A quick overview of where we stand for 8 of the most traded currencies. This helps build a general fundamental backdrop, which helps in positioning our technical analysis strategies in the broader picture and improves strategies and risk management.
FOREX Fundamentals Overview
As always, use the general fundamentals for positioning the technical price action and technical indicators within the broader “flavor of the week/month” picture and use price action and technical indicators for entry, exit, and risk management.
Yellen seeks to keep rates lower for longer to pull up demand and “overheat” the economy, which would make the unemployment rate drop towards the 4% area in 2017 and create a boost for the long-standing slump in the employment rate. Others of the FOMC don’t agree and would prefer regular rate hikes, because they want to avoid asset bubbles and move the policy rate further away from zero to allow more space for cuts when the next negative shock happens.
A rate hike is likely for December, along with a possible pickup in growth after a sluggish first half of 2016, putting a bullish bias on the USD up to end of 2016.
The outlook in January 2017 will depend on the combo of Fed policy, growth, labor market conditions, and possible fiscal stimulus. Lower rates will be bearish on the USD, but stronger growth and significant fiscal stimulus would be bullish on the USD, so the net effect will have to be reassessed once more data is available.
For the near term outlook, the “flavor of the month” will depend on communications from FOMC members, but should be USD bullish, on average.
Euro Area is in a hard place, as usual, with sluggish growth and a large “disconnect” between the big sluggish members (France, Italy, Spain) and the better-going giant (Germany). The general picture suggests “more of the same”, with no more and no less QE intervention by the ECB until March 2017. Nothing special to report for now. Big market movers would be a bank collapse and extra financial stress, but that is not the case for now. Overall, there are signs of slow, gradual improvements, with a generally sluggish context.
Deflation persists, but improved growth and a low unemployment rate combined to the safe haven status of jpy will limit large-scale depreciation, especially versus the weaker currencies. The USD bullish bias for the next few weeks may push usdjpy up, but beware of being short on jpy without QE from the BOJ – it is a risky bet, but as all risky bets, it could be very lucrative, of course!
Post-Brexit fears have yet to materialize, but the currency has still been under bearish pressure non stop since June. This may be the most undervalued currency of all 8, but the bearish sentiment makes it a risk long. The effect of the past depreciation is increasing inflation (weakening currency = higher prices for imports = more inflation), but inflation still remains below target, so this is actually a good thing, plus the added benefit on exports (and jobs) of the depreciation. Overall, gbp may have hit a temporary bottom for now, but calling the end of the fall is a VERY risky bet, which I will not dare make. Long at your own risk (it may be very lucrative in the end, of course). If I were to long gbp, I would sell eurgbp, aiming for 0,8755 or I would buy gbpcad, aiming for 1,6555.
The general economy is doing rather well, with an improving trade balance, low unemployment, and resilient growth. USD would need quite a bit of bullish bias to punch through the 0.9940 resistance in any convincing way, especially with the bearish tail on Oct 21 for usdchf.
The new Governor of the central bank Philip Lowe is keenly aware and sensitive to the danger of financial bubbles when rates are too low for too long. He may thus refrain from cutting rates further, even if inflation remains below-target, as he fears that cutting rates could exacerbate asset market imbalances. The currency may thus be under pressure to appreciate, as the policy rate is higher than most other industrialized economies (thus attracting global capital) and the general economic context quite positive. This suggests a bullish bias on aud for the near term.
The dovish tone of the central bank along with the deteriorating trade balance are putting a bearish pressure on nzd, but the generallly solid economy and higher-than-rest-of-world real interest rate puts a bullish twist on it, thus leading to a “tie” and a currency that will fluctuate depending on the pair, with technical levels having a strong influence and the most bearish currencies probably losing ground versus nzd.
OPEC calls to limit global supply of oil created a temporary boost on CAD, which faded fast and was replaced by the generally bearish assessment of the outlook by the central bank. With a deteriorating outlook, CAD remains with a bearish bias, although it may get occasional boosts from oil prices.