FBS: Currency Outlook for December

Elizaveta Belugina, Kira Iukhtenko, FXBAZOOKA analysts

November became another interesting in Forex trading: US dollar rose against commodity currencies such as Australian, New Zealand’s and Canadian dollars, as well versus ‘safe’ Japanese yen. The dollar index (DXY) broke above the resistance line connecting the highs of July and September. At the same time, the greenback depreciated versus euro and pound.

The Fed keeps making our life interesting: minutes of the October FOMC meeting showed that many members of the central bank are considering reduction of monetary stimulus “even before the labor market projections point to an unambiguous improvement.”

On the one hand, there are some positive economic improvements in America: GDP rose in Q3 by good 2.8%, non-farm payrolls added more than 200K, while ISM manufacturing index rose to the highest level since May 2011. On the other hand, durable goods orders, pending home sales and consumer prices declined.

There’s still no certainty about the timing of QE tapering. As the New Year approaches, the US moves closer to the necessity of resolving its debt problems. We don’t think that it’s a good time for the Fed to start withdrawing monetary stimulus.

The market players are now starting to get used to the idea that the reduction of quantitative easing won’t mean the Fed’s policy tightening. No doubts the regulator will do its best to compensate the departure from bond purchases and make sure that interest rates remain low for a long time. While 10-year Treasury yield is below the annual maximum of 3% set in September, it is still significantly higher than levels under 2% seen in the first half of the year. High bond yields in the US usually represent a big argument against reducing QE.

The next Fed meeting will take place on Dec. 18. The central bank will also release its economic forecasts. This information should help investors to adjust their expectations.

EUR/USD: ECB’s efforts to bring back inflation  

Background: The European Central Bank decided to make a proactive step in its fight against low inflation and cut its benchmark rate in Nov. to 0.25%. Consumer prices in the euro zone rose in October at the slowest pace since January 2010 and added 0.7%, while the inflation target is just below 2%. Note that the price stability is the ECB’s top priority. In the following days the ECB officials tried to convince the market that the central bank still has a number of tools for further easing. Meanwhile, President Mario Draghi made ​​it clear that he doesn’t support the idea of ​​introducing negative interest rates on deposits. Such position of the ECB’s chief became one of the main drivers of euro’s growth.

Economic recovery of the euro area, which in the second quarter finally went out of recession, isn’t smooth. In Oct. the monetary union’s GDP added only 0.1% after increasing by 0.3% in the previous 3 months. At the same time, business and consumer confidence in the region’s largest economy, Germany, is high.

The next ECB meeting is scheduled on Dec. 5. In addition, the regulator will publish its economic forecasts. According to Reuter’s poll from 27 Nov., only 1 out of 68 economists expects another rate cut in December. At the same time, it’s hard to believe that the meeting will pass calmly: Mario Draghi loves surprises. Euro’s strength increases the risk of deflation, so if the single currency reaches levels around $1.3700, the ECB may try to discourage the bulls.

Technical picture: At the beginning of November EUR/USD found support at the 200-week MA just above $1.3300 and regained almost 61.8% of its rapid decline from October to November. Last month the single currency kept pushing up. Euro is playing with the 5-month uptrend line and the daily Ichimoku Cloud, trying to get back to the former and escape from the latter. We believe that the European currency will finish the year in the positive territory: euro would hardly be able to overcome October highs, but it won’t be left without support.

Resistance: $1.3650, $1.3700, $1.3830

Support: $1.3420/00, $1.3300

Сhart. Weekly EUR/USD

GBP/USD at new highs

Background: November statistics confirms that the British economy is on the right track to recovery. The Bank of England raised its 2014 GDP forecast from 2.5% to 2.8%. The Central Bank also noted that unemployment could fall below the critical 7% level significantly earlier than expected (Q1 2015 instead of Q2 2016). Unemployment rate fell from 7.7 % to 7.6 % In September.

Despite the fact that the BOE's tone has become much more hawkish over the recent months, the bank’s governor Mark Carney does everything to convince the markets that rates won’t be raised soon. He repeated several times that the unemployment drop below 7% is necessary, but not enough for a rate hike. Low inflation forecasts also confirm that quick policy tightening is unlikely. However, who has never tasted bitter, knows not what is sweet: the future Fed Chairman Janet Yellen remains committed to the "dovish" views, providing GBP/USD with fundamental support.

Technical picture: Despite all the talks about a double or even triple top in late November, GBP/USD broke above the sideways channel resistance ($1.5850/6260) and headed north. At the end of the month the pair closed above the key $1.6340 resistance – a 4-year trend line. We believe this is a good sign for purchasing cable with a medium-term target of $1.6600. The pair still has a chance to reverse lower from here, but we would not recommend to short the pair above $1.5900.

Support:  $1.6260, $1.6060, $1.5900, $1.5850

Resistance: $1.6600/30 (200-month MA), $1.6750

Сhart. Weekly GBP/USD

USD/JPY tested levels above 103 yen

Background:  In November, demand for the safe Japanese currency fell sharply. The main reason for yen’s drop was the news from the US: upbeat figures (GDP, employment data) and "hawkish" comments by Fed members. The deal with Iran at the end of the month has also contributed to the JPY weakness.  In addition, the market is convinced: if necessary, the Bank of Japan will increase monetary stimulus.

In the meantime, Japanese statistics confirms the effectiveness of the Abe’s strategy. The main goal of the regulator to overcome deflation is gradually becoming closer. Core inflation in Japan - National Core CPI, an indicator for which the Japanese government has set a target of 2% - rose to a 15-week high in October and reached 0.9% y/y. The figure includes energy prices, but does not reflect a change in food prices. According to the official forecast of the Bank of Japan for the 2014 fiscal year, core inflation in the country will rise to1.3% and in 2015 - to 1.9%. However, the BOJ member Shirai emphasizes “downside risks" for consumer prices.

Preliminary Japan’s Q3 GDP grew by 0.5% q/q (forecast: 0.4%; Q2 GDP growth was revised up to 0.9%). The final Q3 figure will be published on Dec. 9. The next BOJ meeting will take place on Dec. 20.

Technical picture: USD/JPY finally broke above the symmetrical triangle early November and, as this technical formation implies, entered a period of decisive growth. As can be seen from the monthly chart, the pair rebounded from 100 -period MA (97.60) and broke up from a wide bearish Ichimoku. At the end of the month the dollar tested fresh 6-month highs above the103.00 mark. Note that JPY has also weakened versus the other currencies (EUR, GBP). The Nikkei 225 stock index climbed above $15,000 late November and reached the highest level since Dec. 2007.

Bearish JPY trend is strong both technically and fundamentally and suggests further losses. Next USD/JPY targets are located at 103.75 and 105.50 (61.8 % Fibo). However, one should bear in mind that the net short JPY positions are at critical highs and create risks for a deeper bearish correction. Strong support lies at 100.60 yen.

Support: 101.15, 100.60 (Sept. 11 high), 100.00 (50% Fibo)

Resistance: 103.00, 103.75 (May 2013 high), 105.50 (61.8% Fibo), 107.55 (200-month MA)

Chart. Weekly USD/JPY

AUD/USD: the rapid decline

Background: This was a year of sales for the Australian currency. The mining boom in Australia is over, the Reserve Bank of Australia’s policy is dovish and there are some alarming reports from China. The RBA’s Governor Glenn Stevens once again provoked the depreciation of the national currency saying that the regulator is considering the possibility of currency intervention. Although Aussie has already made a spectacular decline, the IMF said that the currency is still overvalued by about 10%.

Although Australian economic data were rather good in November, investors were ignoring the positive and focusing on the negative news. The RBA kept rates unchanged at 2.5%, but accompanied its decision with dovish comments.

Australian dollar can afford a moderate correction up, but in the medium term the outlook remains bearish. AUD will be affected by both domestic factors mentioned above and the external pressure as the Fed will inevitably move closer to QE tapering.

Technical picture: AUD/USD continued its slide from the second half of October. The pair tried to find support around $0.9300, but the bears were persistent: Aussie broke down through all the barriers and dropped to levels below $0.9100 retracing 76.4% of the rise from Aug. to Oct. Note that the pair almost approached support line from 2008 lows. We plan to sell Aussie on its attempts to recover.

Support: $0.9000, $0.8850, $0.8800

Resistance: $0.9200, $0.9300, $0.9400

Chart. Weekly AUD/USD

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