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AUD/USD Fundamental Forecast – February 11, 2016

The AUD/USD declined .0032 on its way to a low of .7037, however, losses were limited because of light volume and volatility. Yesterday, the market was driven lower most of the session as traders dumped assets, however, position-squaring ahead of the testimony of U.S. Federal Reserve Janet Yellen on Wednesday helped fuel a rebound rally.
Earlier in the session, there was little reaction to the release of the latest survey from Westpac Bank and the Melbourne Institute. The consumer confidence report revealed a 4.2 percent surge to 101.3. That follows a 3.5 percent decline in January to a reading of 97.3. It also moves back above the key boom-or-bust line of 100 that separates optimists from pessimists. The better-than-expected reading suggests that investors were probably relieved that stock prices recovered after a sharp break in early January.
Wednesday and Thursday’s testimony by Yellen is expected to provide some clarity for traders who are searching for answers amid global volatility and fears of another world recession. Yellen is expected to attempt to balance the central bank’s stated goal of raising rates against the risks of a weaker global economy.
While Yellen is expected to talk about a wide variety of subjects including rate hikes and banking reform, she will be primarily asked to explain how the Fed will be able to raise rates over fears of a weakening world outlook and divergent central bank maneuvering.
Her comments will be released at 8:30 a.m. ET, but her testimony before the House Committee on Financial Services won’t start until 10:00 a.m. ET. Dovish comments should be supportive for the Australian Dollar. Hawkish comments should help underpin the U.S. Dollar.

USD/JPY Fundamental Forecast – February 11, 2016

Today is a bank holiday in Japan, but that didn’t stop investors from reacting to the early weakness in the global equity markets and from preparing for the testimony from Fed Chair Janet Yellen later today at 10:00 a.m. ET.
The USD/JPY closed near 114.851, down 0.275 after trading as low as 114.25. This was its lowest level since October 2014.
The Japanese Yen strengthened early in the session after a number of Asian/Pacific stock indices fell sharply. In Australia, the S&P/ASX 200 lost 1.50 percent to trade at 4,766.40. In Japan, the Nikkei 225 dropped 4.0 percent and in Singapore, the Straits Times Index fell as much as 2.08. The Yen benefitted because it is a funding currency.
After trading near the previous day’s low, the U.S. Dollar began to firm against the Japanese Yen after U.S. equity markets began to firm.
Traders are anxiously waiting to hear what Yellen has to say about the Fed’s plans to raise interest rates in the future. Traders are looking for definitive ideas and are not expected to settle for ambiguous answers such as the “Fed’s decision will be data dependent”. Dovish comments from Yellen will likely pressure the U.S. Dollar and consequently underpin the Japanese Yen. Hawkish comments will likely support the USD/JPY. However, the direction of the Forex pair will ultimately be determined by the path that stock investors choose to take.

USD/CNY Fundamental Forecast – February 11, 2016

The USD/CNY finished lower at 6.5354, down 0.02850, or -0.43%. With China essentially out of the market’s this week because of the Lunar New Year, the price action today will likely be determined by the movement in the U.S. Dollar.
Setting the tone of the market today and determining the direction will be the testimony by Fed Chair Janet Yellen. She begins speaking before the House Committee on Financial Services at 10:00 a.m. ET Wednesday. Her prepared comments will be released at 8:30 a.m. ET. Traders should expect increased volatility and volume when she speaks, but the direction is uncertain. Her comments may, at times, produce a choppy, two-sided trade unless she is definitive about the timing of future rate hikes.
Traders are looking for clarity at this time and Yellen will have to deliver her message with clarity and conviction. If she says that rate hikes are still a possibility then look for the USD/CNY to strengthen. If she comes out dovish or unclear then look for the USD/CNY to weaken. This would include a comment such as the decision will be “data dependent”.
Additionally, if Yellen paints a pessimistic picture of the economy, the Yuan could move higher against the Greenback. Just a few months ago, the Fed was hinting that we could see a series of rate hikes in 2016, but the recent turmoil in global markets has drastically changed these plans, with some experts opening questioning if the Fed will make any more moves before next year.

NZD/USD Fundamental Forecast – February 11, 2016

The NZD/USD finished higher at .6649, up 0.0016, or 0.24%. The market firmed on greater demand for risky assets after a stock market recovery in Europe and the U.S. Earlier in the session, the Forex pair was under pressure because of sharply lower equity markets in Japan and Australia.
Also driving the market lower was position-squaring ahead of Fed Chair Janet Yellen’s testimony before Congress today at 10:00 a.m. ET. Her comments will be released at 8:30 a.m. ET. Traders should look for increased volatility and volume at that time.
Yellen will talk about a number of subjects ranging from interest rates to banking regulation. However, the main focus by traders will be her response to the future of interest rate hikes in 2016. Traders want to know if the central bank still feels the economy is strong enough to handle another interest rate hike this year, or if there is too much risk due to the weakening global economy. Furthermore, she may be asked to explain why the Fed feels that additional rate hikes are possible given that fact that other central banks are considering additional stimulus including a move to a negative interest rate environment by the Bank of Japan.
In other news, earlier today, the currency forecast team at the Reserve Bank of New Zealand told its clients that they are still anticipating a lower currency in 2016. The cited the following reasons for their assessment:  1) low risk appetite in an uncertain global environment. 2) the falling/soft commodity price environment continuing. 3) narrower NZ-global interest rate spreads, and 4) a weaker CNY and Asian currency dynamic spilling over into the NZD.
Colleagues at the RBNZ also said, “The RBNZ doesn’t like it when the NZD moves higher, against the grain of weaker fundamentals. It means a more difficult task of achieving its inflation objective, which is already proving difficult. Thus, in the last week, the hurdle for further easing has just been lowered.”
This suggests we could soon hear the RBNZ attempt to talk the currency lower.

EUR/USD Fundamental Forecast – February 11, 2016

The EUR/USD was under pressure most of the session, closing at 1.1259, down .0033, or -0.29%. Trader indecision and position-squaring ahead of Fed Chair Janet Yellen’s testimony before Congress was behind most of the weakness and the limited price action.
With today’s testimony, investors will be looking for clues regarding the timing of another rate hike, this event could be a market-mover, so traders should be prepared for better-than-average volatility and volume throughout the session.
Traders should expect to see Yellen take on some pointed questions from the members of the House Committee on Financial Services at 10:00 a.m. ET on Wednesday. Her comments will be released at 8:30 a.m. ET. After raising interest rates in December for the first time since 2006, the Fed remained on the sidelines in January, but issued a dovish monetary policy statement. This move reflected a softening in U.S. economic growth.
Yellen’s testimony will help investors decide if a March rate hike is still on the table, or if the first rate hike in 2016 has been moved to June, September or beyond. Traders want clarity and conviction from Yellen, however, she may deliver the company line, “a rate hike will be data dependent”. The Euro is likely to pick up strength if Yellen’s responses are confusing to investors.
If Yellen paints a pessimistic picture of the economy, the EUR/USD could also post strong gains. Just a couple of months ago, the Fed was hinting at the possibility of a series of rate hikes in 2016, but these plans have drastically changed since the first of the year, with many experts openly questioning if the central bank will make any more moves before next year.
Look for the EUR/USD to strengthen if Yellen comes off as unclear about the intentions of the Fed and is pessimistic about the economy. Look for the EUR/USD to break if Yellen talks about the economy and the timing of futures rate hikes with clarity and conviction.

Copper Fundamental Forecast – February 11, 2016

March Comex High Grade Copper futures posted a two-sided trade on Wednesday before finishing lower for the session. Uncertainty over upcoming remarks from Fed Chair Janet Yellen kept investors on the sidelines. Volume remained below average, mostly due to the impact of the week long Chinese Lunar New Year.
Copper production in Democratic Republic of Congo dropped for the first time in six years in 2015 and this year could be another tough one as low commodity prices continue to exert an impact on production plans. Output dropped 3.3 percent in Africa’s top copper producer to 995,805 tonnes from 1.03 million tonnes in 2014, the first time production fell since the global economic downturn in 2009.
Traders will be watching to see if Yellen’s comments today have an impact on the direction of the U.S. Dollar. According to traders, losses on industrial metals have been limited lately by the tumbling dollar. The lower U.S. currency makes metals price in dollars cheaper for non-U.S. firms.
From a technical perspective, the market is testing a major retracement zone that may attract fresh speculative buying. However, the strength of the next rally will be determined by whether bullish investors can build a support base between 2.0365 to 2.0130.

USD/CAD Fundamental Forecast – February 11, 2016

The USD/CAD posted a modest gain shortly before the start of Fed Chair Janet Yellen’s testimony before Congress. The Forex pair finished at 1.3927, up 0.0063, or 0.45%.
Market participants faced a choppy, two-sided trade at times due to volatility in the crude oil market, but for the most part, traders were focused on what Yellen was preparing to say.
Crude oil prices reached a new 12-year low, helping to underpin the market, but uncertainty ahead of Yellen prevented a substantial rally from taking place. Crude price were driven by rumors that both Iran and Russia were in favor of holding a meeting to discuss production cuts. Some traders went as far as to say that Russia even proposed an across the board one million barrel per day production cut by all the market players. However, the major players didn’t bite on the news, suggesting that the news about Iran and Russia was just rumors.
The USD/CAD could pick up strength later in the session if oil rebounds, or if Fed Chair Yellen delivers hawkish remarks. Look for weakness to prevail if Yellen is pessimistic about the economy.

EUR/GBP Fundamental Forecast – February 11, 2016

The EUR/GBP traded lower, dropping -0.0047, or -0.61% to .7755. Stronger equity markets in Europe and the U.S. helped drive down the Euro. The Euro was under pressure because it is a funding currency and tends to move lower when equities appreciate.
Some investors were on the sidelines ahead of U.S. Federal Reserve Chair Janet Yellen’s testimony before the House Committee on Financial Services. Her testimony is likely to affect all the financial markets and not just the U.S. Dollar or its equity markets.
If she is pessimistic about the economy then look for equity markets to break. This could be supportive for the EUR/GBP.
According to data released on Wednesday, Britain’s industrial production slumped 1% in December after warm weather forced a sharp decline in energy output and the low price hit North Sea oil producers. The decline meant that industrial output in the U.K. suffered its sharpest monthly drop in three years in December, official figures showed. The Office for National Statistics said industrial output fell 1.1% in December compared with a 0.8% fall in November.
The manufacturing sector suffered a further decline from an already weak November while mining and quarrying also dropped, fueling concerns that the slowdown in the U.S. and turmoil on global markets is undermining confidence across the U.K.’s major export industries. Manufacturing output fell 0.2% in December for the third month in a row.

USD/JPY: candlestick analysis

The U.S. Dollar firmed a little on Wednesday as investors prepared for the testimony of Fed Chair Janet Yellen before the House Committee on Financial Services at 10 a.m. ET. Her comments will be released at 8:30 a.m. ET. Yellen is scheduled to testify on the economy before congressional committees Wednesday and Thursday.
She is expected to talk about a variety of subjects from interest rate hikes to banking reform, but her primary focus will be explaining how the Fed is going to balance the central bank’s goal of raising interest rates against the risks of a weaker global economy. At this time, the markets are being rattled by the fact that the Fed’s forecast continues to show the need for rate hikes even as markets gyrate over fears of a weakening world outlook and divergent central bank activity.
Yellen is basically going to have to give reasons why the Fed remains on a path to normalize rates, while other major central banks have increased stimulus through further easing and even negative interest rates.

The Japanese Yen continued to show strength as a safe haven currency with the USD/JPY reaching a low of 114.25 on Wednesday. This was its lowest level since November 2014. The strength prompted Japan’s Finance Minister Taro Aso to say Tuesday that the Yen’s moves were “rough” and that he was watching, according to Reuters. This brought up questions about a possible intervention, which many feel is not likely because the BoJ is still optimistic about the economy.
The falling stock markets are the reasons behind the strength in the Yen because it is a funding currency. However, its recent steep rise will likely lead to a drop in exports.

Short-covering in the U.S. equity markets helped pressure the EUR/USD on Wednesday. The Euro is currently trading at 1.1254, down .0037 or 0.33%. The market is basically feeling pressure because of the single-currency’s very high inverse correlation with risk assets.

The GBP/USD traded slightly better at 1.4487, up .0017, as investors awaited news on U.K. manufacturing production and industrial production. Both are expected to show changes of 0.0% and -0.1% respectively.
The AUD/USD traded steady most of the Asian session as investors squared positions ahead of Yellen’s speech. Traders had a muted reaction to the Westpac Consumer Sentiment report which came in 4.2% higher versus a 3.5% decline in the last report. HIA New Home Sales also posted a strong 6.0% gain.

USD/JPY: candlestick analysis

The bullish rally become slower after a “Hummer” and a “Inverted Hummer” have been formed at the last minimum. At the same time, there’s a bearish “Three Methods” pattern as well, so it’s likely that we’ll see just a small correction and more selling pressure afterwards. The bullish "Hammer" has been formed on the daily chart.

There’s a correction in progress near the last minimums and we’ve got three bullish patterns: a “Hummer’, a “Morning Doji Star” and a “Tweezers’. The price movement has found a resistance at the 2014 minimum. There's still time for the correction, but it’s very likely that the main trend is going to continue soon.


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