The Week Ahead: Trading Outlook

Key Events This Week: February 1st – 6th:

Monday: USD ISM Manufacturing
Tuesday: AUD Reserve Bank of Australia Rate Decision
Wednesday: USD ISM Non Manufacturing Composite
Thursday: GBP Bank of England Rate Decision
Friday: USD Change In Non Farm Payrolls

USD Index Short Term (1-3 Days): Neutral –Medium Term (1-3 Weeks) Bullish

Uptrend remains in good shape, certainly as long as the Fed continues to cement expectations for a mid-2015 lift off while most if not all the Fed’s G10 peers are tacking toward easier policy. Upside progress though is likely to be a more of a grinding affair from here with positions getting more crowded, yield spreads not pushing as consistently in the USD’s favour as was the case in the second half of 2014 and related to that US data of late has been a little softer than anticipated. All eyes will be on the NFP’s Friday as the likely next catalyst for the USD

EURUSD Short Term (1-3 Days): Neutral – Medium Term (1-3 Weeks) Bearish

Not a lot going for the EUR right now, even as ECB QE anticipation is out of the way and positions are of course heavily skewed to the short side. Fresh negatives include a highly combustible Greek/troika review in coming weeks, with recent sound bites from officials on both sides showing precious little goodwill amid ongoing ECB QE and instability in Russia all point to further pressure to come for the beleaguered Euro.

GBPUSD Short Term (1-3 Days): Neutral – Medium Term (1-3 Weeks) Bearish  

BOE’s Forbes warns on potential for early UK rate rise given signs of productivity gains. Gov Carney raises likelihood of negative UK inflation prints and 10yr Gilts etch out new record yield lows. Never mind fundamentals (still decent growth and positive core inflation); it’s all about flows and with political uncertainties looming and a more doveish BOE stance, these remain GBP negative for now.

USDJPY  Short Term (1-3 Days): Neutral – Medium Term (1-3 Weeks) Bullish

Pretty much spent last week confined inside the 117.20 – 118.90 range, and from the looks of it, market is content to stand aside before any of these levels break. With the BOJ on hold at least until April month-end flows have been the main story with the USDJPY grinding lower in spite of the weaker than expected CPI data.

AUDUSD Short Term (1-3 Days): Bearish – Medium Term (1-3 Weeks) Bearish

Has little to commend it near term after printing five year lows last week. The iron ore price recovery has reversed, producing new lowest readings since 2009, with similar lows on copper. Markets expect a potential rate cut at this weeks RBA meeting should be followed by downgrades to CPI and GDP forecasts.

USDCAD Short Term (1-3 Days): Bullish – Medium Term (1-3 Weeks) Bullish 

The case for a quick BOC follow up easing at their March meeting continues to build – notably, local banks have only passed on 15bp of the 25 bp cut while Statscan revisions have slashed 2014 jobs growth by close to a third. Rates markets are pricing in a 60% chance of another 25bp rate in March so the odds, while already better even, can certainly grow further. Markets targeting a test of the big 1.30 level next.

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