Fundamental Analysis by Admiral Markets

Top-Tier Releases To Propel This Week’s Forex Moves

Even if the US economic calendar failed to provide welcome numbers, weaker than forecast readings from Europe, coupled with dovish remarks of the ECB President and expectations favoring further monetary easing by the BoJ, again shifted market focus to monetary policy divergence between the US Fed and the rest of the major central bankers, which in-turn helped the greenback index (I.USDX) secure consecutive second weekly gain. The Euro remained mostly on the downside after the ECB head said low inflation worries might force the central bank to act during March meeting while lesser than consensus PMIs further dragged the regional currency down. Moving on, the GBP reversed some of its recent losses after receiving upbeat UK job and inflation numbers while JPY dropped against majority of its counterparts after softer data-points, together with a downbeat message from one of the BoJ policymaker, magnified concerns for further monetary easing by the Bank of Japan. Moreover, profit booking in the Crude prices from 13 year lows, coupled with a bit of weather demand, helped the AUD, NZD and CAD register gains during last week while CAD was also helped by the BOC's decision to refrain from additional monetary easing.

Moving forward, monetary policy meetings by the FOMC, RBNZ and the BoJ are likely to take the center-stage of the market during the current week while GDP numbers from US and UK, coupled with EU Flash CPI, US Consumer Confidence and Durable Goods Orders, are some of the economic details that could propel this week's forex moves.

US GDP and FOMC Might Help Foresee USD Trend

Although recently soft US data-points have raised concerns that the US Federal Reserve might refrain from its expected four rate hikes during 2016, advance estimation of Q4 2015 GDP, coupled with the monetary policy meeting of the US central bank, could help determine the chances of further interest-rate lifts by the Fed and foresee near-term USD trend.

Aforementioned chart from the Bureau of Economic Analysis reveals that the US growth number has been volatile since 2011 and it recently confirmed 2.0% mark for Q3 2015, which was lower than the 3.9% growth for the Q2. Forecast relating to the Q4 2015 GDP growth, scheduled for release on Friday, indicates a 0.8% number for the world's largest economy. While pessimism at China and weaker Crude prices were largely expected to provide harm to global economic growth, and the US isn't an objection, softer print could raise the bars for the US central bank in announcing rate-hikes during its consecutive monetary policy meetings.

Monetary policy meeting by the FOMC, on Wednesday, becomes another important event, in addition to GDP release, that could help analyze USD moves. Even if the Fed isn't expected to alter its monetary policy at this meeting, neither does the meeting has Fed Chair's press conference scheduled, market players are likely to examine the FOMC statement in detail to predict chances of further rate-hikes by the central bank.

While absence of Fed Chair's press conference reduces the importance of FOMC meeting, soft growth numbers, together with downbeat tone of the FOMC members, considering global economic worries triggered by China, could reverse some of the recent gains earned by the greenback.

Other than the GDP and FOMC, monthly releases of US CB Consumer Confidence, New Home Sales, Durable Goods Orders, Pending Home Sales and the Chicago PMI, are some of the second-tier economics that could propel the USD waves. While Tuesday's official Consumer Confidence index is likely to remain near the previous 96.5 by marking 96.6, housing market details, namely the New and Pending Home Sales, up for respective releases on Wednesday and Thursday, may print welcome numbers with New Home Sales consensus signaling 503K versus 490K prior and the Pending Home Sales growth of 1.1% against previous contraction of -0.9%. Moreover, the Durable Goods Orders, to be published on Thursday, bears the forecast of registering -0.7% mark against 0.0% prior while theCore reading is likely reimbursing its prior -0.1% with 0.0% number and the Chicago PMI, even after expected to print 45.4 against 42.9, still bears a soft consensus and likely maintaining its shrink by being below 50.00 mark. Even if the housing market details are likely to print upbeat numbers, negative marks of the Durable Goods Orders, coupled with unchanged Consumer Confidence, can drag the US Dollar down.

EU Inflation & UK GDP To Determine EUR & GBP Trades Respectively

Irrespective of the last week's ECB President's comments favoring further monetary easing during March meeting, January month EU Flash CPI, to be published on Friday, becomes a crucial reading for the central bank to watch as the number is expected to mark the highest point since October 2014 with 0.4% against 0.2% prior. Moving on, Preliminary UK GDP release for the Q4 2015, scheduled for Thursday, is likely joining the recent upbeat data stream by marking 0.5% growth against 0.4% print revealed for Q3 2015.

Should the Euro-area inflation matches forecast, concerns relating to further monetary easing announcement during March become less expected, fueling the regional currency higher while upbeat UK GDP number can provide additional strength to the GBP in recovering recent losses.

NZD & AUD Traders Should Look RBNZ Details And Australian Inflation Figures

Recent pullbacks in Crude prices helped commodity currencies, including NZD & AUD, stop their downside; however, this week's RBNZ, New-Zealand Trade Balance, up for Wednesday, and Inflation numbers from Australia might help further project the moves of the NZD and AUD respectively.

After the Reserve Bank of New-Zealand (RBNZ) cut its benchmark interest-rate during December meeting, it is less likely to announce any further monetary policy action; though, pessimism at China, coupled with weakness in Crude prices, might force the central bank to favor further easing in future. Further, January month New-Zealand Trade Balance is likely to register -130M number against -779M marked in December. Looking at the Australian CPI and PPI, up for Wednesday and Friday respectively, the headline inflation readings are likely to mark softer numbers by being at 0.3% and 0.6% against 0.5% and 0.9% priors.

With the global commodity markets being still under pressure, mainly due to China and Crude supply glut, a surprise rate-cut by the RBNZ can extend the NZD downward trajectory while weaker Australian Inflation number might add downside pressure onto the AUD.

JPY Trend Could Rely On BoJ Details

Friday becomes an important day for the JPY traders as the Japanese Inflation numbers, coupled with the BoJ monetary policy meeting, are set to take place on the same day. Following the Bank of Japan (BoJ) Governor's speech, at the WEF, that Japanese inflation expectations are weakening, market players have started looking for the hints of further monetary easing by the BoJ. Release of the said monetary policy meeting detail is also accompanied by the quarterly economic outlook announcement and the press conference by the BoJ Governor. Moreover, Japanese inflation figures, scheduled for publish on the same day, are likely to maintain their 0.1% mark.

Given the extended timeline for inflation target achievement and weaker economic outlook, coupled with hints for further monetary easing, the JPY can continue extending its recent downside; however, broader safe-haven demand might restrict the currency's crash.

“Original analysis is provided by Admiral Markets
Central Bankers And Job Details To Offer Another Volatile Week

With a surprise negative rate announcement by the BoJ and dovish messages from the ECB and BoE heads, market players' attention again shifted towards the monetary policy divergence between the US Federal Reserve and rest of the major central banks, helping the US Dollar Index (I.USDX) to close the week on a flat note even if headline economic details, including Durable Goods Orders, marked soft numbers and the FOMC sound worried about the global inflation hurting their rate-hike path. Moving on, commodity currencies, namely AUD, CAD and NZD, printed positive weekly closing against its US counterpart due to pullback in commodity prices, headed by Crude bounce, while no rate-cut by the RBNZ provided additional support to the NZD.

After major central bankers helped magnifying the Forex volatility during last week, job details from US, Canada & New-Zealand and monetary policy meetings of the RBA & the BoE, together with BoE's Quarterly Inflation Report (QIR), could take those liquid moves a step forward. Moreover, headline PMI announcements from the US & the UK, in addition to the ECB President's testimony, are some other details/events that could make forex traders busy throughout the upcoming week.

Job Details Are What The USD Traders Would Be Concerned About

While monetary policy divergence helped the greenback ignore last week's soft data-points, January month labor market details, namely the Earnings, NFP and the Unemployment Rate, scheduled for Friday release, gain the market attention as soft job numbers might raise another hurdle for the Fed's 1.0% rate-hike plan which seems currently disturbed by global inflation worries.

As can be informed from the aforementioned chart, US NFP has surpassed even the most optimistic expectations for three-consecutive months till Dec. 2015, making the yearly average of 215K while the unemployment rate has also been held steady from Oct. 2015 at 5.0%, the lowest level since May 2008. However, consensus relating to January month reading favors a slide in NFP to 192K, lowest in four months, and one more unchanged print by the Unemployment Rate at 5.0%. Further, theAverage Hourly Earnings is likely heading to test three months high with 0.3% growth against 0.0% prior while the early signal for Friday's crucial NFP, the ADP Non-Farm Employment Change, scheduled for Wednesday release, is also expected to test the three month low with 193K print as compared to 257K prior.

Other than the headline labor market numbers, ISM Manufacturing and Non-Manufacturing PMIs, scheduled for respective release on Monday and Wednesday, Factory Orders, up for Thursday release, and the monthly Trade Balance, to be released on Friday, are some other US data-points that could help predict near-term US Dollar moves. While forecast relating to ISM-Manufacturing PMIfavors another below-50 mark, with 48.6 against 48.2 prior, and the Non-Manufacturing PMI is expected to print 55.1 number as compared to 55.3 prior, the Factory Orders are likely contracting the steepest in a year with -2.5% versus -0.2% marked last month and the Trade Balance deficit is also expected to widen to -42.9B from its -42.4B prior.

Even as steady Unemployment Rate and higher Earnings, coupled with renewed monetary policy divergence concerns, favor USD strength, soft prints by the NFP and some of the second-tier economic details might hold the greenback's up-move captive.

Draghi's Testimony Can Help Forecast ECB's Next Action

ECB President Mario Draghi, even after being famous for his bold attempts & hawkish tone, has recently spread his concern for global deflation and said that the central bank might not refrain from taking additional measures to safeguard the economy from such threats. The President, who is scheduled to present Testimony before the European Parliament on Monday, may utter some words on monetary policy guidance for the ECB in addition to speaking how the economy have reacted to central bank's measures. Should the testimony be an echo of what the central banker said last week, chances of another monetary policy easing measure announcement in March and an extended EUR downside can't be denied. However, concentration on the ECB's good work and an optimistic tone for the region's future might help the Euro recover some of its recent declines.

In addition to the ECB President's Testimony, monthly reading of German Factory Orders, up for Friday release, becomes the only detail to help foresee EUR moves. The number from the Euro-region's largest economy is expected to test the lowest in three months by printing -0.3% against +1.5% prior, which if matched the consensus, might drag the EUR further down.

BoE Inflation Report And Headline PMIs Could Direct GBP Moves

Bank of England's Quarterly announcement of Inflation Report, QIR, up for Thursday, becomes an eye-catcher for all the GBP participants as the UK currency slid more than 8% since the last announcement was made in November when the central bank sound worried about commodity decline hurting global inflation outlook and downgraded their forecast for near-term growth and inflation. The central bank, alike previous QIR announcement, is also scheduled to hold its monetary policy meeting and release the minutes of the same together with the QIR release. Further, UK Construction & Services PMIs, scheduled for release on Tuesday and Wednesday respectively, become some more important news out of the Britain to predict near-term GBP moves.

Following Monday's UK Manufacturing PMI printed highest level in three months with 52.9 number versus 51.8 consensus and 52.1 prior, the Construction PMI is likely being near the previous release of 57.8 by marking 57.6 while the Services PMI, core to the UK economy, is also expected to remain around the previous 55.5 mark with 55.4 forecasted number.

Considering recently released downbeat UK details, dovish message from the BoE Governor, coupled with another downgraded economic forecast in QIR, can continue extending the GBP's southward trajectory.

Rest Of The Globe Details

Although BoE and US job numbers are likely to gain the most market attention during current week, monetary policy meeting by the Reserve Bank of Australia (RBA), together with the labor market details from Canada and New-Zealand, are rest of the globe details that can continue fueling the Forex liquidity through the upcoming sessions.

RBA, in its monetary policy meeting on Tuesday, is expected stretch the hold on monetary policy for eight consecutive time; however, market players are more likely to observe details of the RBA statement to look for any hints relating to central bank's future monetary policy action as its largest consumer, China, has been struggling off-late. Given the central bank maintains its tone of economic improvement, as it has been, chances of the AUD up-move becomes brighter; though, pessimism at China, as supported by recently released headline PMIs, might restrict further upside of the Australian currency.

Moving forward, quarterly details of New-Zealand Employment Change and Unemployment Rate, out for Tuesday release, in addition to the January month Employment Change and Unemployment Rate from Canada, scheduled for Friday, are the numbers that could help foresee near-term trend of the NZD and CAD respectively. While the New-Zealand Unemployment rate is expected to print 6.1%, the highest levels since the data was released in November 2013, against 6.0% prior, the Canadian Unemployment is likely remaining constant at 7.1%. However, consensus relating to the Canadian Employment Change favors a lower print of 5.4K against 2.8K prior while the same release from New-Zealand is expected to test the highest level in four quarters with 0.8% mark as compared to prior -0.4% reading. While renewed downside pressure of the Crude, Canada's main export, coupled with weaker job details might halt the recent CAD upside, improvement in New-Zealand labor market details can favor the RBNZ's recent announcement of not altering the interest-rate and help the NZD regain its strength.

“Original analysis is provided by Admiral Markets
Absence of Top-Tier Economics Could Hold-Back This Week’s Forex Moves

During early days of the last week, the US Dollar Index (I.USDX) was dragged down by disappointing economic data-points and dovish comments from some of the FOMC members which tamed speculations that the US Federal Reserve could stick to its plan of four interest-rate hikes in 2016. The downfall was strong enough to counter Friday's eight year low Unemployment Rate and a year's high Earnings detail by fetching the greenback gauge to negative weekly closing for the first time in four weeks. The GBP continued on its up-move and ignored the BoE's downgraded forecasts for near-term Inflation and growth numbers as positive economic releases and a bit hawkish tone of the BoE Governor favored the UK currency's strength while the AUD was hit by the RBA's choice to left the doors open for interest-rate cuts in future. Further, the NZD remained strong against majority of its counterparts due to surprise plunge in Unemployment rate and hawkish comments from RBNZ while the CAD enjoyed the recent strength of Crude prices and registered weekly positive closing. Moreover, weaker USD and risk-off market sentiment continued favoring the JPY and the Gold for one more week.

Unlike last week, the current week might witness less liquid market sessions as there are fewer catalysts scheduled for publish; however, US Retail Sales and a testimony by the US Federal Reserve Chair, coupled with EU Flash GDP, UK Manufacturing Production and Trade Balance, are some of the data-points that might propel some liquidity into the world's largest financial market.

US Retail Sales and Fed Chair's Testimony To Guide USD Moves

With the recently weaker dataflow, except Friday's job report, in addition to nearness with March FOMC meeting, market players are likely focusing more on incoming US details to forecast whether the Fed could actually practice its plan of 1.0% rate-hike during the current year. Hence, January month Retail Sales coupled with Preliminary reading of UoM Consumer Sentiment for the month of February, up for Friday release, become important for the USD traders as it would reflect the state of consumer confidence in the world's largest economy. Moreover, Federal Reserve Chair Janet Yellen's semi-annual testimony on monetary policy before the House of Financial Services Committee and the Senate Banking Committee, on Wednesday and Thursday respectively, will be on market players' radar as comments relating to the future actions of the Fed, in relation to interest-rate hikes, could help predict near-term greenback moves.

The Retail Sales and the Core Retail Sales are both likely to reverse their prior -0.1% mark with +0.1% and 0.0% mark respectively while the Consumer Sentiment Index is expected to mark 92.6 number against the downwardly revised prior to 92.00. Moreover, the US Fed Chair, in addition to testifying the monetary policy stance of the central bank, might also comment on the present economic scenario of the US, if the question arises, which in-turn could help knowing whether the recent downtick in economic numbers really stops the central banker from its planned interest-rate actions for the year 2016 or not.

While lack of major releases, coupled with upbeat forecasts from consumer-centric details, favors the USD up-move, market players would closely observe comments from the Fed Chair. Should the central banker continue remaining hawkish on monetary policy stance, chances of the greenback recovering some of its recent losses can't be denied.

EU GDP To Help Forecast The Euro Trend

Even as the European Central Bank (ECB) announced monetary policy actions in the month of December, the Euro region is still left to witness any positive outcomes and the central bank chief, Mario Draghi, recently said that the global worries might force them to announce additional measures during its March meeting. However, Preliminary readings of Q4 2015 GDP number for the Germany and the EU, scheduled for Friday, become important for the EUR traders as weaker reading increases chances of the ECB announcing another round of stimulus measures in its monetary policy meeting in March.

Having marked the lowest reading in a year, with 0.3% growth rate, the EU GDP is likely to maintain the same 0.3% growth rate for the last quarter of 2015. The German GDP, alike EU number, is also likely to print 0.3% growth rate for one more time. Even as GDP readings are expected to maintain their previous growth numbers, those were the weakest in 2015 and reflect continued need of monetary policy stimulus, which in-turn favors EUR weakness. Should downbeat numbers disappoint the market, chances of a plunge in Euro prices become brighter.

GBP Traders Should Watch UK Trade Balance And Manufacturing Production Numbers

Alike recently upbeat UK releases, monthly details of the Trade Balance and Manufacturing Production, up for publish on Tuesday and Wednesday respectively, are also expected to mark welcome numbers and can help cut speculations that the BoE might also go for interest rate-cut than a hike. The Trade deficit is likely to shrink to -10.4B against -10.6B and the Manufacturing Production is expected to reverse its previous contraction of -0.4% with 0.0% reading. With the scheduled second-tier releases likely joining the recently upbeat UK data-flow, the GBP becomes more likely to extend its near-term pullback except these numbers vary drastically from consensus.

“Original analysis is provided by Admiral Markets
Headline PMIs And Jobs Report To Offer Another Volatile Week

Eighteen month high US Durable Goods Orders' growth, followed by upbeat GDP print, helped the US Dollar Index (I.USDX) carry its previous weekly gains forward during the last week. The greenback managed to rally across the board on the speculation that improvement in headline economics could support the Fed in announcing future rate-hikes; however, rising Crude prices, mainly due to production freeze talks between the Russia and the Saudi Arabia, helped the CAD register a positive weekly closing against its US counterpart. The Euro remained fragile as weaker inflation reading, coupled with talks at G20, favored need of ECB's additional monetary easing while GBP maintained its downtrend as some of the influential UK leaders continue supporting the 'Brexit' move. Moreover, the JPY also liquidated some its weights to the USD due to absence of major economic details and an on-going greenback buying.

Following positive prints of the headline US details, market players would closely observe February month US job details, scheduled during the current week, in order to determine chances of the Federal Reserve's interest-rate lift-offs. Moreover, headline PMIs from UK, US and China, coupled with monetary policy meeting by the RBA and the Australian GDP, are some of the important data-points/events that could continue fueling the Forex market volatility during the current week.

US Labor Market Details To Portray USD Moves

With recently printed upbeat US economic details reigniting concerns for the Fed's interest-rate hike, monthly details of the US labor market, namely the Unemployment Rate, Non-farm Payrolls (NFP) and the Average Earnings, would gain additional attention from the market players as sustained labor market strength indicates only few obstacles in the Federal Reserve's four rate-hike a year plan.

Even as the January month NFP dropped to the lowest levels in four months, the Unemployment rate maintained its decline and marked fresh eight year low while the Average Earnings rallied to a year's high, indicating overall strength of the US labor market. Considering forecasts relating to Friday's scheduled job details, the NFP is likely printing a near 200K mark with 195K against its prior 151K while the Unemployment Rate is expected to remain steady at 4.9% lows. Moreover, the Earningsmay reveal a bit of weakness with 0.2% growth against 0.5% mark disclosed during prior month and the Wednesday's ADP Non-farm Employment Change, an early signal for headline labor market details, is also expected to print a weaker 185K number versus the prior 205K mark.

Other than the Friday's headline labor market details, Monday's Chicago PMI and Pending Home Sales, Tuesday's ISM Manufacturing PMI and the Thursday's Factory Orders, are some of the additional data-points that USD traders might be interesting in to forecast near-term greenback trend. While Pending Home Sales is expected to continue signaling robust US housing market, with seven month high of +0.6% against +0.1% prior, the ISM Manufacturing PMI is likely printing 48.5 mark versus 48.2 previous and the consensus relating to Chicago PMI indicates a weaker 52.1 number compared to its 55.6 prior. Further, the factory orders might reverse their prior -2.9% loss with +2.1% mark, testing the highest levels since May 2015.

After the US GDP rejuvenated expectations of further Fed-rate hike, strong job numbers can provide an echo to these speculations, which in-turn can help the USD stretch its recent up-move.

GBP Traders Should Observe 'Brexit' Talks And Leading PMI Numbers

Although British PM announced a referendum to vote on 'Brexit' on June 23 and EU leaders are also trying their hard to preserve the UK into region, noticeable UK leaders, including the British Mayor, have been observed to opine on UK exiting from the EU region and hence forcing the GBP further towards south. Though, the deadline is still far away and forces market players to observe developments in regard to possible chances of UK waving good-bye to the troubled region.

In addition to the 'Brexit' talks, headline UK PMIs, namely the Manufacturing, Construction and Services, can provide important quantitative details to forecast near-term GBP trend. Even as the Wednesday's Construction PMI is expected to mark 55.5 number against 55.1 prior, other two important PMIs, namely the Manufacturing PMI and the Services PMI, scheduled for Tuesday and Thursday respectively, are likely printing weaker marks with 52.3 and the 55.1 stats as compared to their 52.9 and 55.6 previous releases.

As 'Brexit' talks started gaining support from influential political leaders and the economic data-points are also expected to print weaker marks, chances of GBP maintaining its south-run becomes brighter.

The Critical Chinese PMIs And Australian Details/Events

While global attention recently shifted away from the Chinese economic crisis, February month details of the official Manufacturing and Non-Manufacturing PMI, together with the Caixin Manufacturing PMI, scheduled for publish on Tuesday, could flash important signals for commodity traders and industrial players. Although, both the Manufacturing PMIs, the official and the Caixin version, are expected to maintain their previous levels of 49.4 and the 48.4 respectively, coupled with the upbeat Non-Manufacturing PMI at 53.5, the Caixin Manufacturing PMI continue remaining below the 50 mark, indicating contraction of the manufacturing activity at the world's largest industrial player.

Off-late upbeat Australian economics, coupled with the Reserve Bank of Australia's (RBA) resistance from an interest-rate cut, continued helping the Australian Dollar (AUD) to mark near 1% gains against its US counterpart during the month of February. However, this week's monetary policy meeting by the RBA, scheduled for Tuesday, followed by the Q4 2015 Australian GDP, up for Wednesday release, seems crucial for the AUD traders as cues for the global economic threat affecting the Australian economy would be looked for in these events.

Though the Australian central bank isn't expected to alter its current monetary policy and the GDP growth is also likely to dip down with 0.5% mark against 0.9% previous reading, another stream of hawkish comments from the RBA Governor, coupled with possible improvement in Chinese PMIs, might help the AUD in maintaining its up-move.

Canadian GDP And Ivey PMI Are The Rest To Observe

Profit-booking in Crude prices, backed by talks of oil production freeze at the Russia and Saudi-Arabia, off-late helped the Canadian Dollar (CAD) advance against majority of its counterparts; however, monthly details of GDP and Ivey PMI, scheduled for Tuesday and Friday respectively, might offer addition help to foresee near-term CAD moves. While December month GDP is expected to print 0.1% mark against 0.3% prior, the Ivey PMI recently rallied to the highest levels since March 2012 with 66.00 reading. Given the Russian-Saudi Arabian agreement on production freeze succeeds, chances of the Crude, main Canadian export, witnessing further upside can't be denied. Moreover, welcome numbers from the Canadian economic calendar can provide additional support to the CAD in marking positive closings across the board.

“Original analysis is provided by Admiral Markets
Your weekly fundamental view

Need to know

A quiet week for US data, but we have Eurozone Q4 2015 GDP and the March ECB interest rate meeting to keep us busy.

Coming up

On Tuesday 8 March we have Eurozone Q4 2015 GDP.GDP in the Eurozone has been in low single digits (QoQ) since November 2014.The ECB will hope it stays that way.Anything below +0.3% will disappoint. Why should traders care? GDP measures economic growth a key input when comparing economies and their currencies. Watch EUR/USD support 1.864: resistance 1.1026

Thursday 10 March sees China CPI and PPI for February released. The Producer Price Index is a measure of factory gate inflation, whilst CPI tracks consumer prices. PPI may have bottomed at -5.3% (YoY) in Jan.CPI has had two consecutive reads of +0.5% (MoM); can it make a third? Why should traders care? These inflation measures can shed light on levels of demand within China's slowing economy. Watch the HSI 50 support 19715: resistance 20415

The ECB council meets to decide on interest rates and QE on Thursday 10 March.This much anticipated meeting could see the ECB lower rates further and enlarge their QE program, in an attempt to stimulate the Eurozone economy. Why should traders care? The ECB has so far failed to lift the Eurozone economy out of the doldrums. They may now have to take more drastic action to do so. Watch the Bund support 164.00: resistance 165.86

Chart to watch: USD JPY Weekly

Yen strength has persisted in 2016 despite Bank of Japan moving to negative rates and Dollar Yen is trading well below its long-term uptrend line. Watch support at 110.97/109.87, through which a bigger fall is possible. Alternatively, watch resistance at 115.62, in the event of Yen weakness re-emerging.

“Original analysis is provided by Admiral Markets
To cut or not to cut ?

Calm after the storm

The US economic calendar is thinly populated this week following on from Fridays surprise jump in Non-Farm Payrolls. However there is plenty of news due from elsewhere to keep us occupied. At the recent G20 meeting, in Shanghai, the closing message talked about co-ordinated global stimulus as means to head off any impending economic downturn. Though that is increasingly looking like wishful thinking, it does provides us with an excuse, if any were needed, to look at the interconnectedness of the global economy as a whole.

Chinas Communist party concluded its annual congress at the weekend. During which it outlined a growth target of 6.5% to 7% out to 2020.Marginally lower than its prior guidance, this still seems to fly in the face of what appears to be the situation on the ground.

However for the moment markets seem to have stabilised, in the expectation that PBOC and the Government will continue to add stimulus and use looser monetary policy to the keep the Chinese economy moving. Despite a pledge by G20 members not to use competitive currency devaluations, as a tool to bolster economies, we still think futher rounds of Yuan easing are likely over the coming months.

We will get the chance to take another peek at Chinese economic performance early on Tuesday morning. When we get Balance of Trade data for February. Chinese Exports have been declining since March 2015, whilst Imports have fallen since November 2014. Imports have posted some hefty double digit percentage falls over that period, a clear sign of a faltering economy. I note that we will also see both PPI and CPI data for February from China, early on Thursday morning. Inflation of course is usually associated with or seen as a proxy for growth.

The chart shows the value of China's Imports and Exports over the last 5 years. (Trading Economics)

Bank of Japan on hold?

We heard on Monday morning from Chinas principal regional rival Japan. Bank of Japan (BOJ) governor Kuroda spoke on monetary policy and likely future actions from the bank. Mr Kuroda suggested that the Japanese central bank will not cut rates further in the near term, rather that they will take a step back and examine the effects that negative interest rates are having on the economy. However Mr Kuroda also stressed that the BOJ would be ready to cut rates if required, to help it meet its 2% inflation target. The governor was also resolutely optimistic on Japans economic outlook saying that

"Current negative rates would have a very powerful stimulus effect on the economy by driving down borrowing costs and nudging firms into boosting investment."

The chart below currently tells a different story however with both GDP and inflation in Japan heading lower.

Chart shows Japans GDP growth rates and change in inflation MoM (Trading Economics)

The ECB's turn to play its cards

The main event this week however will be the ECB meeting and interest rate decision on Thursday lunchtime. The ECB of course followed the BOJ and moved to negative interest rates in February. To some extent that move took the markets by surprise and though they have had a month to get used to the idea, there still seems to be some confusion as to what the next moves will be from here.

A futher cut in rates is a definite possibility and there may be some finessing of the policy. Perhaps through the adoption of a tiered approach ala Japan,such that individual consumers would effectively be shielded from the day to day implications of those negative rates.

That said sub-zero rates were introduced to encourage businesses and individuals to spend money rather than keep it in the bank. Consumers are a significant part of the Eurozone economy so this is not a given. At the same time negative interest rates encouraged money to flow into safe haven assets, such as German ten year bonds. Whose yields also fell below zero as a result. German bond yields have bounced back, above zero, in early March. However a further cut in Eurozone interest rates could send these and other Eurozone bond yields, back below zero. And in doing so undermine the effectiveness of the ECBs on going QE (bond buying) program.

The issues facing the ECB are summarised in the chart below. Which shows how the power house Germany economy is losing momentum at the same time that the rate of inflation there is turning lower once more , despite the ongoing ECB stimulus.

Chart shows German GDP growth and the German inflation rate.

Risk is back on the menu.

Markets have moved away from the Risk Off stance with which they started the year.We note that the VIX (CBOE Volatility Index) is trading at substantial discount to its 60 day EMA line . Readers will recall that we believe that "Risk Off" periods are signified when the VIX trades at 10% or more above that moving average. We can see further evidence of this "Risk On" attitude in the performance of some leading equity indices over the last week. The top five performers have been: The Brazilian Bovespa +18%, China A share index +7.8%, India's Sensex +6.4%, Japan's Nikkei +5.5% and the Spanish Ibex, also up by 5.5% (data as of close 05-03-2016). There is a clear bias here towards Emerging Markets and indices that have underperformed in 2016.

Commodities are also back in vogue, the FTSE 350 Mining Sector Index is up 31% year to date, having added almost 18% last week. Although I note that underlying commodity prices, as measured by the CRB Commodity Index, remain down by -4.4% in 2016 and so still have some work do.

To my mind none of the problems that caused the sharp sell off seen in the late summer 2015 and again in the opening weeks of 2016 have not been resolved. Rather they have been swept under the carpet once more and are therefore likely to raise their ugly heads once more at some stage in the near future.

“Original analysis is provided by Admiral Markets