Weekly Fundamental Analysis Review
The major event for the past week was undoubtedly the FOMC Meeting and the accompanied press conference by Fed Chair Janet Yellen. The FOMC decided to drop its forward guidance on the 6.5% unemployment threshold, but the market was blindsided by the “honest” answer from Yellen that the Fed is considering rate hikes 6 months after the end of asset purchases, or the second half of 2014; and based on the overall forecasts by sixteen members of the FOMC, Federal Funds rate will be at least at 1.00% by the end of 2015.
Market was not at all impressed at such a hawkish tone out of the FOMC, but equity markets quickly recovered and by the end of the week, DJIA gained 1.4%, S&P gained 1.3%, and Nasdaq gained at 0.7%. Most analysts were expecting some consolidation from the risk aversion sentiment brought on by the Ukrainian crisis the week before, and as of today, Russia has officially absorbed Crimea into the Federation and various sanctions are currently in place against high-level officials in Russia, but the overall tension has come down from war to sanction, thus less risk aversion sentiment.
In U.S., in addition to the FOMC announcement, the Fed also released the first component of its Comprehensive Capital Analysis and Review (CCAR) this week, and out of the 30 banks, 29 passed the severely adverse scenario, which included a 4% jump in the unemployment rate, 4.75% negative GDP growth, a 50% decline in equity prices and a 25% decline in real estate prices. Zions Bancorp was the only one that didn’t pass, but supposedly a re-filing with new data that wasn’t included in the original report would be satisfactory to pass the stress test, according to a spokesperson at Zion Bancorp.
In China, the Chinese Yuan has now given back all of its 2013 gains as the PBoC lets the currency weaken further to curb hot money inflows. Last weekend, the PBoC widened its daily yuan trading band from 1% to 2%. USD/CNY spent most of the week above 6.20, raising concerns about a specialized financial product, originally used to hedge foreign exchange risk, called a trade redemption forward contract (RFC). The contract pays investors if the yuan remains strong and will start costing dearly as USD/CNY weakens past 6.20. In a report out recently, Morgan Stanley wrote there had been $350 billion RFCs sold since the beginning of 2013 and $150 billion might still be outstanding.
In Japan, another trade deficit report was released and it was wider than expected, but still smaller than the past three months on an adjusted basis. Both exports and imports were up in high-single digits, for a 12th and 16th consecutive rise, respectively. Trade components also showed some improvement, with double-digit y/y exports increase to Asia, China, and Europe as well as a 6.4% drop in the bill for crude oil imports.
In conclusion, with Yellen and the FOMC sounding more hawkish than previously expected, and the fact that there is no more quantitative forward guidance, I expect to see strong support under the USD, and unless there are reasons to change this view, I would be going LONG on the greenback. EUR should remain under pressure, especially now with the USD being the center of attention, I would definitely stay clear of EUR longs. GBP’s fate will be determined this week as there are major events scheduled out of the UK, therefore I’d recommend to trade in the direction of the news. AUD, CAD, and NZD are likely to be ranged bound, especially with the market trying to determine risk sentiment or USD strength. CHF is likely to weaken further against USD, that is the primary direction I’ll be looking for. JPY should weaken as well, now with the USD taking the lead, so I will be looking to go LONG on USDJPY.
Forex Calendar March 24 ~ 28, 2014
Fundamental Analysis Review And Forex Calendar March 24 ~ 28, 2014
March 24, 2014 by Leave a Comment