact of its macroprudential measures announced in June.
Japan • At long last, the Bank of Japan (BoJ) will release its semi-annual Outlook Report, which includes updated forecasts for inflation and growth. It has become increasingly clear that BoJ is unlikely to reach its inflation goals in the 2-year horizon set out when it began its QQE program in April 2013 – but that does not mean the BoJ will not keep its positive assessment on prices intact. The BoJ may maintain its positive stance on prices and growth over its forecast horizon, fending off renewed calls for additional easing. The BoJ may want additional clarity on the future of the second consumption tax hike in 2015 before embarking on new large-scale stimulus. In terms of data, September CPI highlights a busy data week in Japan. We favour USD/JPY upside next week – broader-based risk aversion is the key risk to that view.

New Zealand • The Reserve Bank of New Zealand (RBNZ) holds its October policy meeting, which will not include updated forecasts. Lower-than-expected headline inflation gives the RBNZ plenty of scope to maintain its neutral stance, which notes that a “period of assessment” on the policy rate is needed after the Bank increased the policy rate by 1.0% in 2014. The RBNZ may be unwilling to make significant changes to its monetary policy stance before completing its Financial Stability Review on November 12th. The RBNZ will review the merits of the macroprudential measures introduced to cool home price inflation, which have proven to be effective. In terms of reducing inflation pressure, RBNZ Governor Wheeler said the measures equate to a 25-50bp policy rate hike. • The RBNZ also releases currency intervention data for September – we expect the RBNZ still sees the NZD as both unsustainable and unjustified, implying that intervention may have continued.
Canada • Bank of Canada (BoC) Governor Poloz will testify before Parliament on the Monetary Policy Report next Wednesday – the press conference, normally the day of the release, was postponed after the tragic events in Ottawa this week. We expect Governor Poloz to reinforce that the stance of the BoC on growth and inflation has not materially changed relative to September’s. The removal of the “neutral with regards to direction and timing” phrase from the October statement appears more related to the Governor’s views on the effectiveness of forward guidance when rates are not at the zero bound than an indication of a change in the outlook. We expect the Governor to imply that the Bank has not taken on a more hawkish view simply because they have removed this phrasing. • Monthly GDP for August is due. Data for August largely underwhelmed – the trade surplus reverted to a small deficit, retail sales declined on a m/m basis, and manufacturing sales plunged as well.
Sweden • The Riksbank meets and with rates at just 25bp, the ability of the Riksbank to cut is somewhat hampered by the zero lower bound (ZLB). There are questions as to how much the Riksbank may cut interest rates next week – a smaller cut next week risks disappointing and has less impact, but leaves room to perhaps cut once more if necessary. Our Scandinavian Rates Strategist, Par Magnusson, expects a 15bp cut. Beyond the October meeting, we see rising risk of non-standard measures taking place in 2015. A discussion of potential non-standard easing options available to the Riksbank can be found in the Scandinavian Rates Weekly.
Brazil • Markets head into the Brazilian second round presidential elections this Sunday with incumbent Rousseff either ahead in the polls by 6-9% or in a technical tie, depending on what polls one decides to look at. The last presidential debate this Friday evening and the weekend press are set to deliver more negative headlines, but without providing much clarity on the final results. Given the election is all electronic, the result should be known by 24:00 local time on Monday, 27-Oct (22:00 EST), and the results will likely be made official around at 19:00 local time (17:00 EST) that same day. With so much uncertainty around election results, it is difficult to assess the moves behind USDBRL at the end of the week, with BRL gaining back a 1.5% off the 2.50 highs by mid-day Friday (EST). While there is some argument that a Rousseff victory has been priced into Brazilian asset prices, the uncertainty goes beyond Monday particularly with the Rousseff victory. The polarization of these elections and the markets’ concern with the pace of deterioration put a tremendous amount of pressure for a Rousseff government to quickly deliver positive signals—which needs to start with reconciliation of the middle class and the business sector in Brazil. We maintain the view that an opposition victory will lead to a strong open in BRL on Monday (2.30), and a Dilma victory will take USDBRL towards 2.60 until the positive comments come out

Forex Chart

BoML add a short NZDUSD trade to its portfolio

 

After the US investment bank went short AUDUSD this week, they add a similar trade on NZDUSD:

 

Sell NZD/$. The downtrend is resuming.
The overnight breakdown says the 3wk+ correction is over and the larger downtrend
is resuming. Minimum downside targets are seen to 0.7627 (see chart for logic),
ahead of the Nov’11low at 0.7371. Bounces should not exceed old trendline/wedge
support, now resistance, at 0.7888, while a break 0.7944 would invalidate this
bearish view.
Sell NZD/$ at market (now 0.7852), add at 0.7888 risk 0.7944, target 0.7627 ahead of 0.7371.

FXC Forex Image

Credit Suisse looking to sell AUDUSD at 0.8875

CS update its entry and target on its potential short AUDUSD trade.

AUDUSD staged an “inside” session last Friday, leaving it in its broad sideways range. Immediate resistance shows at .8861, above which would turn the key focus on .8900/33 where we would look to ideally cap any further strength for a turn lower. A break above .8933 though – the 38.2% retracement of the collapse from early September – can resolve the range higher for strength towards .8973.

Support remains at .8735 initially, followed by .8687/76. A break below here is needed to revisit the .8652/43 support zone – the recent lows and 38.2% retracement of the entire 2001/2011 bull market – which we would look to hold.

Strategy: Flat, sell at .8875, stop/reverse .8935, for .8680.

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Key support at .8654/43 continues to hold.
AUDUSD’s decline to retest the critical .8674/43 support zone – the recent lows and 38.2% of the entire 2001/2011 bull market – has once again met with fresh buying. We would look for the bounce here to extend towards .8788/94 initially, on top of which is needed to see scope for a retest of the .8900 recent high. Above here can then see a challenge of the .8929/33 barrier, which we would look to cap any near- term strength to resume the core bear trend.
Near-term support moves to .8702. A clear removal of .8654/43 should maintain a medium-term bearish outlook to target .8546 next – the 50% retracement of the 2008/2011 uptrend.

Strategy: Flat, sell at .8880, stop above .8935, for .8550.

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