DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
Learn forex trading with a free practice account and trading charts from FXCM.

Euro: ‘Buying Time’ May Not Work This Time as Crisis Intensifies

Fundamental Forecast for the Euro: Bearish

There are many comparisons being made to current Euro-region market conditions and those back in the second quarter of 2010 when trouble just started brewing for Greece. However, it is perhaps better to draw the connections to the situation now and that of the second half of 2008. With the financial crisis three and a half years ago, both investors and policy officials were incredulous that the situation could spiral out of control so quickly due to the interconnectivity of the global financial markets and the speed with which panic can spread. This time around, recent history has made the masses cautious, policy officials have clearer threshold at which they will act and there is less retail leverage behind current highs. That said, we have overextended the dependency on central bank / government support, growth is slowing once again and the source of the next potential global pandemic is a long-festering, structural problem of the Euro Zone.

For two years now, the modus operandi for European officials has been to ‘buy time’. Whether intentional or not (under most cases it is not intentional), changes to policy and rescue efforts have secured a short period of market calm rather than genuinely solved underlying issues. Yet, as with the diminishing influence of US easing programs on the country’s capital markets, the market has found less and less reprieve from EU officials’ efforts as of late. There are multiple ‘hot spots’ that are being managed at this moment.

The most prominent concern (in other words, the most headline friendly) is the possibility of a Greek exit from the Euro Zone. The is such a prominent threat for the shared currency because the impact of this worst-case-scenario is so significant – and it is no longer such a far-fetched outcome. The time table for this threat, however, is probably not as dire as the media would like it to be (it it bleeds, it leads). Speculation that the country will announce its exit sometime next week are unreasonable as such a decision is not likely to be made under a caretaker government. On the other hand, a recovery after having sunk this deep is unlikely. For now, we wait until the next election supposedly on June 17 to see what next steps will be made as few decisions will be made without a government.

Another, more expansive concern is the broader region’s financial health. Spain in particular seems at-risk. We have seen capital outflow from the banking system, a closed funding market and trouble with collateral sink Greece to brink of a banking collapse. Now, we are starting to see similar symptoms in Spain. The nationalization of Bankia, a forced merger amongst shaky cajas and reports of mass withdrawals speaks to spreading panic. If this is not quelled quickly, we will have a serious problem as it quickly returns to the other bailout countries (Ireland and Portugal) and potentially even exposed core members (like Italy).

Most of our fundamental guidance this coming week will come via the larger themes and splashy financial headlines, but there are a few scheduled milestones that should be monitored. On Tuesday’s we have regional consumer confidence figures as well as a Spanish and EFSF bond auction. Thursday, there is the second reading of German GDP numbers (the components can see sizable revision), but the real growth reading is the PMI figures for May – timely and accurate proxies for regional activity. Beyond that, we need to watch what the policy makers are saying. Are they keeping a strong front or do they continue to head down the road of capitulation? – JK

US Dollar Makes a Break to 16-Month Highs as Fear Creeps In

Fundamental Forecast for the US Dollar: Bullish

• CPI and retail sales do little to alter the outlook for rates and growth
• The 10-year Treasury Yield pushes towards a fresh record low, shrinking the dollar’s return
• USDollar breaks to a 16-month high

Though the benchmark currency eased back into the final 48 hours of this past trading week, the dollar nevertheless posted another impressive run through the entire period. A third consecutive weekly advance for the Dow Jones FXCM Dollar index marks the best run for the currency since November of 2010 and subsequently posts its highest close in 16 months. By all accounts, this is a bullish turn. However, in these impressive statistics, there is still something lacking – momentum. Sure a rally that posts 11 bullish days in 15 trading sessions (marred only by very small setbacks) is inspiring, but progress is still in its fledgling state having just crossed the multi-month threshold. What are we missing? True fundamental support.

It may seem peculiar to suggest that the US dollar is lacking for fundamental drive considering the burn of risk aversion and speculative deleveraging is so obvious across other assets. Most prominent is the S&P 500’s tumble this past week. The benchmark equity indexes are the best measures of risk appetite given the strong correlation between Fed-based stimulus and the US stock market’s performance. Having assumed the role of global safety net years ago, the US central bank has acclimatized the investors to expect a shot of support (additional stimulus) every time the perception of wealth fades. All that said, the S&P 500 dropped 12 of the past 15 trading days to a four-month low. Furthermore, Friday’s plunge was highlighted with the largest swell in volume (the second largest this year).

In risk aversion, traders will first unwind positions deemed excessively risky and then start to move into true safe havens. These are two distinct stages – and subsequently, it is a primary reason USDJPY has shown its consistent decline these past months. While the greenback offers safety, it does not offer a competitive yield. In fact, most low-risk or risk-free assets (the only academically risk-free is Treasuries) have negative, real interest rates – adjusted for inflation. If there is no return on the investment – and you may even lose money on it if you stick with the entire holding period – the market must be strongly motivated to buy into the US. And, nothing motivates better than panic.

We have certainly seen risk aversion to this point, but outright fear has been held in check. We can see this in various measures of financial stability. Credit markets are healthy, there are few signs that Europe’s troubles pose an imminent threat to the US system and even the capital market slide has been orderly to this point. On the other hand, implied volatility measures for the equity, currency and commodity markets are starting to pick up. Default risk premiums are starting to rise. There is a notable shift to shorter-term maturity debt. These are early and lower-impact signs of trouble ahead.

As we move forward, to support the dollar’s push to a serious bull trend, we need to fall within a specific band of sentiment. We certainly need risk aversion to keep the currency on the bid. There is an ‘anti-euro reserve’ quality to the greenback, but that isn’t active enough to keep leverage the heights are already scaling. Alternatively, if risk aversion grows too intense, we risk rousing the attention of the Fed and fellow global policy groups. Though stimulus programs have shown a diminish impact on source currencies (for the Fed, it is the dollar), the short-term impact would certainly be detrimental. We have a G8 meeting this weekend, but conditions are not likely volatility enough. – JK

Fundamental Forecast for New Zealand Dollar: Neutral

An iron-clad correlation with the MSCI World Stock Index and a lackluster domestic economic calendar puts the New Zealand Dollar the mercy of market-wide risk sentiment trends. On one hand, this puts the focus on US economic growth expectations as traders work out the probability that a pick-up in the US will be able to counter headwinds facing global performance from a slump in Europe and a slowdown in Asia. On the other, fears that turmoil in Greece is metastasizing to engulf the Eurozone and possibly spark a wider credit crisis continue to linger.

Sizing up the US calendar, the spotlight is likely to fall on the Richmond and Kansas City Fed surveys as markets continue to build their baseline for where world’s top economy stands in May. Expectations point to mixed results and traders will be keen to put the final outcomes in the context of last week’s mixed news-flow, where a stronger Empire Manufacturing gauge was tarnished by a deeply disappointing Philadelphia Fed print. The final revision of May’s University of Michigan Consumer Confidence gauge rounds out the docket. Soft readings are likely to fan the flames of QE3 speculation, a supportive development for risk appetite and the Kiwi Dollar alike. Scheduled remarks from the Fed’s Kocherlakota, Lockhart, Plosser and Dudley will be interpreted along the same lines.

In the Eurozone, the tone for the week will be set by a G8 summit taking place at Camp David over the weekend. Markets will be holding out hope for signs of an emerging multilateral response to ensure global financial markets are protected from contagion. The absence of concretely reassuring rhetoric is likely to weigh on risky assets and the New Zealand unit, while a convincing commitment to swift stabilization policy would be supportive on both fronts. The preliminary set of May’s Eurozone PMI figures may likewise enter into the equation, updating markets on the extent to which a deepening slowdown threatens to sabotage deficit-reduction efforts and amplify credit market stress.

April’s Trade Balance figures amount to the only bit of noteworthy domestic event risk, with immediate fireworks unlikely. The flash Chinese Manufacturing PMI print from HSBC may prove market-moving however. Needless to say, the manufacturing sector is at the heart of China’s export prowess and thereby represents a crucial engine for Asian and overall global growth, and so the PMI release has potential to be an important inflection for risk sentiment trends.

• Dollar Stumbles but Doesn’t Break Trend Into Week End
• Euro: Moving Away from Scheduled Event Risk to Rumor and Panic
• British Pound Takes a Shot Across the Bow by Posen
• Japanese Yen Traders Wonder: Will the BoJ Up Stimulus, Does it Matter?
• Swiss Franc: Will the SNB Simply Wait for a Eurozone Explosion to Act?
• Australian Dollar Plunges Fresh 7 Month Lows as Speculative Interest Nearly Flips
• Gold Capitalizes on Dollar’s Weakness, Posts Biggest Two-Day Rally Since October

Dollar Stumbles but Doesn’t Break Trend Into Week End

The Dow Jones FXCM Dollar Index put in for its first two-day bearish performance in three weeks Thursday and Friday, but this was more a technical development than a trend change. Ending the week at exactly 10,100 (the breaking point for the 16-months of congestion prior to Wednesday’s drive), we can see that the market is hesitant to abandon the safe haven dollar so quickly. The disappointing performance for the greenback is particularly surprising when we look to what the more traditional gauges of risk appetite had done through the close. The S&P 500 – often sheltered from the winds of risk by the open-ended hope of further stimulus from the Fed – dropped for a sixth consecutive session (the longest bear run since November 25) to a four-month low below 1300. Why is the high-risk barometer dropping and the key safe haven not taking advantage? Intensity. Volatility is a critical factor to the dollar’s performance. Without panic, a negative, real US rate of return dissuades.

Euro: Moving Away from Scheduled Event Risk to Rumor and Panic

The euro managed to advance against all of its most liquid majors Friday. Did the fundamental headlines improve through the final trading session? No. That said, they didn’t exactly build in bearish intensity either. After such an aggressive selloff, we have to assume that a significant amount of pain has been priced in for the shared currency. The question is whether it stands at enough of a discount to accurately represent the troubles that lie ahead. That is unlikely. Through Friday’s session, there was more rumor than actual headline news. Spain reportedly revised its final 2011 budget deficit numbers up to 8.9 percent (from 8.5) and LCH (the clearing house) raised its margin requirements to trade Spanish government bonds, but that is hardly headline-worthy news. Far more interesting were reports that German Chancellor Merkel was calling on Greek officials to put a referendum for the country to remain in the EU up for vote alongside the governmental election. This was later refuted by one of the Chancellor’s spokespeople, but Greek officials took it seriously enough to angrily reply. Another rumor early Saturday is that Greece would look to exit the Euro Zone come Monday. That is an unlikely scenario under a caretaker government. Keep watching the feeds next week.

British Pound Takes a Shot Across the Bow by Posen

You don’t need to be a fundamental expert to recognize that the sterling has lost a serious strut to its bullish foundation. The sterling dropped 2.8 percent against the yen and 1.6 percent against the dollar this past week. Why would the pound take up a risk sensitivity when not too long ago, it was seemed completely immune to such changes in tide? The shift is in subtle rate expectations. Not long ago, the dollar fought the current under a short-lived surge in rate expectations, and this was the pound’s turn. That turn, however, is over. The double dip recession brought doubt, but perma-dove Adam Posen confirmed expectations Friday by suggestion more QE may be needed. That said, he will exit in August.

Japanese Yen Traders Wonder: Will the BoJ Up Stimulus, Does it Matter?

USDJPY closed virtually at its low for the day Friday and subsequently set a fresh three month low. One of the most common questions that traders ask me happens to be: when is the right time to go long USDJPY. Those that ask are often looking for a hard level, but a line in the sand will not be deciding factor with this pair. Far more important here is the momentum. There is some fundamentally balance to this pair (both currencies are safe havens, low yielders, have tremendous debt loads) but when we look further into the future, we see that the dollar has an advantage of both absolute liquidity demand, structural economic projections and a return of yield. The balance now falls to the cross winds that are coming off of the more effectual carry pairs unwind. Against that backdrop, is there any weight being assigned to the BoJ meeting?

Swiss Franc: Will the SNB Simply Wait for a Eurozone Explosion to Act?

Don’t let the 7 pip average daily range on EURCHF fool you. There is tremendous pressure behind this pair. On one side, we have an unstoppable force – risk aversion specifically sourced from Europeans’ fears that their capital is in jeopardy. On the other, the immovable object – the SNB holding the line at 1.2000 with a pledge of unlimited intervention to maintain the floor. Yet, Friday’s close (1.2005) is the second lowest since the unusual policy effort was introduced, and it reminds us that something has to give. If the Swiss central bank is determined to sit on its hands, it could very well be their pledge that is broken as the Euro-region crisis intensifies. They no doubt realize this truth. And, if they realize it, they are likely weighing their options. The question is: what would it take to approve the nuclear option?

Australian Dollar Plunges Fresh 7 Month Lows as Speculative Interest Nearly Flips

Though the greenback’s losses were not doubt offering some counter-trend, bullish pressure on AUDUSD; the pair would not break stride. A 13th decline in the past 15 active trading days speaks to a very serious trend. General risk aversion (headed by the S&P 500) certainly supported momentum, but there was perhaps a level of gravity to Friday’s move that outpaced a simply risk aversion push on carry unwind. A morning Chinese business sentiment indicator was modestly disappointing, but the real hit for the carry currency was in its yield (both current and outlook). The benchmark 10-year Australian government bond yield was already on the decline, but Friday saw an unexpected plunge that brought the rate to a generational low 3.08 percent. In turn, the swaps market is now pricing in a certainty of a 25 basis point cut next next with a near 75 percent chance of a 50 basis point move, and the 12 month forecast has jumped from a quarter-point in a day (to 126 bps).

Gold Capitalizes on Dollar’s Weakness, Posts Biggest Two-Day Rally Since October

Now this is what a reversal from an oversold position looks like. When a market or individual asset overruns its fundamental boundaries leveraged by speculation rather than fundamentals, the subsequent correction is often just as dramatic. Gold put in for an impressive back-to-back rally Thursday and Friday (2.2 and 1.2 percent respectively) for the best two-day performance since October 26. However, we need to run this impressive move through the fundamental process. The previous metal’s decline has been heavily influenced by the strength of the US dollar. The greenback certainly lost its pace through the end of the week, but it didn’t correct with the same level of veracity as was seen in gold. The disconnect comes from the fact that in the place of the dollar’s influence, we were reminded of European (and global) risks concerns.

For Real Time Forex News, visit: http://www.dailyfx.com/real_time_news/

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

Next 24 Hours

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

CLASSIC SUPPORT AND RESISTANCE –EMERGING MARKETS 18:00 GMTSCANDIES CURRENCIES 18:00 GMT

INTRA-DAY PROBABILITY BANDS 18:00 GMT

v

— Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

To be added to John’s email distribution list, send an email with the subject line “Distribution List” to jkicklighter@dailyfx.com.

Additional Content:Money Management Video

Trading the News Video

Fundamental Forecast for Gold: Neutral

Gold prices mounted a swift recovery toward the end of last week as fears of a spreading crisis in the Eurozone and disappointing US economic news drove demand for alternative stores of value. An unexpectedly soft Philadelphia Fed print dented hopes that an accelerating US recovery will offset headwinds to global growth from sluggish conditions in Europe and Asia. The outcome marked only the second bit of significant data from the May set of activity surveys, tarnishing positive cues from the Empire Manufacturing print earlier in the week and pulling gold higher on inflation-hedge buying as traders sized up the uneven performance with minutes from the Fed’s April policy minutes. The release showed some policymakers made the case for a QE3 program in the event that growth falters.

Meanwhile, Moody’s downgraded 16 Spanish banks, citing the weak economy and mounting government debt. The announcement stoked fears that lenders in the Eurozone’s fourth-largest economy (and possibly elsewhere) may buckle as Greek-born jitters metastasize region-wide. This unearthed the possibility of another broad-based credit crisis akin to the 2008 fiasco, driving investors to seek refuge in assets of intrinsic worth that don’t necessarily rely on well-functioning financial markets to derive and maintain their value.

The week ahead presents headline event risk along both themes driving gold prices. On the US data front, the focus is on the Richmond and Kansas City Fed surveys as markets continue to expand their understanding of where world’s top economy stands in May. Expectations point to mixed results and traders will be keen to put the final outcomes in the context of last week’s news flow. The final revision of May’s University of Michigan Consumer Confidence gauge rounds out the docket. Soft readings are likely to fan the flames of QE3 speculation, driving gold higher. Scheduled remarks from the Fed’s Kocherlakota, Lockhart, Plosser and Dudley will be interpreted along the same lines.

Turning to the Eurozone, the tone for the week will be set by the G8 summit set to take place at Camp David over the weekend. Markets will be holding out hope for signs of an emerging multilateral response to ensure global financial markets are protected from contagion. The absence of concretely reassuring rhetoric is likely to add to gold’s upward momentum as a seemingly growing possibility of another market-wide rout buys demand. The preliminary set of May’s Eurozone PMI figures as well as Germany’s IFO survey of business confidence will color expectations of the degree of economic slowdown in the region. Soft outcomes will warn that sluggish performance threatens to sabotage precarious deficit-reduction efforts and amplify credit market stress. This too may prove gold-supportive if markets see the Eurozone issue as one with swelling global implications (a perception the G8 outcome is likely to establish in the near term).

Fundamental Forecast for Japanese Yen: Bearish

The Japanese Yen was far and away the top performer this week, gaining nearly 4.8% against the worst performer, the New Zealand dollar. Overall, the Yen gained 1.1% against the US Dollar, which was the best performing currency. The theme here is evident: flight to safety was the prevailing trend this week. Yet as we turn towards the last full week in May, recent price action alongside seemingly diverting Bank of Japan and Federal Reserve monetary policies has placed the USDJPY in a precarious position: below 80.00. The USDJPY even retraced to its 61.8 Fibonacci on Thursday, or the “golden ratio” level, based on the February low to March high move. This warrants the question: will the BoJ look to weaken the Yen? Due to the tug-and-pull between the weaker USDJPY and a worsening Euro-zone crisis – one that demands liquidity and the Yen is one of two currencies that satiate this – we bear a neutral outlook for the Japanese Yen this week.

A think thank report on Thursday dispelled the notion that the BoJ would move in the market to stimulate more at its next policy meeting on May 23. This is largely due to the recent growth reading. The preliminary first quarter GDP reading for Japan cruised by the 3.5 percent expectation showing a 4.0 percent actual annualized print. Perhaps the better than expected reading was due to the weak Yen in the first quarter: the USDJPY appreciated by 7.75 percent (I would certainly think this helped and I’m sure BoJ policymakers do as well). If this is the case, that the BoJ is leaning away from easing more, then the Yen becomes the favored safe haven above the US Dollar given recent Fed rhetoric.

As the Fed minutes showed, there are now “several” up from a “couple” of policymakers that now believe more easing could be warranted if the US economy to falter in the periods ahead. While the USDJPY was relatively unchanged around this news, a severely disappointing Philadelphia Fed Manufacturing Index for May provided the impetus to fuel new QE rumors. But this has placed the USDJPY back below 80.00, a psychologically significant figure; what will the BoJ do? This could be largely predicated around data due this week, which unfortunately, comes out after the BoJ policy meeting on Wednesday.

The key piece of data this week, due on Thursday, is the National Consumer Price Index for April. According to Bloomberg News, the headline figure is forecasted to show that price pressures have moderated, falling to 0.4 percent year-over-year from 0.5 percent y/y in March. However, the core reading, which excludes the more volatile food and energy components, is expected to show that deflation remains, albeit at a slower pace, at -0.4 percent y/y in April from -0.5 percent y/y in March. Inflation, or rather, deflation, has been a significant problem for the Japanese economy for much of the past two decades, and certainly, further deflationary pressures are unwelcomed. The recent GDP reading would suggest that price pressures should be firmer, so it is quite possible that CPI figures tick slightly higher. A weak figure or even further downside price action in USDJPY could provoke another intervention by an increasingly desperate BoJ. All things equal, we expect the Yen to strengthen from a fundamental perspective amid the deepening Euro-zone crisis but we are weary of the heavy hand of a determined BoJ; and for that, our Japanese Yen forecast for the coming periods is neutral. –CV

Fundamental Forecast for British Pound: Bullish

The dovish tone struck by the Bank of England weakened the British Pound by nearly 300pips, and the economic developments on tap for the following week may heighten the bearish sentiment underlining the sterling as market participants increase bets for more quantitative easing. Indeed, consumer prices in the U.K. are expected to expand at the slowest pace September 2010, while private sector consumption is projected to contract 0.7% in April.

In turn, the weakening outlook for Britain may ultimately produce another selloff in the exchange rate, and the sterling may struggle to find support as the central bank keeps the door open to expand monetary policy further. In fact, the BoE Minutes may reveal that Monetary Policy Committee member David Miles remains the sole affiliate to call for another GBP 25B in quantitative easing, but it seems as though the central bank will preserve its easing cycle over the medium-term as it curbs its forecast for growth and inflation. In light of the recent developments, BoE board member Adam Posen, who’s scheduled to leave his post at the end of August, argued that he may have been overly optimistic on the economy after siding with the majority in April, and expects to see the core rate of inflation taper off despite the stickiness in price growth. However, as the headline reading for inflation holds well-above the 2% target, BoE Governor Mervyn King may have little choice but to write another letter of explanation to Chancellor of the Exchequer George Osborne, and the central bank head may find it increasingly difficult to preserve a dovish tone for monetary policy as the economic recovery gradually gathers pace. Nevertheless, the shift in the policy outlook has curbs our bullish call for the GBPUSD as the BoE sees a renewed risk of undershooting the inflation target, and the pair may continue to give back the advance from earlier this year as it searches for a bottom.

As the GBPUSD comes off of the 38.2% Fibonacci retracement from the 2009 low to high around 1.5730-50, with the relative strength index holding above 30, it sees as though we will see the pair consolidate going into the following week. However, negative developments coming out of the U.K. could fuel another selloff in the exchange rate, and we may see the pound-dollar revert back towards the 1.5600 figure as the relative strength index flirts with oversold territory. – DS

Fundamental Forecast for Canadian Dollar: Neutral

The Canadian Dollar struggled this past week as some disappointing US data alongside a commodities’ liquidation dragged the high beta currency to its lowest level against the US Dollar since January 16. Yet the Canadian Dollar wasn’t the worst performer, and that says a lot in this current risk landscape. In fact, the Canadian Dollar has a lot going for it right now: an improving housing sector; a strengthening labor market; and above all, a hawkish Bank of Canada.

However, given the Euro-zone crisis and the disappointing Chinese growth story, the Loonie, has been susceptible to losses. And herein lays the Loonies’ loony dilemma: is it going to take cues off of its strong fundamental backdrop or the weak global one? Given this, we hold a neutral bias for the Loonie in the periods ahead; but specifically, bullish against the AUD, EUR, GBP, and NZD; and weaker against the JPY and USD.

In terms of data due out in the coming week, Wednesday is the only day will prints set for release. At 12:30 GMT, Leading Indicators for April and Retail Sales for May are due, and on the collective, they are expected to show a stronger Canadian economy. Leading Indicators are expected to show growth of 0.4 percent, but this will represent a slight slowdown from the 0.5 percent reading in March.

On the other hand, Retail Sales are poised to show growth, with a Bloomberg News survey showing a 0.4 percent gain from a 0.2 percent contraction in April. Additionally, when discounting automobile sales, retail sales growth is expected to remain steady at 0.5 percent in May, unchanged from April. Assuming these prints come in at the forecasts, then the Canadian Dollar will be insulated against further declines in an increasingly risk-averse environment.

Amid growing concerns across the globe, rate expectations have fallen a bit from the Loonie, which has contributed to its downfall. Whereas the market was pricing in a 26.8 percent change of a 25.0-basis rate hike on May 11, expectations dipped to 14.0 percent today. However, when we examine the number of basis points being priced into the Canadian Dollar over the next 12-months, the Credit Suisse Overnight Index Swaps show that the Loonie has the most amount of bps being priced in going forward; this is supportive. In an atmosphere in which global growth prospects are being clobbered and the European currencies look vulnerable to the sovereign debt crisis, it is expected that there will be strong demand for safety; but, due to the aforementioned reasons, we believe that the Canadian Dollar should remain resilient, and while facing downside pressure against the Japanese Yen and the US Dollar, it is primed to gain elsewhere. It is for this we are neutral on the Canadian Dollar in the week ahead. –CV

Fundamental Forecast for Australian Dollar: Bearish

The Australian dollar slipped to a fresh yearly low of 0.9794 as traders scaled back their appetite for risk, and the high-yielding currency may face additional headwinds in the week ahead as investor confidence remains frail. Beyond the negative headlines surrounding Europe, the slowing recovery in China – Australia’s largest trading partner – certainly cast a dour outlook for the $1T economy , and the fundamental developments on tap for the following week may stoke fears of a ‘hard landing’ amid the ongoing weakness in manufacturing activity.

After lowering the reserve requirement ratio by 50bp, People’s Bank of China Governor Zhou Xiaochuan called for further reforms amid the ‘structural imbalances’ in the capital markets, and the central bank is widely expected to take additional steps later this year in an effort to engineer a ‘soft landing.’ In turn, the Reserve Bank of Australia is widely expected to follow suit, and we may see the central bank continue to embark on a very aggressive path as the outlook for growth and inflation deteriorates. According to Credit Suisse overnight index swaps, market participants are pricing a 73% chance for another 50bp rate cut in June, while borrowing costs are expected to fall by more than 125bp over the next 12-months as Governor Glenn Stevens adopts a highlight dovish tone for monetary policy. In contrast, 25 of the 28 economists polled by Bloomberg News see the RBA keeping the interest rate on hold next month, and we may see the central bank resume its easing cycle in the second-half of the year as the outlook for global growth remains clouded with high uncertainty.

Although the AUDUSD remains oversold, we expected to see further declines in the exchange rate until the relative strength index crosses back above 30, and the bearish sentiment underlining the high-yielding currency should gather pace next week as the flight to safety gathers pace. At the same time, interest rate expectations may deteriorate further as we’re expecting to see more dismal data coming out of China, the aussie-dollar may continue to give back the rebound from back in November as it struggles to find support. – DS

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) remains 0.03 percent higher from the open after moving 105 percent of its average true range, and we may see the greenback consolidate throughout the North American trade as hopes surrounding the G8 Summit props up market sentiment. However, as the EU struggles to meet on common ground, there’s certainly limited scope of seeing something done on a global scale, and we should see the flight to safety gather pace in the days ahead as the heightening risk for contagion saps risk-taking behavior. In turn, the upward trending channel should continue to take shape in the week ahead, and we will be watching for fresh 2012 highs in the index as the economic docket is expected to highlight an improved outlook for the U.S. economy.

Although the USDOLLAR remains overbought, the drop in risk-taking behavior continues to increase the appeal of the reserve currency, and we will need to see the oscillator fall back below 70 to pave the way for a short-term correction. As the fundamental developments on tap for the following week are expected to show a rise in home sales paired with a rebound in U.S. durable goods, a slew of positive developments should heighten the bullish sentiment underlining the greenback, and we may see the fundamentals play an increased role in dictating price action as it dampens speculation for additional monetary support. However, as the index struggles to hold above the 78.6 percent Fibonacci retracement around 10,118, the dollar may be carving out a higher high in May, and we will be looking for a higher low as the greenback looks poised for a correction. In turn, we may see the 61.8 percent Fib around 9,949 come in as new support, and we will maintain our bullish call for the USD as the Fed slowly moves away from its easing cycle.

Two of the four components weakened the greenback, led by a 0.62 percent decline in the Australian dollar, and the high-yielding currency may face additional headwinds in the week ahead as the growth outlook for the $1T economy deteriorates. Beyond the headlines coming out of Europe, developments coming out of China – Australia’s largest trading partner – may continue to stoke fears of a ‘hard landing,’ and we may see market participants increase bets for lower borrowing costs as the Reserve Bank of Australia looks to carry its easing cycle into the second-half of the year. According to Credit Suisse overnight index swaps, market participants are pricing a 73 percent chance for another 50bp rate cut at the next rate decision on June 5th, and the AUDUSD may continue to give back the rebound from back in November as it searches for support.

— Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David’s e-mail distribution list, send an e-mail with subject line “Distribution List” to dsong@dailyfx.com.

Join us to discuss the outlook for the major currencies on the DailyFX Forums

Gold and silver took a sharp turn and sharply rose yesterday. Gold recorded the sharpest single day gain this year (UTD). The Philly Fed Index tumbled down to -5.8 in May; this news may have rallied bullion prices but traded down U.S stock indexes and oil prices. This news along with the recent minutes of the FOMC meeting from April may have rekindled the speculation around QE3.

On today’s agenda: GB 10 Year Bond Auction and Canada’s Core CPI.

Gold spiked on Thursday by 2.49% to $1,574.6; silver also rose by 3.03% to $28.02. During the month gold declined by 5.37% and silver by 12.32%. The Euro/USD slipped again on Thursday by 0.14% to 1.2698 – the lowest level since January 13th 2012.

The chart below presents the normalized prices during month (normalized to 100 as of April 30th).

Philly Fed Fell to -5.8 in May

In the recent May survey, the Philly Fed Manufacturing Indextumbled from +8.5 in April to -5.8 in May 2012. This shift is a negative signal for the developments in the U.S economy. Furthermore, along with the recent minutes of the FOMC meeting, the speculation around another quantitative easing was rekindled again.

On Today’s Agenda

Canada’s Core CPI: According to the Canadian CPI report for March 2012, the core CPI excluding food and energy increased by 1.9% from March 2011 to March 2012. This report might affect the CAD, which is also strongly correlated with bullion;

G8 Meeting: this meeting will be held over the weekend (Friday and Saturday); if the G8 countries will come up with big headlines from this meeting it may have some effects on the financial markets;

Daily Outlook

Metals may have changed direction during yesterday’s trading, but for now the circumstances have changed much. In my opinion, the Philly Fed index doesn’t project well on the progress of the U.S economy, but this isn’t a clear cut evidence for a slowdown in the U.S that will translate to the Fed issuing another QE program in the near future. On the one hand if the U.S dollar will continue to appreciate then precious metals prices may resume their downward trend or at least curb their recent uprise. On the other hand this renewed speculation around the QE3 prospects may keep this rally going to close the week on a positive note for bullion.

This gold and silver prices forecast was first presents in Trading NRG

For further reading:

Gold Price and U.S Money Base – May Report

Gold and Silver Outlook for May 2012

By: Lior Cohen, M.A. in Economics, Commodities Analyst and Blogger at Trading NRG

Would you like to see more third-party contributors on DailyFX? For questions and comments, please send them to research@dailyfx.com

Talking Points

• Euro: Remains Oversold, Germany Vows Additional Assistance For Greece
• British Pound: Rebounds Ahead Of Key Event Risks, BoE Posen Mulls More QE
• U.S. Dollar: Index Falls Back From Fresh 2012 High Ahead Of G8 Summit

Euro: Remains Oversold, Germany Vows Additional Assistance For Greece

The Euro bounced back from a fresh monthly low of 1.2641 as a spokesperson for the EU denied rumors that the group is working on a contingency plan for a Greek exit, while German Chancellor Angela Merkel showed an increased willingness to further assist Greece as the sovereign debt crisis continues to dampen the outlook for the region. At the same time, German Finance Minister Wolfgang Schaeuble encourage the EU to ‘form a common position as quickly as possible’ as the group heads into G8 meeting, but warned that debt crisis may continue to weigh on the financial market for another two-years as European policy makers struggle to restore investor confidence.

As the EU maintains a reactionary approach in addressing the risk for contagion, the European Central Bank is certainly coming under increased pressure to shore up the ailing economy, and there’s speculation that the Governing Council will take additional steps at the next meeting on June 6 as the fundamental outlook for the region turns increasingly bleak. According to Credit Suisse overnight index swaps, investors are currently pricing an 11% chance for a 25bp rate, but the ECB may show an increased willingness to target the benchmark interest rate as the non-standard measures have a limited impact in addressing the risks surrounding the region. As the EURUSD continues to trade above the 23.6% Fibonacci retracement around 1.2640-50, it seems as though the pair is carving out a short-term base, and we will be keeping a close eye on the relative strength index as it continues to sit in oversold territory. Should the oscillator cross back above 30 next week, we will be watching former support around the 1.3000 figure for new resistance, and we will be looking for opportunities to sell the single currency as we expect to see fresh 2012 lows in the exchange rate.

British Pound: Rebounds Ahead Of Key Event Risks,BoE Posen Mulls More QE

The British Pound regained its footing during the overnight trade, with the GBPUSD snapping back from a fresh monthly low of 1.5731, but the economic developments on tap for the following week may drag on the sterling as the Bank of England turns increasingly dovish. Indeed, we’re expecting to see the headline reading for inflation expand at the slowest pace since September 2010, while the BoE Minutes may reinforce expectations for more quantitative easing as the central bank sees a renewed risk of undershooting the 2% target for price growth. Indeed, Monetary Policy Committee member Adam Posen argued that he may have been overly optimistic on the economy after scaling back his vote to expand the asset purchase program by another GBP 25B, and curbed his outlook for core of inflation despite the stickiness in price growth. Even though we’re seeing the RSI hold above oversold territory, we may see the recent weakness in the GBPUSD gather pace next week as market participants increase bets for additional monetary support, and we may see the pair come up against the 1.5600 figure as it continues to search for support.

U.S. Dollar: Index Falls Back From Fresh 2012 High Ahead Of G8 Summit

The greenback is struggling to hold its ground on Friday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) falling back from a fresh yearly high of 10,153, and the reserve currency may consolidate throughout the North American trade amid the rebound in risk-taking behavior. As the G8 Summit comes into focus, the group may try to talk up market sentiment, but we don’t expect to see any major developments over the weekend as European policy makers continue to look at the ECB for relief. Nevertheless, as the economic docket for the following week is expected to instill an improved outlook for the U.S., a slew of positive developments should continue to dampen speculation for additional monetary support, and we may see the greenback track higher in the week ahead as the Fed moves away from its easing cycle.

— Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David’s e-mail distribution list, send an e-mail with subject line “Distribution List” to dsong@dailyfx.com.

Will the EUR/USD Resume the Downward Trend From 2011? Join us in the Forum

Related Articles: Weekly Currency Trading Forecast

FX Upcoming

Video Transcript

Hi, this is Rudy Martin for Uncommon Wisdom Daily.

Members of my Emerging Market Winners service know that some of the fastest-growing economies in the world are in Latin America. And one of the fastest-growing industries within that region is the Internet.

A recent report by ComScore showed that Latin America’s online population grew by 16% last year, faster than any other region in the world, including Asia. In fact, Latin America is home to five of the most-engaged social networking markets on the planet.

Internet users in Argentina averaged 10.7 hours per month on social-networking sites, and the numbers in Chile, Peru, Colombia and Mexico weren’t far behind.

Facebook accounted for the most time spent online, at 25%, but the most-visited website among Latin American Internet users was Google. Overall, the total number of searches conducted in the region increased by 38%, to more than 21 billion in December.

Apple is also enjoying solid growth in Latin America, thanks to an increase in the use of mobile phones and tablet computers. Puerto Rico is leading the way in that area, with 7.7% of its digital traffic consumed away from a personal computer.

More than 40% of Latin America’s population now has access to the Internet. I expect that number to continue to rise, and to soon top 50%. That would add an additional 30 million potential customers for scores of Internet companies, including online retailers.

That’s why I think the best way to play this growth may be with MercadoLibre, the eBay of Latin America. If the region gets to 50% Internet penetration as I predict, it could boost the company’s revenue by 20%!

MercadoLibre is also benefiting from the solid economic growth in its home country of Brazil. And this growth could continue for a while, considering the fact that Latin American populations are expanding much faster than in the United States and around the world.

Investors seem to be ignoring MercadoLibre’s long-term bullish outlook this week, instead focusing on a disappointing earnings report. But I think the stock’s recent decline presents a great buying opportunity.

I’m Rudy Martin for Uncommon Wisdom Daily. Thanks for watching.

Talking Points

• Crude Oil, Copper May Rise Amid Profit-Taking on Risk Aversion Bets
• Gold and Silver Well-Supported on QE3 Hopes, Eurozone Instability

Commodity prices are showing diverging performance in early European trade. Growth-sensitive crude oil prices are following shares lower but likewise sentiment-linked copper is essentially flat. Meanwhile, gold and silver are on the upswing, following up on a jump higher in late Wall Street trade after a disappointing set of US economic data seemed to stoke Fed QE3 bets and drive demand for precious metals as an alternative store of value while boosting Treasuries and weighing on the US Dollar.

Looking ahead, a difficult environment presents itself. Risk appetite is under pressure as the aforementioned US data set dents hopes that an accelerating US recovery will help offset slowing performance in Europe and Asia. Mounting Eurozone crisis woes are compounding the dour mood after Moody’s downgraded 16 Spanish banks overnight, stoking fears that lenders in the currency bloc’s fourth-largest economy (and possibly elsewhere) may buckle as Greek-born jitters metastasize region-wide.

However, three consecutive weeks of aggressive selling across the spectrum of risky assets may force a period of profit-taking, with traders unlikely to be willing to carry significant directional exposure into the weekend given the degree of unprecedented uncertainty surrounding the satiation in the Eurozone. S&P 500 stock index futures have erased overnight losses and now point higher, hinting that correction may be brewing that pulls crude oil and copper higher along with equity prices.

Gold and silver appear likely to remain well-supported however. The current environment plays to the metals’ appeal both as inflation hedges (given QE3 speculation) and as assets that don’t necessarily rely on financial markets to derive their value, a major advantage at a time when another 2008-style rout is appearing increasingly plausible. In the absence of US economic data, the high-profile Facebook IPO may also prove to be a catalyst to consider.

WTI Crude Oil (NY Close): $92.56 // -0.25 // -0.27%

Prices put in back-to-back Spinning Top candlesticks above support at 92.51, the December 16 low, pointing to indecision and hinting a bounce may materialize. Initial resistance lines up at 95.41, the February 2 session low. Alternatively, renewed selling through support exposes 90.49.

Daily Chart – Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1574.27 // +34.70 // +2.25%

As we suspected yesterday, prices recovered after putting in a Spinning Top candlestick above support in the 1532.45-1522.50 area, marked by the September 26 and December 29 spike lows. Buyers cleared the 23.6% Fibonacci retracement at 1560.98 to challenge the 38.2% level at 1582.10, with a break above that exposing the 1600/oz figure and 1616.23. The 1560.98 has been recast as near-term support.

Daily Chart – Created Using FXCM Marketscope 2.0

Spot Silver (NY Close): $28.04 // +0.82 // +3.01%

Prices are recovering from support at 27.06 to challenge resistance in the 28.43-70 area marked by a former support level and the underside of a previously broken falling channel set from early March. A break above this barrier exposes 29.71. Alternatively, a push through support exposes the 26.05-15 region marked by the September 26 and December 29 spike lows.

Daily Chart – Created Using FXCM Marketscope 2.0

COMEX E-Mini Copper (NY Close): $3.480 // +0.002 // +0.06%

Prices are mounting a shallow recovery after putting in an Inverted Hammer candlestick above support at 3.459, the 50% Fibonacci retracement. Buyers see initial resistance at 3.584, marked by the 38.2% Fib level. Alternatively, a reversal through support exposes the 61.8% retracement at 3.334.

Daily Chart – Created Using FXCM Marketscope 2.0

— Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

To be added to Ilya‘s e-mail distribution list, send a note with subject line “Distribution List” to ispivak@dailyfx.com