EUR/GBP Fundamental Forecast – August 12, 2016

The EUR/GBP gained 8 points to trade at 0.8600 after both the pound the euro fell against the US dollar. There is a void of economics data from Europe today leaving currency traders to mull over Brexit once again.  The surprising referendum outcome prompted the Bank of England and the European Central Bank to pump more liquidity into the market.
It also triggered massive capital outflows from Europe. As much as US$6 billion has been withdrawn from European equities in a single week, according to data provider EPFR. The money has mainly flowed into the US and some emerging markets.
Certainly, sentiment has shifted in just a few weeks. While the City increasingly adopts the traditional European model of vacationing en masse in the summer, the warning signs have been picking up.
Immediately after the referendum, many ordinary investors lapped up the opportunity to buy oversold assets at rock-bottom prices.
UK, US and most Asian equity markets rose in the weeks immediately after the vote, with volatility only slightly elevated.
No one has as a clue how greatly the British economy will lose out in trade deals The rapid appointment of Theresa May brought stability to UK policy-making, and gilts rallied nicely, with their yield against Bunds and Treasuries narrowing rather than widening. Sentix research group's monthly index of investor morale rose to 4.2, from 1.7 in July, which seemed to indicate that Eurozone investors had shaken off their initial concern over Brexit.
However, there is a long negotiation process with the EU ahead, which will grind on, drag down growth and could prompt periods of sector- and industry-specific uncertainty.
No one yet has as a clue for how greatly - or even whether - the British economy will lose out in trade deals or face new barriers or tariffs.

USD/CAD Fundamental Forecast – August 12, 2016

The USD/CAD is flat at 1.3058 with oil and the US dollar pressuring the Canadian currency.  The U.S. greenback and Canada’s loonie face diverging fates after jobs data showed America’s economy continues to gain traction while its northern neighbor slips further into malaise.
While U.S. employers added 255,000 jobs last month, more than the most optimistic estimate in a Bloomberg survey of 89 economists, Canada’s labour market unexpectedly contracted for the second month in a row. Further underlining the nation’s economic woes, Canada suffered its largest-ever trade deficit in June, the country’s statistics agency reported last week.
U.S. labour figures are bolstering the odds the Federal Reserve will raise interest rates this year, while the one-two punch of worse-than-expected jobs and trade data is fueling speculation Canada’s economy will require a dose of monetary easing to get back on track. The diverging policy expectations sent the loonie tumbling the most since June versus the dollar Friday.
While the Canadian dollar might currently be stronger than economic fundamentals suggest it should be, the currency is relatively weak when considered over a longer time frame.
When the oil shock tore through the heart of Canada’s resource economy, the loonie went into free fall. In the year and a half or so up to last January, the dollar dropped to 68 cents (U.S.) from almost 95 cents.
Even after the subsequent rebound, the dollar has spent most of this year well below its long-term average, trading on Monday at about 76 cents.
But the boost in demand for Canadian exports that is the main selling point of a weak currency has yet to materialize.
The country’s trade deficit is running at a record rate of $40-billion (Canadian) annualized. And export volumes declined at a 20-per-cent annualized rate in the second quarter.

NZD/USD Fundamental Forecast – August 12, 2016

The NZD/USD gained 60 points to trade at 0.7273 after the central bank dropped rates to 2.00% lower by 25bps as markets expected. The Reserve Bank last month signaled intentions to drop the official cash rate as a persistently high kiwi dollar made imports cheaper, making it more difficult for Mr Wheeler to lift inflation into his target band of 1-3%. Traders have fully priced in a 25 basis point cut to the official cash rate to 2% and the swaps market is indicating they see almost 70 basis points of cuts in the year ahead.
Of 28 economists polled by Reuters, 27 had expected the Reserve Bank of New Zealand (RBNZ) to cut the rate by 25 basis points and one had tipped the central bank to remain on hold.
"Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range," Reserve Bank Governor Graeme Wheeler said in a statement.
The central bank is mandated with keeping annual inflation at between 1 percent and 3 percent. It is currently running at 0.4 percent.
Global growth is below trend despite being supported by unprecedented levels of monetary stimulus.  Significant surplus capacity remains across many economies and, along with low commodity prices, is suppressing global inflation.  Some central banks have eased policy further since the June Monetary Policy Statement, and long-term interest rates are at record lows.  The prospects for global growth and commodity prices remain uncertain.  Political risks are also heightened.
Weak global conditions and low interest rates relative to New Zealand are placing upward pressure on the New Zealand dollar exchange rate.  The trade-weighted exchange rate is significantly higher than assumed in the June Statement. The high exchange rate is adding further pressure to the export and import-competing sectors and, together with low global inflation, is causing negative inflation in the tradable sector.  This makes it difficult for the Bank to meet its inflation objective.  A decline in the exchange rate is needed.

USD/JPY Fundamental Forecast – August 12, 2016

The USD/JPY is flat in the morning session but remains near its lowest level at 101.28 after the US dollar tumbled this week as the elation from the NFP subsided. Japanese markets are on holiday today celebrating Mountain Day.  As Japanese prepare to head for the hills Thursday for the nation’s inaugural Mountain Day holiday, retailers and tour operators are gearing up for an ¥820 billion windfall.
Disappointment with the fiscal stimulus followed hard on the heels of the Bank of Japan (BOJ) on Friday surprising many market players with smaller-than-expected easing measures. The BOJ said it would increase its purchases of exchange-traded funds (ETFs), but kept interest rate unchanged and did not increase its purchases of government bonds, as had been widely expected.
Japanese indicators started the week on the right foot, as the current account surplus jumped to JPY 1.65 trillion, up from JPY 1.45 trillion a month earlier. This figure beat the forecast of JPY 1.60 trillion and marked a 3-month high. If the yen continues to strengthen, however, we could see lower surpluses. Last week, Prime Minister Shinzo Abe’s cabinet approved a JPY 28 trillion stimulus plan, and the yen posted some gains before retracting. The package includes JPY 13.5 trillion of fiscal measures, with new spending to commence this year. Will this be enough to kick-start the languishing economy? It will be a tough task to convince the Japanese consumer, who remains deeply pessimistic about the economy and will be reluctant to loosen her purse strings. The government isn’t getting any help from the Bank of Japan, which has refrained from utilizing its major monetary tools – lowering interest rates or expanding its asset-purchase program. Is the BoJ out of monetary ammunition? If so, the yen could gain more ground and move closer to the symbolic 100 level.
Japan’s core private-sector machinery orders rose a seasonally adjusted 8.3 percent in June from May, rebounding from two straight month of decline, the government said Wednesday, led by large orders for transport equipment including rail cars.

AUD/USD Fundamental Forecast – August 12, 2016

The AUD/USD added 3 points but made little reaction after the RBNZ lowered rates by 25bps as expected. The week before the RBA also lowered rates and the action today was well expected. The Aussie is trading at 0.7702 near the very top of its trading range. Both central banks were looking at similar economics data and their statements were more or less the same. Headline inflation is being held below the target band by continuing negative tradable inflation.  Annual CPI inflation is expected to weaken in the September quarter, reflecting lower fuel prices and cuts in ACC levies. Annual inflation is expected to rise from the December quarter, reflecting the policy stimulus to date, the strength of the domestic economy, reduced drag from tradable inflation, and rising non-tradable inflation.  Although long-term inflation expectations are well-anchored at 2 percent, the sustained weakness in headline inflation risks further declines in inflation expectations.
Monetary policy will continue to be accommodative.  Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range.  We will continue to watch closely the emerging economic data.
Major Australian miner, Rio Tinto, also reported half-year earnings after market close, which saw its first half underlying earnings drop 47 percent from $2.92 billion in first half 2015 to $1.56 billion in first half 2016. The miner also declared an interim dividend of 45 U.S. cents per share for first half 2016. Shares of Rio Tinto closed near flat at 49.42 Australian dollars.
Major Australian banks sold off more than 1.9 percent each, as traders reacted to the Reserve Bank of Australia's decisionto cut its cash rate by another 25 basis points to a record low 1.50 percent.

EUR/USD Fundamental Forecast – August 12, 2016

The EUR/USD fell 29 points to 1.1150 as the dollar regained its losses. There is little on the eco calendar until late in the US session but it is all second tier data that will most likely have little reaction in the markets. The dollar inched up 0.1 percent against the basket of currencies used to measure its broader strength, amid increasing expectations that the U.S. Federal Reserve could raise interest rates later this year.
"The weaker-than-expected U.S. productivity data weighed on the dollar broadly. The market usually does not give the data much heed, but it drew attention as it marked the third straight quarter of decline," said Shin Kadota, chief Japan FX strategist at Barclays in Tokyo.
The U.S. Labor Department said on Tuesday that productivity, which measures hourly output per worker, dropped at a 0.5 percent annual rate in the April-June period, extending the longest decline since 1979.
The euro found support at the 1.1040 level we’ve rebounded a little, which suggests we remain stuck in the same broad 1.0950/1.1250 range. Traders need a move beyond 1.1250 to open up a retest of the June highs at 1.1400. The pound has reversed a move in the euro that took the ECB years to engineer. The magnitude of this change with €1 now buying just below 86p has been destructive for European exporters to the UK, but so has the speed of the move; where un-hedged positions can erode margins.
The manufacturing sector in the Eurozone has been hit hard by weak global demand, and the economic instability caused by Britain’s decision to leave the EU could take a further toll, as construction projects may be put on hold during this period of great uncertainty. This week’s manufacturing numbers have looked good, and the trend continued with French Industrial Production. The indicator gained 0.3%, easily beating the forecast of -0.8%. Earlier in the week, German Industrial Production posted a gain of 0.8% in June, rebounding after a sharp decline of 1.3% in the previous release. This figure was just shy of the forecast of 0.9%. At the same, time, German June Factory Orders declined 0.4% and the indicator has failed to post a gain in three months. This points to a deterioration in the manufacturing base of the largest economy in the Eurozone.

GBP/USD Fundamental Forecast – August 12, 2016

The GBP/USD tumbled 46 points to 1.2695 as Brexit remains a growing factor along with the massive stimulus program started by the Bank of England which this week started buying up corporate bonds. As the extent of the uncertainty dawns, markets are beginning to anticipate higher unemployment, a drop in household incomes and house prices, and a further spike in inflation, for which the Bank of England's solutions alone can be no remedy. The pound fell back below $1.30 for the first time since the second week of July after Ian McCafferty told The Times that more easing would be required after the package of measures the BoE unveiled last week if the economy slowed as much as sentiment surveys have suggested.
Previously the lone supporter of higher interest rates on the BoE's policy committee, he did however caution that information on the scale of the downturn was still limited.
Chancellor Philip Hammond, it is said, must attempt to deliver a well-targeted fiscal boost, cutting business regulations and perhaps taxes to encourage business to Britain from across the world.
There are doubts the ECB can keep up its stimulus buying at the current rate It is all part of a growing understanding that central banks are at the limit of their effective policy reach, and that too much comfort has been taken from their early swift responses to the crisis.
For example, the European Central Bank has been buying corporate bonds, bar banks and those that lack at least one investment-grade rating, in an attempt to stimulate employment and investment by lowering borrowing costs for firms. At the rate of €7.5 billion (£6.4 billion) a month, there are doubts it will be able to continue buying at the same pace.
Neither can Mario Draghi's statement that the EU should create a bailout fund for troubled banks do much to counter the appalling reality of €360 billion of non-performing loans in the Italian banking sector.
Despite these strong central bank pronouncements, there is a growing sense of impotence. So far, cover has been provided by the sterling market, with depreciation cushioning bonds and stocks.

AUD/USD Forecast August 11, 2016, Technical Analysis

The AUD/USD pair took out during the course of the session on Wednesday, clearing the 0.7675 level. With this being the case, the market should continue to go much higher and if gold markets continue to push higher as well, this is a nice opportunity to go much higher. The market will more than likely continue to be volatile, but I do think that there are a lot of things in place to continue to push towards the 0.80 level above. With this, I am “buy only” at this point in time.

EUR/GBP Forecast August 11, 2016, Technical Analysis

The EUR/GBP pair initially fell during the course of the day on Wednesday, but found enough support at the 0.85 level to turn things back around and form a positive candle. With this being the case, the market more than likely will reach towards the 0.90 level given enough time. I think that pullbacks will find more than enough support as we continue to try to build momentum to the upside and at this point in time I have no interest whatsoever in selling this market as there has been so much support all the way down to the 0.8250 level.

EUR/JPY Forecast August 11, 2016, Technical Analysis

The EUR/JPY pair initially fell during the course of the day on Wednesday, but bounced enough to form a hammer. The hammer of course is a bullish sign, so having said that it’s likely that the market could bounce from here but I still believe that there is a massive amount of resistance at the 115 level. A break down below the bottom of the hammer sends this market looking for the 111 level as far as I can see. Ultimately, this is a market that will continue to be very choppy, see you will have to be able to deal with the volatility.

EUR/USD Forecast August 11, 2016, Technical Analysis

The EUR/USD pair is rallying yet again, as we continue to go back and forth. Having said that though, I still think that there’s a lot of noise above that could cause resistance. With this, it’s likely that we will continue you back and forth but at this point in time I believe that the Euro will continue to have a bit of a weight around its neck, as there are a lot of concerns in the European Union. Given enough time, I think we may get a little bit more of a clear signal, but at this point I’m very comfortable with sitting on the sidelines.

GBP/JPY Forecast August 11, 2016, Technical Analysis

The GBP/JPY pair fell a bit during the course of the session on Wednesday, drifting lower yet again. Ultimately, we are reaching towards the 130 level in my estimation, and therefore I feel that selling on short-term charts will continue to go forward. I believe that the 130 level above is essentially the “ceiling” in this market, and as a result I am sell only, but recognize that there is a lot of volatility ahead, as is typical with the pair anyway, as quite often it will jump around in large areas.

GBP/USD Forecast August 11, 2016, Technical Analysis

The GBP/USD pair initially tried to rally during the course of the day on Wednesday, but turned around to form a bit of a shooting star. The shooting star of course is a very negative sign, and as a result it looks as if we are going to try to grind lower. The 1.28 level below is the absolute bottom of this support “zone”, so having said that it’s likely that this market will break down significantly below that area. In the meantime, expect short-term rallies that offer selling opportunities for short-term trades.

NZD/USD Forecast August 11, 2016, Technical Analysis

The NZD/USD pair rose during the course of the day on Wednesday, testing the 0.73 level. With this being the case, the market ran into resistance, and pulled back in order to form a market that continues to show quite a bit of volatility. I believe that the market should continue to be volatile, but it does seem like there is a lot of buying pressure underneath. Once we can get above the 0.73 level, the market should continue to find buyers and push this market much higher. I have no interest in selling whatsoever.

USD/CAD Forecast August 11, 2016, Technical Analysis

The USD/CAD pair fell rather significantly during the course of the session on Wednesday, testing the 1.30 level. This is an area that offers quite a bit of support, so the fact that we bounced from there isn’t much of a surprise. With this, I believe that we will sooner or later find enough buying pressure, but if we do break down below the 1.30 level with a significant move, that could send this market back down to the lower levels previously seen. Ultimately, this is a market that should continue to be very volatile in the short-term.