Fundamental Forecast for Gold: Bearish

• Gold, Silver May Renew Rebound if US Data Tops Forecasts Again
• Gold 1715 Viewed as Probable Support
• Gold Drop is Largest Since Early July

Gold continued its decline off the October high at $1796 with the precious metal shedding nearly 2% on the week to trade at $1722 at the close of trade in New York on Friday. The move marks the second weekly loss for bullion with prices continuing to track risk amid ongoing weakness in broader equity markets. Losses have been further exacerbated by advances in the greenback which pared early losses to close firmer on the week.

Disappointing corporate earnings and weaker than expected existing home sales late in the week kept risk on the defensive with stocks paring nearly the entire week’s gains as haven flows kept the US dollar well supported. The European Summit which began on Thursday offered no clarity as to the steps policy makers will take to address the ongoing crisis that has gripped the region for nearly three years. In fact, German Chancellor Angela Merkel prepped markets, stating that she expects no decisions to be taken this week as policy makers lay the ground work for the December meeting where they will discuss steps towards further economic, monetary and financial integration among the member states.

Looking ahead to next week, gold traders will be taking cues from the FOMC interest rate decision on Wednesday and 3Q GDP data on Friday. Although the central bank is not expected to alter its policy stance, investors will be closely eyeing the accompanying statement for an updated assessment of the domestic economy. With headline CPI data this week coming in above expectations at 2.0% y/y, traders will be closely eying the statement’s language as it pertains to inflation. The Fed has remained unwavering with its expectations for price growth with the September statement citing that, “Inflation has been subdued, although the prices of some key commodities have increased recently,” and that, “Longer-term inflation expectations have remained stable.” Should the statement cite added concerns about rising prices, look for gold to remain well supported as investors flock into bullion as a traditional hedge against inflationary pressures. On the other hand, if there’s no change, gold is likely to continue to track risks as gains in the greenback weigh on precious metal.

From a technical standpoint, gold remains poised for weakness in the near-term with prices breaking below interim supported noted last week at the 78.6% Fibonacci extension taken from the December and May troughs at $1738 before encountering support at the September 13th low at $1715. Critical support now rests at the confluence of the 61.8% extension and the 38.2% retracement off the May advance at $1693. We reserve this level as our bottom limit with only a break below this threshold invalidating our long-term bullish outlook. Resistance now stands at former support at $1738 backed by the weekly high at $1758 and the monthly high at 1796. Note that daily RSI closed just above the 40-threshold with a break below this mark suggesting that a deeper correction towards $1693 may yet be underway. –MB

Fundamental Forecast for Japanese Yen: Bearish

• Japanese Yen likely topped on sentiment extreme
• Chinese economic data forces Japanese Yen losses
• Key US event risk looms large next week

The Japanese Yen finally showed signs of activity, posting its single-largest weekly move since setting a bottom versus the US Dollar (ticker: USDOLLAR) in August. A significant turn in retail forex trader sentiment suggests a larger reversal may be underway, but a key US Federal Reserve interest rate decision could force significant volatility out of the yield-sensitive USDJPY pair.

The US Federal Open Market Committee decision will likely dominate attention through early-week trade, but a late-week US GDP growth reading could likewise bring important USDJPY moves. FOMC officials will almost certainly leave monetary policy unchanged as they stick to their open-ended asset purchasing program. It’s going to be important to watch for any shifts in rhetoric as traders attempt to predict whether the Fed will announce real conditions on what would force them to end Quantitative Easing policy.

For nearly a month we have argued that extremely one-sided US Dollar/Japanese Yen sentiment pointed to an important bottom, and the most recent turn in retail trader positioning lends weight to our forecasts. Yet we’re not quite out of the woods yet—price resistance at the key ¥80 mark looms large and would put the recent rally to an important test.

We have consistently argued that a larger USDJPY reversal would need to come on a material shift in market yields—specifically for the US Dollar. The US 2-year Treasury Note yield currently trades at the top of its 6-month trading range, and it will be critical to watch whether it is able to break higher.

Ultimately a jump in the 2-year would likely come on a shift in US Federal Reserve interest rate expectations. An important change in Fed policy looks unlikely in the foreseeable future, but we’ll keep a close eye on any and all shifts in Fed rhetoric at the upcoming FOMC decision. – DR

Fundamental Forecast for New Zealand Dollar: Neutral

• Dollar Vulnerable on US Data Surprise Risk, EU Summit Fails to Excite
• Investors Drop Safe Havens in Favor of Aussie, Euro Amid Bailout Speculation
• New Zealand Dollar Subject to Risk Trends

The New Zealand Dollar had a mediocre week, finishing in the middle of the pack among the majors and dropping by a mere -0.10% against the US Dollar. Needless to say, if the NZDUSD was essentially unchanged on the week, risk sentiment could not have been all that bad. Of course, the Kiwi was weaker headed into the last part of the week, as high beta currencies and risk-correlated assets topped out on Thursday after a decent third quarter Chinese GDP print, and then the Euro-zone Summit disappointed by its culmination on Friday.

These setbacks leave anything with a yield in a precarious situation, as investor confidence is increasingly feeble for a number of reasons. First, the Euro-zone Summit offered little progress on anything material in the near-term. The hope was, at least from this analyst, that some of the chatter we’ve heard over the past few weeks was an indication of something bigger and different in the works. But, as the saying in technical analysis goes, “the trend is your friend,” and thus we should expect future Euro-zone Summits to be nothing short of failures until they’re not.

Developments in the Euro-zone crisis are crucial to New Zealand Dollar. As noted on numerous occasions in the New Zealand Dollar Weekly Trading Forecast, “On February 6, Moody’s Investors Service said that the New Zealand economy was among the “most exposed” to the crisis, further noting that its banking system (along with Australia’s and Korea’s) is “more vulnerable to the first-round impact of a further worsening of the euro area crisis than other systems in Asia Pacific.” Now that Euro-zone issues are coming back – we’ve seen leaders’ attempts to stabilize markets fail in October and November 2011, late-February and early-March 2012, and then again after the Spanish bailout in June 2012 – the New Zealand Dollar will be most exposed. The question is: will the European Central Bank’s September efforts join this list of doomed promises?

The second influence, the Chinese growth story, is looking kinder. In fact, data has started to trend higher and inflation looks well-contained now that growth is slowing and the Chinese Yuan is gaining value against the US Dollar. Taking a look at recent moves from the People’s Bank of China, it is not a far reach to suggest that policymakers are using the Yuan’s exchange rate as a policy tool: if inflation cools too much, they can allow the Yuan to depreciate, for example.

The last influence on risk trends, to which the Kiwi is very much tied to (as established above), did not come into play in a major fashion, but it is certainly getting close to there. The US fiscal cliff prompted the first of the big banks, JPMorgan Chase, to cut its 2013 growth forecast to +1.0%. Anxiety is building as the US Presidential election cycle comes to a head, and with the candidates meeting daily with media and weekly for debates, a lot of focus is being drawn to the American fiscal mess. As we saw in the summer of 2011, US fiscal concerns are supremely negative for the New Zealand Dollar.

While these exogenous influences will both boost and weigh on the Kiwi, there are also some important domestic events on the docket this week that will guide price action.

On Wednesday, the most important event of the week, the Reserve Bank of New Zealand Rate Decision, takes place. The RBNZ is expected to leave the key interest rate on hold at 2.50%, where it has been since March 2011. Negative rate expectations have been building into the Kiwi, and there are now -26.0-basis points being priced out over the next 12-months, from +1.0-bps being priced in on September 18. If the RBNZ draws attention to the three aforementioned points, we suspect there could be some more downside left in the New Zealand Dollar (we saw the Reserve Bank of Australia issue some concerns over global growth, Asia, and Europe a few weeks ago in their October meeting, and that weighed on the Australian Dollar; they also cut rates).

With nothing major expected from the RBNZ, there’s also the September Trade Balance due on Thursday. The stronger New Zealand Dollar last month (rebounding from mid-summer lows) is expected to have boosted the deficit, from –N$789M to –N$850M. The Export figure is of greater interest than the Import figure, given the concerns over slowing growth in Asia; that will be the key metric to watch. If better than anticipated, the trade report could keep the Kiwi elevated into the end of the week.

Overall, global risk trends and domestic New Zealand data and events aren’t enough to offer a clear picture for the week ahead, and we thus are choosing to take a “neutral” bias once more. Accordingly, we note that the firming in Chinese data offers the clearest picture for the Kiwi in context of the renewed concerns out of Europe, which means that if risk-aversion is rampant, the European currencies are likely to depreciate more than the Asian-Oceanic currencies. As long as the NZDUSD holds 0.8110 next week, the potential remains for a run back to 0.8300. – CV

Fundamental Forecast for US Dollar: Bearish

• US Dollar Recovers But Larger Down Trend Intact for Now
• Yen Seen Lower vs. US Dollar on Technical Break, Sentiment
• Dollar Falls on Positive, Gains on Negative US Economic Data

Currency traders’ perpetual obsession with the trajectory of monetary policy would imply the Federal Reserve monetary policy announcement ought to be the center of attention in the week ahead. The outing is unlikely to be as market-moving as one might suspect however. Indeed, coming on the heels of a reboot of quantitative easing just last month, it seems unlikely that Ben Bernanke and company are geared to deliver anything significant besides a restatement of the new status quo. Indeed, policymakers are almost certainly in wait-and-see mode for some time from here as they assess the effects of the new MBS purchase effort.

With that in mind, a busy calendar of US economic is likely to take on a broader significance for financial markets, with investors interpreting data flow in terms of its implications for larger risk sentiment trends. Despite a still disappointing pace of recovery, the US remains a pocket of relative of strength compared with the other major engines of global output as the slowdown in China turns increasingly overt while the recession in the Eurozone shows no meaningful signs of improvement. That means next week’s ample supply of US growth indicators is likely to be judged in terms of the ability of the North American powerhouse to offset sluggish performance elsewhere.

Not surprisingly, third-quarter US GDP figures take top billing. Expectations call an increase of 1.8 percent, marking acceleration from the 1.3 percent recorded in the three months through June. Meanwhile, October’s manufacturing activity surveys from the Richmond and Kansas City branches of the Federal Reserve are likewise forecast to show improvement, hinting the positive momentum shining through in September data carried over into the following month. This bodes well for risk appetite, which somewhat counter-intuitively threatens to weigh on the US Dollar against most of its major counterparts (with the notable exception of the Yen) as support from haven-seeking capital flows unravels.

Besides economic data, incoming third-quarter corporate earnings reports stand as the other critical catalyst shaping market sentiment, and thereby the trajectory of the greenback. Guidance from cycle-sensitive names like Caterpillar is likely to be interpreted long the same lines as US economic data releases, helping to shape the degree to which North America can power worldwide performance given malaise elsewhere. The main event is likely to be found elsewhere however as all eyes turn to the results from Apple. The tech behemoth is in focus not only because of its sheer size relative to the overall equities space but also in light of last week’s volatility-driving disappointments from two prominent titans of the tech space, Google and Microsoft. This casts a cloud over what would otherwise promise to be a healthy week for risk appetite, hinting the US Dollar may yet find a lifeline amid returning market jitters. -IS

Fundamental Forecast for the Euro: Bearish

• EU Summit ends without meaningful progress on Spain or Greece
• Moody’s passes over chance to downgrade Spain, Euro finds temporary rally
• EURUSD and broader markets face a critical week for direction, momentum

Through the end of this past week, the euro managed to close a bullish performance against all major counterparts with the exception of the Australian dollar. Yet, given the comparison between the first half and second half of the week along with the downturn in fundamental forecasts, it certainly didn’t feel like a favorable week for the currency. Traders’ focus this past period was heavily concentrated on a Euro-area event: EU Summit through the final 48 hour of trade. This helped to distract from disappointing developments in the lead up and dazed the market enough to prevent a dramatic reaction to an unfavorable outcome. Yet with the ‘hope’ element diminished, risk trends back in play and the docket filling out; the coming week will likely shake traders from their stupor and possibly deliver on a major EURUSD breakout and perhaps even trend.

In the hierarchy of fundamental drivers for trading the euro, we must respect the same omnipresent catalyst that most other currencies and assets are destined to follow: risk appetite. For each currency there are two considerations when assessing the risk impact: the intensity of sentiment itself and the asset’s sensitivity to those changes. When risk trends are moving aggressively (whether towards mania or panic), each currency will quickly return to its ‘standard’ position in the spectrum – amplified by volatility and conviction. Where the US dollar defaults to safe haven, the euro’s two-and-a-half year financial crisis has labeled it a ‘risky’ currency (to fall when optimism falls).

We’ve passed through a number of events over the past weeks that could have potentially set off a decisive risk trends (3Q earnings, Chinese GDP, EU Summit, IMF meeting) and none have delivered. Yet, the negative reaction to Google’s reporting last week (drawing stark contrast between malleable bank earnings and everyone else), may have confirmed the doubts for corporate revenue that has built for weeks. That said, Apple’s earnings on Thursday should be monitored closely.

Economic growth will be another, critical topic over the coming week. The definitive measure of that theme will be the advanced reading of US 3Q GDP (as it is the world’s largest economy). However, a Friday release threatens to stall a decisive bearing for general sentiment. Yet, more timely (monthly) growth proxies from China and the Euro Zone (PMI figures) on Wednesday can disrupt any quiet well before we even reach the US data. The best scenario for a serious and lasting risk trend shift would be to see a critical break lower on US equity benchmarks (1425 for the S&P 500 and 13,300 for the Dow Jones Industrial Average) in the first 48 hours. That would set a bias before the data comes into play – a scenario that would likely find positive developments downplayed and the negative amplified.

The euro’s more thematic issues will contribute to the global balance between risk and reward in its own (if passive) way. A lack of progress on Greece and Spain is commonplace at this point, but we are quickly reaching the extent of the market’s tolerance. And, a strong shift in general confidence levels will accelerate that fact. Greece will return to the negotiation table with the Troika moving forward, but the market has priced in their receiving the next tranche of aid at this point. A convincing, euro bullish outcome likely rests with further favorable conditions to its financial position (more time, restructuring or more funds).

Spain may not be as volatile a threat, but its influence is far greater than that of its smaller counterpart. The market expects Spain to ask for a full bailout and thereby tap the OMT program the ECB setup. Yet, those anticipation coupled with the recent swell in sentiment has helped lower Spain’s yields and convinced Rajoy to delay the request. In the end, this will likely look a lot like the previous rescue efforts: refusal to move until forced and generating painful volatility in the process.

When we look at the big picture, we find that risk appetite is elevated on a lack of participation and the Euro-area crisis has not even reached its turning point. Yet, these factors can be downplayed or temporarily overlooked with ongoing distractions. For those looking for short-term volatility in response to event risk: the docket holds Eurozone debt-to-GDP figures for 2011 on Monday, a Spanish bond auction on Tuesday, and the PMI October activity numbers Wednesday. After that wave, we focus on the big picture. – JK

The Israeli parliament (Knesset) officially set a date for general elections: January 22nd. Prime Minister Netanyahu’s right wing bloc enjoys a wide lead in opinion polls and is expected to stay in his position.

With a rather safe lead, there is only a very small chance that he will need to raise the flames around Iran in the three months leading to the elections.

Binyamin Netanyahu has been in office since early 2009. His Likud party has only 27 seats in a 120 seat parliament, but his coalition was very stable, despite its diversity. His government included the former Labor Party leader Ehud Barak as minister of defense, Avigdor Lieberan from Israel Beytenu (a secular right wing party) as minister of foreign affairs and also ultra orthodox parties and other right wing parties.

Opinion polls conducted in October show that the religious / right wing bloc will likely enlarge its majority in the parliament, winning over the center / left wing bloc.

The heightened rhetoric about Iran seen in August waned down in September. Also the social protest movement, that reached its peak in September 2011, is struggling to have its voice heard, also thanks to the intensive media.

In addition, there are no significant competitors for the pilot seat: the middle of the road mainstream Kadima party is split, and while Labor’s Shelly Yechimovich is gaining traction, she is not seen as a significant competitor by the media or by most of the public.

All in all, Netanyahu enters the campaign with great confidence, that he will receive a new mandate and even enhance his grip on power. In addition, the economy is relatively stable, in contrast with the never ending debt crisis in Europe. Netanyahu likes to compare Israel’s stability with the mess in Spain, even though he praised Spain during the latter’s good days.

With this stable economy, stable coalition and stable security situation, Netanyahu will likely refrain from raising the flames regarding Iran in the 3 month election campaign. He is likely to keep the issue high on the internal agenda, but making serious threats is unlikely, at least as long as his victory seems significant and secure.

Further reading: 5 Reasons Why Israel Will Not Attack Iran – But if It Will, How will Currencies React?

By Yohay Elam, ForexCrunch

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