Forex Trading Weekly Forecast

• US Dollar May Find Itself As The Top FX Safe Haven And Growth Leader
• Euro Forecast Dims on Worst GDP Result in 13 Years
• Japanese Yen Safe Haven Status In Jeopardy From "Unimaginable" GDP
• British Pound Outlook Remains Volatile; CPI, BOE Minutes Could Weigh
• Swiss Franc May Sustain Gains as Confidence Falls on Financial Markets
• Canadian Dollar Sinks on First Canadian Trade Deficit in 32 Years
• Australian Dollar May Break Higher If Risk Appetite Holds Up
• New Zealand Dollar Rate Outlook Dims as Growth and Inflation Falter

US Dollar May Find Itself As The Top FX Safe Haven And Growth Leader

Fundamental Outlook for US Dollar: Bullish

• Treasury Secretary Geithner and Congress pour money into the market yet traders remain skeptical
• Retail sales rise for the first time in seven months through January, but does one month undo such a dour trend?
• A reminder of whose opinion truly matters to growth, consumer outlook plunges to a 28 year low

While the dollar exhibited incredible volatility this past week; for the most part, the increase in price action would not come with any defined direction from the world's most liquid currency. Instead, the majors would further carve prominent wedge formations that will ultimately demand breakouts and a decision for direction some time soon – and that resolution may come this week. First, we need to take a look at price action to understand the building stress behind the markets. Both EURUSD and USDJPY have worked their way into terminal wedges that will force the market into a decision. However, from a fundamental standpoint, these two pairs highlight very different roles for the US dollar. When measured against the euro, direction will come from a bias in growth forecasts. Far more unique among the majors, USDJPY pits the market's top two safe haven currencies against each other – and long-held rules may change.

It is well known that the Japanese yen is the go to currency for safety of funds concerns. This has been the case for more than a decade as Japan has kept its lending rates at or near zero (deriving an anti-carry interest) and the economy has floated large surpluses and savings. However, with global interest rates plunging towards zero and world-wide growth expected to hit its worst pace since WWII; investors are left to rethink where their capital is safest – and where it could also generate return when conditions do turn around. For the United States' part, there little room for yields to deflate any further (they are also near zero). More importantly, though, they are far ahead of the curve on efforts to stabilize the domestic markets and economy. Constant liquidity injections, government guarantees, critical bailouts, proposals to draw out toxic debt that is clogging the credit system, the introduction of massive stimulus plans and endeavors to develop regulation for the long-term make for a strong foundation that few other economy's can match. It is simply a matter of time before these cumulative stimulus catches up with the greenback.

The safe haven dynamic of the world's most liquid currency (backed by the world's most liquid ‘risk-free' asset) has been a clear driver in all of the majors outside of the yen's purview. However, as global policy makers attempt to put out the fires and interest rates near zero; we are slowly seeing a shift away from panic to growth. With global interest rates quickly approaching zero and more than three months of congestion under the market's belt, fundamental speculation is focusing on gauging the world's economies' position on the recession curve. For those that are looking at relatively shallow and short contractions (and therefore expected to recover first), investors see the potential for return when risk has been fully exercised. The US is certainly a ways off from finding a true bottom in its own recession; but compared to Japan and the United Kingdom – its prospects look much better. Alternatively, when set against the Euro Zone, we are met with real debate. We will keep an eye on the round of second-tier data due this week, but the true shift in sentiment will likely be more closely linked to the efforts of the government to recharge the economy. - JK

Euro Forecast Dims on Worst GDP Result in 13 Years

Fundamental Outlook for Euro: Bearish

• Euro remains largely Rangebound despite ECB rate cut predictions
• EU officials aim for coordinated financial bailouts – Euro remains indifferent
• Euro Zone GDP falls by most since 1995

The Euro finished marginally lower against the US Dollar to end the week's trade, sticking to its fairly well-defined range despite continued tests of established lows. It seems that traders are unwilling to push the Euro/US Dollar below last week's trough near the 1.2700 mark despite clear downward pressure on risky asset classes. The Euro's correlation to the US S&P 500 and other risk barometers has literally never been stronger, and we expect that the currency will continue to follow the trajectory of broader financial sentiment. The euro's resilience to further drops gives us a marginally bullish short-term trading bias.

The upcoming week will bring an important string of forward-looking economic data and paint a much clearer picture on the relative health of Euro Zone economic fundamentals. A German ZEW Economic Sentiment report will be the first key event on the ledger-likely setting the tone for subsequent releases. Analysts predict that business sentiment remains dour, but forecasts nonetheless call for marginal improvement in the forward-looking economic survey. Many research desks claim that stabilization in the rate of economic deterioration may be enough to signal that risky asset classes will turn-implying that the euro could move higher as a result. Though we don't necessarily subscribe to this line of thought, it will be important to watch for positive surprises in German ZEW data.

Friday's Purchasing Manager Index results will likewise shed light on the rate of deterioration in the broader Euro Zone and could potentially force moves in euro pairs. The economic release has not been especially market moving, but we feel that any extra bit of information has become all that more significant during times of extreme uncertainty. Consensus forecasts currently call for modest improvements in Euro Zone Manufacturing and Services conditions. Yet both PMI indices are expected to remain below the neutral 50 mark-implying that both sectors remain mired in recession. It will take an especially large positive surprise to elicit a noteworthy improvement in European economic sentiment and-by extension-the euro itself. Otherwise, it remains critical to watch broader financial market risk sentiment. - DR

Japanese Yen Safe Haven Status In Jeopardy From "Unimaginable" GDP

Fundamental Outlook for Japanese Yen: Bearish

• Risk and carry trends coming to a crossroads as failing growth and government stimulus square off
• A USDJPY breakout could redefine long-term direction between these two safe haven currencies
• The US steps up its bailout efforts yet confidence in growth and financial markets is little moved

How long will the market demand a safe haven? This is the question on most investors minds regardless of their asset class or trading method. Perhaps a more interesting question for the FX market, however, is how long can the Japanese yen retain its position as the favored safety of funds currency. These will be the key drivers for the yen over the coming week and beyond.

There isn't much room (or time for that matter) for traders to think critically about the more complex fundamental questions surrounding the Japanese yen this weekend as the first measure of fourth quarter GDP is scheduled for release first thing Monday morning in Tokyo. Rarely does a regular, scheduled economic indicator threaten to move market; but this reading certainly has the power. Economists are already aiming low by forecasting a 11.6 percent annualized contraction for the world's second largest economy through the end of 2008. Such a slump dwarfs the 1.2 percent contraction in the Euro Zone, the 1.8 percent slump in the UK and even the 3.8 percent slide in the US. So, to put the data on a more even playing field, we can measure it up to its own historical performance. Should such a number be met, it would confirm the worst recession since the 1974 oil crisis.

It is not a stretch to come to the same conclusion when benchmarking the number ourselves. Foreign demand has vanished as global spending has disappeared; and domestic consumption was struggling even during the recent boom years. However, looking beyond the historical significance of this data, it is important to keep in mind the warnings issued by the Bank of Japan's head researcher Kazuo Momma. He warned this past week that the contraction through December "may have been unimaginable," but the more disturbing comment was that the market should be prepared for an even greater slump through the first quarter of this year. This leaves traders to wonder how long Japan's recession will last. Even when global growth does start to turn, it will likely be a drawn out and cautious shift; and there is little to expect from domestic anemic domestic spending. If this is the case, investors will start to wonder why the yen would be considered during a flight to safety. Low interest rates aren't unique and safety of funds is severely compromised if Japan heads into another crisis where its banks are labeled technically insolvent.

A fading correlation between the yen and risk appetite will likely take time; and it may not be prudent driver for price action through near-term. More pressing will be the overall level of sentiment among investors. Should, risk appetite improve, the debate over the best safe haven is irrelevant. Confidence has certainly not returned amongst speculators; but the groundwork has been laid. From the markets, the yen crosses and equities have been confined to congestion since November; money market rates have begun to improve and there has been a notable shift in capital towards those safe investments with some level of return. From a more tangible standpoint, governments have made drastic efforts to thaw credit and hold up their own markets. Conditions will truly turn when confidence among consumers and investors improves; and it may be only a matter of time before these economic participants yield to the loose but global effort being made to turn things around. - JK

British Pound Outlook Remains Volatile; CPI, BOE Minutes Could Weigh

Fundamental Outlook for British Pound: Bearish

• UK jobless claims rose for the 12th straight month to a nearly 10-year high of 1.23 millon
• BOE Governor King says UK economy is in for "deep recession"
• BOE forecasts that CPI will drop "well below" 2 percent, GDP to contract sharply

The British pound finished the week lower against the US dollar, as comments by Bank of England Governor Mervyn King and the minutes from the central bank's last meeting added to evidence that another rate cut was on the way. Looking ahead to this coming week, the currency could remain under pressure unless a surge in investor confidence propels "risky" assets higher. In economic news, the release of UK CPI could weigh on the British pound as the annual rate of growth is anticipated to slow to 2.6 percent from 3.1 percent, putting inflation back within the Bank of England's target range of 1 percent - 3 percent. However, with the BOE expecting that CPI could fall "well below" 2 percent in the first half of the year, such a decline may only be the first in a series.

Meanwhile, the Bank of England's meeting minutes tend to be a huge market-mover for the British pound upon release at 4:30 ET, and the February 18 report is unlikely to be any different. During the February meeting, the BOE's Monetary Policy Committee (MPC) slashed the Bank Rate by 50 basis points to yet another record low of 1.00 percent, as expected. However, the British pound subsequently rallied as the MPC suggested that they may not cut rates again on March 5. Since then, though, BOE Governor Mervyn King's comments have signaled otherwise and if the MPC's comments and outlooks signal that the central bank will reduce the Bank Rate further, the British pound could pull back.

Finally, Friday's UK retail sales figures are forecasted to show another rise in spending during the month of January, and while this could initiate a reaction from the British pound - especially if the reading is significantly higher or lower than estimates - traders shouldn't read too much into the actual figure. A few months ago, the BOE said that they would not put too much stock into these government statistics as they are often volatile, and instead they look toward private surveys like BRC retail sales.

From a technical perspective, there are essentially two clear "lines in the sand" that may dictate whether or not we will see a bearish or bullish break. Indeed, the 1000 point range of 1.4135 - 1.5000 has contained GBP/USD so far, and traders should keep an eye on those levels as a break above or below may signal sharper moves to come. – TB

Swiss Franc May Continue to Gain as Confidence Falls on Financial Markets

Fundamental Outlook for Swiss Franc: Bearish

• Swiss Franc Outperforms Other Major Currencies
• Inflation Rate Drops More than Expected, Prints at 0.1%
• Producer and Import Prices Decline for a Sixth Month on Energy Costs
• Consumer Confidence Unexpectedly Improves, But Fails to Impress

The Swiss franc was the best-performing major currency last week and is likely to remain well-supported as confidence evaporates across financial markets. Investors were clearly not comforted by US policymakers' passage of a gargantuan fiscal stimulus package or Treasury Secretary Tim Geithner's conspicuously vague proposal to rid financial institutions of mortgage-linked toxic assets: stock prices collapsed and capital fled to stand-by safe haven currencies, boosting the Franc, the US Dollar, and the Japanese Yen. Next week promises a hefty dollop of US event risk, culminating in the always-important Consumer Price Index report on Friday. This coupled with expectations of a plan to deal with mounting home foreclosures from an already humbled Obama administration threatens risky assets and promises a fertile environment for extended Swiss Franc upside.

Looking at the economic calendar, Retail Sales have room for a bit of an improvement: traders saw the SECO measure of consumer confidence rebounded from record lows last week as inflation came to a near-standstill, boosting Swiss consumers' purchasing power. Importantly, a print in positive territory is unlikely to be anything more a temporary up-tick: unemployment has risen to a 2-year high of 3.3% and will weigh on disposable incomes as well as prompt precautionary saving; further, the fallout in price growth will work against consumption if inflation turns negative (a reasonable proposition considering CPI printed at just 0.1% in January), for if consumers expect prices to fall in the future they will perpetually put off purchases to get the best possible deal, putting the brakes on spending altogether. Indeed, Swiss National Bank Vice-Chairman Philipp Hildebrand has even suggested forex market intervention to check the deflation threat. The Trade Balance may slip into deficit for the first time since August 2005: the surplus narrowed to just 0.22 billion francs in December as outbound shipments plunged 13.3%, the most on record, reflecting deepening recession in Switzerland's key export markets in the US and Europe. With no noticeable improvement in overseas demand, there seems little scope for trading terms to head anywhere but lower.

Canadian Dollar Slips on First Canadian Trade Deficit in 32 Years

Fundamental Outlook for Canadian Dollar: Bearish

• Canada produces its first trade deficit since 1976
• Housing starts unsurprisingly fall further through housing recession
• (From last week) Economy Sheds 129 Thousand Jobs, The Largest Loss In Over 30 Years

Canada's first trade deficit in over 30 years helped pushed the domestic currency lower against its US namesake, while sharp drops in Crude Oil prices likewise added downward pressure on the commodity price-sensitive currency. Fundamental sentiment for the Canadian Dollar certainly took a hit through the week's developments; Canada remains the most trade-dependent country in our G10 currency universe, and a sharp deterioration in external demand for Canadian production bodes poorly for domestic industry.

Traders will now turn their attention to the coming week's key string of economic reports. Consensus forecasts call for further deterioration in important Manufacturing Shipments data, while Wholesale Sales and CPI figures are likewise predicted to fall. The manufacturing report is rarely market-moving, but the health of Canadian industry remains of paramount significance to broader economic growth. We will keep a close eye on the results, but the highlight of the week will likely come on Friday's highly-anticipated Consumer Price Index results.

Interest rate traders predict that the Bank of Canada will cut interest rates by at least 50 basis points at their March 3 meeting, but such forecasts could shift on a surprise in CPI data. The Bank of Canada targets a 2.0 percent inflation rate on their preferred measure of core prices. Markets will clearly watch for any surprises around this figure, but current forecasts of a 2.2 percent year-over-year print arguably dampen expectations for aggressive rate cuts. Currency markets have proven largely indifferent to interest rate differentials, but we would argue that a significant deterioration in CAD yields could force further losses in the recently downtrodden currency. Otherwise, it will be especially important to watch the trajectory of commodity prices-especially as the USD/CAD-Commodities correlation trades at its highest levels in at least 10 years. - DR

Australian Dollar May Break Higher If Risk Appetite Holds Up

Fundamental Outlook for Australian Dollar: Bearish

• Australian business confidence fell to a record low of -32 in January from -20 the month prior.
• Consumer confidence fell 4.6% after a 2.2% drop in January, as the economy approaches a recession.
• Australian companies unexpectedly added 1,200 jobs in January versus expectations of a 18,000 decline

The Australian dollar started the week on a down note as it retraced the gains from the week prior on a record low in business confidence and growing concerns that the global downturn would continue in spite of the efforts of the governments and central banks. Risk appetite started to pick up toward the end of week as the upcoming G-7 holds the potential to deliver a coordinated global response to the current crisis which is needed versus the every man for himself approach to this point. Fundamentally the Australian economy continues to inch closer to a recession as consumer sentiment also fell 4.6% in January, dimming the outlook for domestic growth. Although we saw a slight increase in the number employed, the unemployment rate rose to the highest level since June 2006.

The upcoming release of the RBA's minutes from their last meeting could present event risk for the Australian dollar as it may give some insight into future monetary policy. The MPC lowered the official target rate to a 45 year low of 3.25% at its last meeting as it attempts to prevent the economy from entering a recession. Last week the central bank cut its growth forecast for 2009 to 0.25% before improving to 1.25% in 2010, but warned that the risks remain that it could contract like other major countries. The 0.6500 price level has held firm as support and may provide a strong base for a move higher, a possible test of the 50-Day SMA 0.6739 seems reasonable with psychological resistance at 0.7000 the next barrier. However, if the G-7 and the "Obama Stimulus" plan fails to inspire traders, we could see a return of risk aversion the Australian dollar trade lower. -JR

New Zealand Dollar Rate Outlook Dims as Growth and Inflation Falter

Fundamental Outlook For New Zealand Dollar: Bearish

• Retail Spending Falters for Four Consecutive Quarters
• NZD/USD COT Signal Bullish Outlook

As investors remain risk adverse, the New Zealand dollar should continue to hold its bearish trend next week as the economic docket is expected to show a deepening downturn in the economy however, as the G-7 is scheduled to meet over the weekend, efforts to mitigate the downside risks for global growth could help to spark a rise in risk appetite. Nevertheless, skepticism about the U.S. bank bailout package paired with expectations for a rate cut by the Reserve Bank of New Zealand is likely to hamper the appeal of the higher-yielding currency, which could weigh on the exchange rate over the near-term.

The fundamental calendar for the following week is expected to show a considerable drop in producer prices as a result of lower commodity prices, and as the outlook for inflation deteriorates, the RBNZ is widely expected to ease policy further as policy makers maintain their dual mandate to ensure price stability while fostering economic growth. A Bloomberg News survey shows that economists forecast Governor Alan Bollard and Co. to lower the cash rate between 50-100bp next month as the central bank aims to steer the $128B economy out of a recession, while Credit Suisse overnight index swaps foreshadows a weakening outlook for interest rates as market participants expect policy makers to cut by nearly 100bp over the next 12 months. Amid expectations for another round of aggressive rate cuts, Dr. Bollard explicitly stated that he "would expect any further reductions to be smaller than those seen recently' after delivering a 150bp cut last month, which suggests that the central bank may continue its easing cycle, but at a slower pace, as the International Monetary Fund forecasts a global recession for 2009. Despite the extraordinary efforts taken on by the New Zealand government, the kiwi slipped to a seven-year low of 0.4961 against the greenback earlier this month, and as the reserve currency continues to benefit from safe-haven flows, the exchange rate may continue to fall lower as investors continue to curb their appetite for risky assets. - DS

DailyFX

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