- Forex Weekly Outlook September 11-15
The US dollar plunged against its counterparts last week following increased Hurricane damage and North Korea missile threat. These uncertainties weighed on economic activities and plunged new job creation. The labour market added fewer jobs, 156,000, in August than expected, below the 180,000 jobs projected by economists and 189,000 recorded in July.
Also, while the second quarter economic growth was revised up to 3 percent from 2.6 percent previously reported, wage growth remained lackluster, rising just 0.1 percent in August. Another reason the markets doubt the Fed will raise rates anymore this year, especially with the US economic activities expected to be impacted by the Hurricane damage in the third and fourth quarters. Hence, the reason the odds dropped to 25 percent from 50 percent last week.
However, the services sector sustained growth, factory activities and private businesses added more jobs. Indicating the economy remains healthy, but surged in uncertainties is weighing on the overall outlook.
This week, GBPAUD, EURCAD, EURGBP, NZDJPY and GBPJPY top my list.
While the Pound Sterling remained weak and largely weighed upon by the ongoing Brexit negotiation. The embattled currency has defiled some predictions as certain sectors, like the manufacturing sector, remain resilient. Also, the possibility of the Monetary Policy Committee raising rate later in the year due to surging inflation rate is aiding the Pound resilience.
The Australian dollar, on the other hand, dipped last week against the pound and few other currencies after data showed the economy grew by 0.8 percent in the second quarter but household savings declined while wage growth remains weak. Growing by just 0.3 percent in the quarter and 2.1 percent year-on-year.
Again, while the drop in savings signaled a surge in consumer confidence, the flat retail sales and the decline in trade surplus to 0.46 billion in July from 0.89 billion in June says otherwise. Accordingly, the Reserve Bank of Australia governor, Philip Lowe said in a statement that the higher Australian dollar exchange rate is expected to weigh on price pressures in the economy and hurt economic output and employment. This suggests that despite the surge in commodity prices and growing economy, the apex bank may not raise rate anytime soon.
In light of this, I will be looking to buy this pair above the downward trendline started on May 10 for 1.6539 targets as shown above. A sustained break above the trendline would affirm mid-term bullish continuation and open up 1.6539 targets. Failure to do so will invalidate this analysis and reign-in prices.
Since the Bank of Canada first raised rates in July, the Canadian economic outlook has changed and strengthened cash inflow. This surge in new investment was also aided by a healthy labour market and moderately stable commodity prices. Last week, the BOC once again raised rates by 25 basis points for the second time within two months. A sign that the economy is growing and expected to continue into the future. Accordingly, the labour market added 22,200 jobs in August, while the unemployment rate improved to 6.2 percent from 6.3 percent recorded in August. This strong economic data is expected to boost Canadian economic outlook and subsequently support the currency against its counterparts going forward.
Also, while the European Central Bank is yet to decide on balance sheet normalization or when inflation rate would meet the apex bank’s 2 percent target. The Bank of Canada is making decisions. However, while I expect the Canadian dollar to gain further this week, the uncertainties in the U.S. are expected to hurt the currency outlook and limit volume of trade. Still, I will be looking to sell this pair below 1.4602 once price closed below that level.
Technically, price moved below the 20-day moving average two weeks ago and has since sustained it. But bearish confirmation below 1.4602 is needed to validate further sell while targeting 1.4398 support level. A sustained break should open up 1.4172 support, our target 2.
Since the EURGBP called the top on August 29, this pair has plunged by 192 pips. However, last week, this pair closed below the 20-day moving average for the first time since July 14. A sign of Pound resilience and ECB monetary policy stance. Therefore, if consumer prices due on Tuesday shows inflation rises from the current 2.6 percent to the projected 2.8 percent, the Bank of England stance on interest rate hike is likely to change as escalating inflation rate is predicted to force the apex bank to raise rates regardless of the Brexit outcome. If happened, it will boost the Pound temporarily.
Also, it is expected that the monetary policy committee will keep interest rate at record low of 0.25 percent on Thursday, but investors will look into the monetary statement for a clue. An increase in the odds of the apex bank raising rates would aid pound outlook against the Euro and vice versa.
This week, I will look to sell this pair below 20-day moving average for 0.9015 support as shown above, while monitoring economic data for a clue on monetary stance.
After our first target was hit three weeks ago, this pair volume of trade dropped following North Korea missile test over the Southern region of Japan. But with the last week candlestick closing below the ascending trend line and as bearish a pin bar as shown below. Once again NZDJPY has confirmed bearish continuation, therefore I remain bearish on this pair with 76.25 as the target.
The Pound remains resilience and for the last three weeks it has gained against the Yen, however, it failed to break the ascending trendline that doubled as the resistance and also the 20-day moving average. Suggesting that downward pressure remains and current pull back was merely caused by growing global uncertainties due to North Korea missile threat.
Hence, I remain bearish on this pair as long as price remains below the ascending trendline and will look to sell below 142.42 price levels for 136.30 targets, a sustained break should open up target 2 as shown above.
Last week, USDCAD’s target 2 was hit after 5 weeks. But the uncertainties in the US, Canada’s largest trading partner, forced me to stand aside, even though I expect the renewed interest in the Canadian economy to bolster Canadian dollar outlook towards 1.1706 support. This week, I will be standing aside on this pair while monitoring global events and update accordingly.
CBN Warns Against Rejection of Old and Lower US Dollar Bills
The Central Bank of Nigeria (CBN) on Tuesday has warned both the Deposit Money Banks (DMBs), Bureau De Changes and other forex dealers against rejecting old and lower US dollar denominations.
In a circular dated April 9th, 2021 and signed by Ahmed B. Umar, Director, Currency Operations Department, CBN, the apex bank said it has received several complaints from members of the public on the rejection of old and low denominations of US Dollar bills by authorised forex dealers operating in the country.
The CBN, therefore, mandated all DMBs/authorised forex dealers to accept both old series and lower denominations of United States Dollars (USD) that are legal tender for deposit from their customers.
The leading bank added that it will not hesitate to sanction any DMB or other authorised dealers who refuse to accept old series and lower denominations of US dollar bills from their customers.
Also, the apex bank warned all authorised dealers to desist from defacing and stamping US Dollar Banknotes as such notes always fail authentication test during processing and sorting.
Naira Remains Under Pressure Amid Weak Macro Fundamentals
The Nigerian Naira plunged as low as N422 to a United States Dollar on the NAFEX window on Wednesday before moderating to N410 following a series of weak macroeconomic fundamentals released in recent weeks.
Nigeria’s inflation rate increased by 18.17 percent year-on-year in March while the unemployment rate rose to 33.33 percent with new job creation hovering at a record low amid weak economic productivity.
The commodity-backed currency traded at N486 to a US Dollar on the parallel market popularly known as the black market.
Against the British Pound, the local currency was exchanged at N670 and N577 to a Euro common currency.
At the Bureau De Change segment of the foreign exchange market, Naira traded at N482 per US Dollar; N670 per British Pound and N580 to a Euro.
In an effort to up revenue generation and ease exposure to the unstable global oil market, the Federal Government of Nigeria had removed electricity tariffs, fuel subsidy, introduced other import related charges and devalued the local currency more than three times in the last 12 months despite the negative impact of COVID-19 on the masses.
The series of adjustments dragged on economic productivity as importers and other forex-dependent businesses struggle with persistent dollar scarcity largely due to low foreign reserves of $35 billion caused by weak crude oil production and OPEC production cap.
The apex bank’s inability to service the economy with sufficient dollar to ease liquidity challenges in spite of various measures introduced recently to lure diaspora to remit more escalated prices of goods while the surge in electricity tariff, petrol price and other increments were passed on to already stressed customers.
Dollar Drops as Traders Prepare for Inflation Data
The dollar slipped on Monday towards a three-week low as Treasury yields traded near recent lows and traders awaited crucial U.S. inflation and retail sales data in coming days.
Elsewhere, it was a quiet start to a data-heavy week for foreign exchange markets. The euro climbed back above $1.19 while the British pound rebounded from a two-month low.
The dollar’s performance has been tied to U.S. Treasury yields for most of 2021, after concern about rising inflation in the United States and a stimulus-fueled economic rebound triggered a jump in Treasury yields in February.
A fall in U.S. yields last week triggered the worst week for the dollar in 2021. With yields inching lower on Monday, it was back under pressure.
Federal Reserve Chairman Jerome Powell said in a U.S. media interview released on Sunday that the U.S. economy was at “an inflection point” and looked set for a strong rebound in the coming months, but he also warned of risks stemming from a hasty re-opening.
Investors are now waiting for U.S. March inflation data due on Tuesday.
“We are set to see the first evidence of the much anticipated surge in inflation that is widely expected through the coming months as base effects from a year ago begin to take effect as the sharp declines post-COVID start to fall out of the annual calculations,” MUFG analysts said.
They said the dollar’s fortunes could well “remain linked to 10-year yields”.
The benchmark 10-year Treasury yield was at 1.664% after dropping to as low as 1.6170% last week. It had surged to a more than a one-year high of 1.7760% on March 30.
The dollar index, which measures the U.S. currency against a basket of currencies, weakened 0.2% to 92.03. The euro initially dropped but later recovered and was up 0.1% to $1.1915.
Bitcoin traded above $60,000, closing the gap to its record high.
Against the pound the dollar initially gained before reversing course. The British currency was last up 0.5% at $1.3763 after briefly touching a two-month low of $1.3669 as traders cheered the latest phase of the government’s economic re-opening plan.
The dollar fell 0.3% to 109.33 yen versus the Japanese currency.
U.S. dollar net short positions have fallen to their lowest in nearly three years, according to data published on Friday.
ING analysts noted that speculators had cut their net short dollar positions for the 12th consecutive week, which could prove a headwind for further dollar gains.
“At this stage, the dollar has lost all its positioning “advantage”, having a neutral speculative positioning, which suggests we should no longer see dollar rallies against most G10 currencies exacerbated by the unwinding of USD shorts,” they wrote.
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