Forex Fundamental Analysis March 12 ~ 17, 2023

We have a few high-impact releases scheduled for the week, so please pay attention to the release times.

Tradable news events of the week:

Core US CPI m/m stands for Core United States Consumer Price Index month-over-month. It measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services, excluding food and energy. This index is used to measure inflation and changes in purchasing trends.

The Core US CPI m/m is an important indicator of economic health as it provides insight into consumer spending habits and inflationary pressures on businesses and households. By tracking this data, investors can gain valuable insights into the current state of the economy and make informed decisions about their investments accordingly.

US Core Retail Sales m/m stands for United States Core Retail Sales month-over-month. It is an economic indicator that measures the change in sales of retail stores from one month to the next, excluding certain volatile items such as automobiles, gasoline and building materials.

The US Core Retail Sales m/m figure is released on a monthly basis by the US Department of Commerce and serves as a key indicator for consumer spending trends. A rising core retail sales number indicates increased consumer spending, which generally leads to an increase in economic activity and inflationary pressures. On the other hand, a declining core retail sales number signals weakening economic activity and deflationary forces at work in the economy.

The data from the US Core Retail Sales m/m report is often used to gauge business cycles, evaluate investment opportunities and assess inflationary pressure, so it is closely watched by investors all over the world.

NZ GDP q/q stands for New Zealand Gross Domestic Product quarter-over-quarter. It is a measure of the total economic output of the country in a single quarter, and it serves as an important indicator of economic health. The NZ GDP q/q figure is released quarterly by Statistics New Zealand, along with its annual counterpart.

The NZ GDP q/q data provides insight into the overall macroeconomic performance of an economy, giving investors and policymakers an indication of where the economy is headed in terms of growth and development. For example, positive or increasing NZ GDP figures generally imply there is increased consumption and investment activity, while declining or negative figures suggest contractionary pressures at work in the economy.

The NZ GDP q/q number also serves as an inflationary indicator as higher GDP numbers tend to indicate stronger demand for goods and services. As such, investors often use this data to assess investment opportunities that may be available within certain sectors or markets.

AU Employment Change is a measure of the total number of people employed in Australia in a given period, typically one month. It is released monthly by the Australian Bureau of Statistics and serves as an indicator of economic health. Rising employment figures suggest there is increased activity within the labour market, while declining figures suggest contractionary pressures at work in the economy.

The data can provide insightful information on how certain industries or sectors are faring, since changes in the overall level of employment can be indicative of changes within specific industries. For instance, sustained increases (or decreases) in employment numbers over multiple months can suggest that either growth or weakness is developing within that sector. This data can thus help investors and policymakers alike to make more informed decisions about investments or policy initiatives.

The ECB Rate Decision is the decision taken by the European Central Bank (ECB) on the official interest rate for Eurozone countries. These decisions affect all economic participants in the Eurozone and are based on their view of what will best help enhance economic growth, control inflation, and achieve other policy goals that they have set.

The ECB makes rate decisions bi-monthly during their meeting of the Governing Council, which consists of members from each of the 19 national central banks within the Eurozone. Decisions made by the ECB can have significant impacts not only on consumer borrowing costs but also on currency exchange rates and economic activity more broadly. As such, these rate decisions are closely followed by investors, economists and policymakers alike as they can provide valuable insight into monetary policy decisions across Europe.

Weekly Forex Fundamental Analysis Summary

It was an intense week for investors as markets reacted to two stimuli that caused significant volatility in fixed-income investments. All eyes were on Capitol Hill, where Fed Chairman Powell testified Tuesday and Wednesday; unfortunately, his comments were not well received by many investors who had hoped for a more dovish stance.

After he suggested the rate of tightening could revive contingent on forthcoming data, the door was flung open for a 50 bps rise at some point this month. Powell also admitted that forecasts from last March would be upgraded following information and revisions in January partially canceled out weakening patterns; nonetheless, it needs to be clarified to what extent they will ascend.

Following Chairman Powell’s words, the US 2-year yield shot above 5%, and the gap between two to ten-year yields dropped below -100 basis points. To top it off, both ADP employment and JOLTS job reports came in better than expected, further solidifying his point.

The Federal Reserve’s stringent tightening strategies are beginning to show difficulties in certain areas of the economy. For example, several regional banks have pointed out how challenging it has been to manage rising deposit costs and that credit normalization could reduce bank profitability.

Wall Street traders were reminded of the 2008 Financial Crisis when investors expressed their anxieties, and the US Treasury yield curve reversed, causing banking stocks to plummet. For example, silicon Valley Bank’s shares declined by more than 60% after they declared that $2.3B was required to cover asset impairments due to extended investments in US Treasuries – a scary scene for experienced market-goers alike.

On Friday, panicking investors caused a dramatic drop in the stock prices of multiple regional banks, leading to a run on SVB by its depositors. Consequently, it necessitated FDIC intervention and ultimately resulted in the closure of one of America’s largest institutions since 2008; only Washington Mutual had ever been larger.

As the weekend approached, many anticipated that a bailout or sale would be reached to prevent any serious disruption in the US venture capital ecosystem. However, opinion was divided regarding how severe the repercussions of this major cog’s collapse could be.

Last Friday’s jobs report offered a signal for investors to pour money into government-backed debt, as the payroll data from February remained strong and in line with expectations.

The below-average increase in hourly wages and a further decline in the workweek indicate that take-home pay and wage trends are weakening more than expected. In addition, unpredictability has been rampant within US Treasury markets, especially concerning 2-year yields.

The yield had climbed to a staggering 5.10%, only to take an unexpected and rapid nosedive of 4.6% in two days – the quickest decrease since 2008! This shift has caused people to rethink their anticipation for a 50 bps rate hike this month, instead favoring 25 bps again. Additionally, there was a notable drop in US dollar value, broadly trading down more than 1%, while gold price saw an impressive increase of nearly 2%.

To the surprise of many, last week saw the S&P 500 dip below 3,900 and appear to be inching lower than its uptrend channel since October 22. Then, unexpectedly, the benchmark index slumped 4.6%, joined by a 4.5% slide on the Dow Jones Industrial Average (DJIA) and a staggering fall of 4.7% for the Nasdaq Composite Index during this period.

Beyond the local banking market, the news was dominated by companies’ earnings declarations and investor day events.

Forex Sentiment Forecast

With markets still largely influenced by Risk Aversion sentiment this week, it is essential to remain vigilant, especially considering that the US Core CPI, Core Retail Sales, and the EU Rate Decision are scheduled to be released this week.

As we continue to observe the USD decline against all major currencies, the Federal Reserve has already taken action to bring some steadiness. I expect a slight reprieve for the greenback as the month progresses; however, I recommend avoiding going long on USD in the short term.

CAD has gained against the USD and remained well supported coming into the week. I would be looking to short the USDCAD pair as the fundamentals are now favoring this direction.

EUR, GBP, and JPY are strengthening, continuing the trend from Friday. However, I would recommend waiting for retracements because it is overdue. Use my market cycle chart to plan your entry if you follow the trend and go long with these majors.

AUD, NZD, and CHF will be either news-driven or range bound. CHF may strengthen from the risk-averse environment but stay away unless you are familiar with the currency. AUD and NZD will be driven by the two major releases scheduled on Wednesday; therefore, I recommend trading after the news, especially if we get a huge surprise.