Quantitative easing in the USA | 18 October 2013

US dollar is volatile as negotiations on debt ceiling are coming ...

Fundamental Forecast for  USA Dollar: Bullish

• Rally of the stock market and the US dollar convey the confidence about the closest time of finding solution regarding state debt ceiling

• Threat of default is a bullish event for the  the US dollar; but real impact is coming from the risk tendency.

This week, dollar broke through 5-week's bearish tendency. It was boosted by the hope that conflict around US state debt ceiling would be over. The level of market confidence is not unexpected if economic, financial and political outcomes of the alternate solutions are taken into account. However, its impact on the market proves that these hopes could be not as unshadowed as a new bullish trend of stocks and Treasuries. And of course, deep gray shadows for dollar can be seen.

Before the weekend, the mood of speakers and news about forthcoming debt ceiling changed a lot. From October, 17 (Thursday) shutdown is planned and it seemed that the US President and Republicans softened their “all or nothing” stand. The market is seemingly glad to the plans shifting debt ceiling for 6 more weeks (until November, 22) and recovering financial provision. That will allow traders gain time and will provide a chance to suspend milestone decisions.

This week gives clear short- and long-term reactions that we can expect. Dollar and money market can be expected in the beginning of a new week. Under the failure of  agreement, increasing optimism for US stocks and drop of risk and volatile indexes will require a prompt flow of capital to insurance and safety zones. As for the US dollar, this impact will depend on extent of fear. Failure to reach an agreement would inevitably lead to panics and thereby raising “shelter” status of dollar.

 Besides, the agreement is set to shift settlement day away, a full solution is not likely, therefore rally of relief is possible afterward too. However, we have to see, for how long this optimism can play. Rally of  S&P 500  and 5 per cent points of drop of the  VIX Volatility Index is within a reach from historical record of optimism. Add to that doubts regarding destiny of fiscal rates, forecasts on growth rates and pivot moment for impetus; and the next bullish wave looks less probable than the one, which led to such highs. It is hard to imagine a full “incline to risk”; all that can work for dollar very well. Further to the initial fresh wave of volatility in the beginning of the week, conditions will get more complicated. It is supposed that 11 hours before the crisis (that will satisfy “shelter” dollar as we move to October, 17), we will see market struggle and a clear “out of market” impetus. One of the direct risks regarding debt ceiling is a delay in releasing reports because of the Government's shutdown. We have got inflation figures, reports on  new houses, flows of capital and trade and budget figures. Nevertheless, September report on Labor will be a release with harder consequences.

Friday is the time of report release and this monthly puts the breaks on market engine. If the US government sets to work again, amount of labor positions can be released as early as on Tuesday. And consequences of this report can be far more affecting than just short-term spurt in volatility. Recently, representatives of the FRS told that in September they decided to postpone narrowing. Some experts pointed that conflict around finance and absence of data can delay inevitable slowdown of the “incentives” program. But if the crises is prevented and report on labor is finally crucial, it can greatly change expectations: at this very time, when the market is sensitive towards changes of background of risk...  

Forex forecast for the week 14 – 18 October

 US Dollar

In the end, it is a global world.

“In the end, it has always been a global world”, Ken Fisher writes in his last books (“Market's Never Forget (But people do)”. The time from Great Plague to WWI and II to the oil crisis of 70-s and downturn of technological boom in the US and Germany as well as to recent finance crisis tell that the world has always been interconnected. Events in one state impact on interests of other states. Now the world is interconnected more than ever. So, the biggest economy in the world, its monetary policy impact on the global economy.

Quantitative easing impacts on the global currencies.

 EUR/USD

Fundamental Forecast for Euro: Neutral

• Slowdown of growth rates in Europe hurts European currencies.

• Retail Forex traders are still net short in the part of EURUSD.

• If figures get better, European Central Bank will allow euro grow.

Trading with Euro over the recent week was mixed against the background of news about the US budget, which was in the focus of attention. The week was closed by  EURUSD with -0.10%, drop, but recovered part of its positions of Friday. It was caused by the assumption that softening of fiscal policy of the US can finally work for Euro.

 GBP/USD

Fundamental Forecast for British Pound: Neutral

• GBP/USD sales above 1.6000 must be a target

British Pound tried to save its bullish trend started in July. October's policy of the Bank of England (BoE) was a continuation of the recent one, but the next week Sterling can get a stronger support.

Central Bank's Monetary Committee abstained from making a public statement, and  Minutes BoE will be released on October, 23. Since recovery of the British economy is spinning up, the protocol can be more sounding.

 USD/JPY

Buyers still control the situation. 4-week's win series followed the inability of the pair to break down 200-dma (96.90) and its approach to  100 dma. Its crossing of  99.00 will perhaps allow testing September Highs around  100.50. Head of the Japanese Bank  Kuorda will speak in Washington, Columbia District, on Saturday's evening. On Monday, Japanese banks are closed because of Health and Sports Day.