Trading Week Outlook: Oct. 17 – Oct. 21

 Although it would be interesting to see what a couple of forward-looking sentiment indexes from the Euro-zone and the U.S. housing, industrial activity and inflation reports might have to add to the current global economic backdrop, the trading week ahead will be all about Sunday’s EU Summit as traders anxiously await to find out more details on the promised by European leaders new plans to put out the fire from the EU sovereign debt crisis.

In preparation for the new trading week, here is the outlook for the Top 10 spotlight economic events that will move the markets around the globe.

1.    USD- U.S. Industrial Production, the main gauge of industrial activity measuring the output of factories, mines and utilities, Mon., Oct. 17, 9:15 am, ET.

Despite of the unexpected increase in the ISM Manufacturing PMI, the U.S. industrial production could lose some momentum in September with a reading of 0.1% m/m, down from 0.2% m/m in August.

2.    CNY- China GDP- Gross Domestic Product, the main measure of economic activity and growth, Mon., Oct. 17, 10:00 pm, ET.

As a result of the global slump, the world’s second-largest economy China is expected to slow, although not dramatically, to 9.2% q/y from 9.5% q/y in Q2 2011.

3.    GBP- U.K. CPI- Consumer Price Index, the main measure of inflation preferred by the Bank of England, Tues., Oct. 18, 4:30 am, ET.

Inflationary pressures in the U.K. are forecast to stay stubbornly high and even spike up to 4.9% y/y in September, compared with 4.5% y/y in August. Even though it might be a long shot, the GBP could attract some bids on expectations that, in light of rising inflation, the Bank of England could decide to limit the size of the recently-announced additional asset purchases.

4.    EUR- Euro-zone ZEW Economic Sentiment Index, a leading indicator of economic conditions and business expectations, Tues., Oct. 18, 5:00 am, ET.

The ZEW institute’s survey is expected to deliver another indicator of the deteriorating economic conditions in the Euro-zone with the economic sentiment index forecast to register a larger -45.0 decline in October, compared with -43.3 in August.

5.    GBP- Bank of England Monetary Policy Committee Meeting Minutes, a comprehensive report of the central bank’s meeting that could provide an outlook on the economy, interest rates and future monetary policy, Wed., Oct. 19, 4:30 am, ET.

The minutes should serve as a reminder of the fears of contagion from the EU debt crisis and the threat of a double dip for the U.K. economy which were the main reasons behind the Bank of England’s decision to offer more quantitative easing and to expand the bank’s Asset Purchase Program by another 75 billion pounds. In other words, heightened event risk for the GBP…

6.    USD- U.S. U.S. Housing Starts, a leading indicator of housing market activity measuring construction of new residential properties, and U.S. CPI- Consumer Price Index, the main measure of inflation, Wed., Oct. 19, 8:30 am, ET.

While the U.S. housing starts are forecast to increase up to 590K in September from 571K in August, the building permits are expected to decline to 610K in September from 630K in the previous month.

Still not large enough of an increase to cause the Fed to reconsider its promise to keep rates “exceptionally low through 2013”, the core consumer price index, which excludes food and energy costs, is expected to rise to 2.1% y/y in September from 2.0% y/y in August.

7.    GBP- U.K. Retail Sales, an important gauge of consumer spending measuring sales at retail establishments, Thurs., Oct. 20, 4:30 am, ET.

The U.K. consumer spending is forecast to increase by 0.1% m/m in September, compared with the 0.2% m/m drop in August.

8.    USD- U.S. Existing Home Sales, the main gauge of the condition of the U.S. housing market measuring the number of closed sales of previously constructed homes, condominiums and co-ops, Thurs., Oct. 20, 10:00 am, ET.

After rising to 5.03M in August, the sales of existing homes in the U.S. are forecast to slow to 4.91M in September, confirming the lack of significant improvement in the U.S. housing market.

9.    EUR- Germany IFO Institute Business Climate and Expectations Index, a leading indicator of economic conditions and business expectations in the Euro-zone’s largest economy, Fri., Oct. 21, 4:00 am, ET.

In the aftermath of the anticipated drop in the ZEW economic sentiment index, the German IFO index is forecast to follow suit with a reading of 106.5 in October from 107.5 in the previous month.

10.     EUR- EU Summit of leaders of the 27 countries in the European Union, Sun., Oct. 23, all day.

Without a doubt, the main event of the trading week, the EU Summit is when the markets around the world expect to see the promised “comprehensive strategy on the euro-area sovereign debt crisis”. The summit was postponed because EU leaders needed more time to finalize their new plans on how to prevent further contagion, recapitalize banks, and conclude discussions on the next bailout installment for Greece. “Better late than never” optimism that EU leaders have finally realized the seriousness of the situation after about 18 months since the beginning of the crisis, has helped investor sentiment and risk appetite, with the euro registering its biggest rally since March, 2009. A lot is riding on this summit and if the EU leaders deliver anything short of spectacular, disappointment and risk aversion could quickly set back in, renewing the pressure on the single currency.

S&P 500 Moves to Challenge 1200 as US Dollar Sinks Past Support

THE TAKEAWAY – The S&P 500 soared higher to challenge the 1200 figure while the safe-haven US Dollar dropped through support, hinting continued weakness is ahead.


S&P 500 – Prices took out resistance at the top of a falling channel set from late August, with the bulls now challenging the 1200.00 figure. A break above this barrier exposes familiar support-turned-resistance in the 1227.40-1257.30 region. The channel bottom, now at 1176.78, marks near-term support.

CRUDE OIL – Prices took out support-turned-resistance at $83.65 to challenge the upper boundary of a multi-month falling channel, now at $85.69. A break above this level would materially shift the bias from bearish to neutral, with a subsequent break above $90.50 needed to establish an overtly bullish tone. The $83.65 level has been recast as near-term support.

GOLD – Unchanged from yesterday: “Prices remain locked in a choppy range between the 14.6% and 38.2% Fibonacci retracements at 1589.14 and 1680.78 respectively. A break below immediate support exposes the September 26 low at 1532.45. Alternatively, a push higher through the range top exposes the 50% Fib at 1726.60.”

US DOLLAR – Prices narrowly closed below support at 9852, the 38.2% Fibonacci retracement, exposing the next downside target at the 50% level (9765). Near-term resistance stands at 9974, the September 22 daily close.

EURAUD and EURCAD Structural Supports Tell a Story

Euro / Australian Dollar

300 MinuteBars

“The operative EURAUD wave count treats the advance from 12987 as a 5 wave advance and yesterday’s high as a wave B unorthodox top. The implications are for weakness over the next few weeks towards and probably below 13644 to complete a flat correction.” Price has reached 13644 so we should shift gears and start looking for a bottom, at least short term. The EURAUD is also a gauge of risk so it is noteworthy that price is testing 13644 and perhaps completing a correction (or part of a larger complex correction). Extended weakness would shift focus lower to 13479.

Euro / Canadian Dollar

60 MinuteBars

“Short term EURCAD wave structure ‘fits’ with that of the EURAUD. That is, the advance from the September low is an impulse (5 waves) and waves A and B of a correction have unfolded since the top. Additional weakness in wave C is expected to complete the correction from 14130. The minimum objective is below 13853 and levels that may produce the low are 13760-13800 (50% retracement and former 4th wave).” The EURCAD has traded lower to test 13853 and a low may be forming as price continues to bounce from its corrective channel and former 4th wave support.

Euro / British Pound

Daily Bars

“The EURGBP bounced from its low September low this week, which keeps the range, primarily 8530-8800, intact. The bearish channel can be used as a point of reference to structure trades with a stop above 8884 (look to short into channel resistance).” Price rallied into the 200 day (and 20 day) average yesterday and reversed just shy of its channel. A downside resolution is favored as long as price is below the July-September trendline.

I wrote Wednesday that “interim resistance comes in at 7415 and 7550 but a run at the late September pivot of 7667 cannot be ruled out given the importance of the support that price has bounced from.” The AUDJPY has already made it to 7590, which is a former pivot high. The rally channels impulsively and a short term top may be in place. Look lower towards 7420 and 7380 next week.

Euro / Japanese Yen

Daily Bars

The EURJPY bounce from the low has encountered and reversed at the trendline that extends off of the 9/15 and 9/29 highs. Respect the downside from the current level as the rally from the low is in just 3 waves at this point and consists of 2 equal waves. A move above 10494 would break the series of lower highs and suggest that a more important low is indeed in place.

British Pound / Japanese Yen

300 Minute Bars

The GBPJPY remains within an Elliott channel from the August high. As long as price is below 12085, favor weakness in one more low to complete the decline from the August high. Trading above 12085 would shift focus higher to 12228 and 12330. A triangle could be forming right now.

Canadian Dollar / Japanese Yen

DailyBars

The CADJPY reversed at the trendline that extends off of the June, August, and September lows this week and the bounce has reached resistance (and turned lower) from the 9/29 high at 7490. Allow for a dip to 7310/40 before another bull leg towards the resistance line and 7568.

HAPPY TRADES!!

US Dollar Weakness to Offer Compelling Buying Setups

EURUSD: Pullback a Chance to Add to Short

Strategy: Short at 1.4328, Targeting 1.3000

Floating Profit / Loss: +1049 pips

We initially sold EURUSD at 1.4328 and trailed our stop-loss to breakeven after the pair met our initial objective, revising our soft target to 1.3416. The pair has now met that objective and we will establish a new soft target at the 1.30 figure. The stop-loss will be trailed lower to be activated on a daily close above 1.3975. A Bullish Engulfing candlestick pattern at the bottom of a minor falling channel hints an upswing is ahead, with initial resistance at the 23.6% Fibonacci retracement level (1.3476). We will treat any forthcoming advance as an opportunity to add to our short position.

Forex Market Outlook 10/4/11

Yesterday’s continuation sell-off from last week was a slight deviation from the activity we were expecting as the usual dose of weekend risk aversion and the re-establishment of risk positions to start the week did not take place.  In fact, just the opposite occurred as the selling accelerated throughout the US trading session.

Part of the reason for this was news out of the Euro zone from the EU Finance Ministers’ meeting regarding what it will take for Greece to receive the next tranche of bailout money.  One of the impediments had been Finland’s insistence upon some sort of collateral agreement to receive their participation and some sort of deal was reached.  But there was also talk that the private sector participation may need to increase.  Known as a “haircut”, essentially this would mean that the private sector would have to agree to accept greater losses on the debt than had previously been agreed upon at the July meeting.  While no definite level has been mentioned, should the haircut increase significantly banks with heavy exposure to European debt could experience big-time losses. 

Thus there has been selling in bank stocks and the overall stock market indices which has dragged the Euro even lower and ignited further safe haven risk aversion via the US dollar and gold buying.  PPI figures in the Euro zone came in slightly higher than expected so Thursday’s ECB rate decision could produce no change but serve as a platform for Trichet to speak on the debt crisis.

Overnight, the RBA rate decision in Australia produced no change as expected but they did leave the door open to rate reductions if the economy begins to slow significantly or if employment starts to fall.  Causing dual stress on the Aussie is the fears of a Chinese slowdown which is evidenced by their lower PMI numbers.  On top of this, the US Senate is proposing legislation to combat China’s unfair trade practices of undervaluing their currency which could ignite a trade war between the world’s top two economies.  While I believe that something needs to be done about the Chinese currency peg, the timing of this may be disastrous.  The Aussie is trading at 1-year lows.

Meanwhile the flight to safety has strengthened the Japanese yen to 10-years highs vs. the Euro and Pound and intervention is unlikely unless the Yen strengthens above 76 vs. USD.

Speaking of the Pound, UK GDP figures are due out tomorrow and bets are increasing that the BOE may increase their bond buying to combat a declining economy.  While the numbers have been weakening, I’m not sure they are weak enough to warrant further easing at this point.  We shall find out on Thursday.

With major risk aversion causing massive selling, thankfully we have Bernanke to the rescue today—not!  He is set to speak to the Joint Economic Committee on the state of the economy and I’m sure he’s going to say, “all is well” or words to that effect, and he may even go so far as to hint at further monetary easing.  The problem he has and hasn’t understood from the start of this crisis is that cheap money is not the end all be all but that consumer confidence in our economy and policymakers is tantamount.  Confidence is near an all-time low and the psyche of the American consumer—and frankly their ability to consume with declining wages and high unemployment—further adds to the downward economic spiral. 

Friday’s employment report is a crapshoot at this point as there is no telling what the number of new jobs added will be.  Estimates are for 50K jobs to be added though it is unclear if that will be an acceptable figure to the markets even if it is reached. 

We are entering very dangerous economic territory here and the recent history has shown that we may be heading straight for the type of market activity we saw after the US financial collapse in mid-2008.  With the Euro debt crisis on the brink of disaster, demand for US dollars to increase bank liquidity further contributes to risk aversion and the correlative effects of taking all other markets lower.  Demand for Treasuries and Dollars has been high for the past few weeks and despite “Operation Twist” this may continue for some time.

There is no magic bullet at this point that can immediately fix the problems, but solutions at this point are more welcome than non-action.  Everyday that passes without resolution hastens the speed at which the problems accelerate.  We feel eerily close to that point, so continue to avoid risk until some clarity emerges. 

Trading Week Outlook: Oct. 3 – Oct. 7

Oct. 2011 – The first trading week of October and of the fourth quarter will kick-start the market’s quest to find out if the U.S. economy is really as bad as the Fed’s gloomy outlook painted it to be. Next week’s Non-Farm Payrolls would provide the first clues, while the Euro-zone debt crisis continues to fuel investors’ concerns that the worst is yet to come.

In preparation for the new trading week, here is the outlook for the Top 10 spotlight economic events that will move the markets around the globe.

1.    USD- U.S. ISM Manufacturing Index, a leading indicator of industrial activity, where a reading above or below 50 is the dividing line between economic expansion and contraction, Mon., Oct. 3, 10:00 am, ET.

The U.S. manufacturing sector index is forecast to maintain above 50 for another month with a reading of 50.5 in September from 50.6 in August, but a move into contraction territory would quickly join the long list of signs of U.S. economic weakness.

2.    AUD- Reserve Bank of Australia Interest Rate Announcement, Mon., Oct. 3, 11:30 pm, ET.

Last month’s monetary policy decisions from all major central banks have made it clear that they are steering further away from tightening in an effort to stimulate growth. The Reserve Bank of Australia is not likely to differ from that course and should keep rates at the current 4.75% level, while expressing a cautious view on domestic and global economic conditions. Even the slightest hint of a rate cut, coupled with risk aversion and weakness in commodity prices, could provide further impetus to the Australian dollar’s recent decline.

3.    GBP- U.K. GDP- Gross Domestic Product, the main measure of economic activity and growth, Wed., Oct. 5, 4:30 am, ET.

The final reading of the U.K. Q2 GDP should confirm that the U.K. economy grew by only 0.2% q/q in the second quarter of 2011 after the 0.5% q/q increase in Q1 2011. An upward revision could give the British pound a temporary boost, but with the Bank of England policy makers warming up to the idea of more quantitative easing and expansion of the Asset Purchase Program, the pound could continue to feel the pressure.

4.    EUR- Euro-zone GDP- Gross Domestic Product, the main measure of economic activity and growth, Wed., Oct. 5, 5:00 am, ET.

The slowdown in the Euro-zone’s economy is not much of a newsflash and the final reading of the Euro-zone Q2 GDP should confirm that the economy grew by only 0.2% q/q in the second quarter of 2011 after the 0.8% q/q increase in Q1 2011.

5.    USD- U.S. ADP-Automatic Data Processing Employment Report, a measure of jobs lost or added to the private sector of the economy, also serving as a leading indicator for the outcome of the monthly non-farm payrolls, Wed., Oct. 5, 8:15 am, ET.

Private sector payrolls are forecast to see a smaller increase by up to 80K in September, following the 91K new jobs created in August. An even lower than expected number could add to the market’s growing concerns about the state of the U.S. job market ahead of Friday’s Non-Farm Payrolls report.

6.    USD- U.S. ISM Non-Manufacturing Index, a leading indicator of economic conditions in the services industries: agriculture, mining, construction, transportation, communications, wholesale trade and retail trade, Wed., Oct. 5, 10:00 am, ET.

The U.S. services industry activity is forecast to expand for another month, although at a slower pace to 54.9 in September from 55.6 in August.

7.    GBP- Bank of England Interest Rate Announcement, Thurs., Oct. 6, 7:00 am, ET.

With more Bank of England policy makers and the Chancellor of the Exchequer warming up to the idea of additional quantitative easing, the pound could continue to feel the pressure ahead of the Bank of England’s October meeting. We are likely to see another unanimous vote by the Monetary Policy Committee to keep the benchmark rate at the low 0.50%. The GBP longs might rush to the exits if the Bank of England announces an expansion of its Asset Purchase Program beyond the current 200 billon-pounds ceiling.

8.    EUR- European Central Bank Interest Rate Announcement, Thurs., Oct. 6, 7:45 am, ET.

As expected, due to the slowdown in the Euro-zone economy and with inflationary pressures flattening throughout the summer months, the market is pricing a rate cut by the European Central Bank. Such announcement could come as early as the next meeting on October 6, although there are some “whispers” that the ECB will probably cut rates in November, after President Trichet retires on October 31. Fighting inflation and maintaining price stability is Mr. Trichet’s legacy and with last Friday’s unexpected spike in consumer prices from 2.5% y/y in July and August to 3.0% y/y in September, the odds for a rate cut in October have somewhat diminished. Whether it comes this month or in November, expectations of an impeding rate cut and the Euro-zone debt crisis will continue to be major risk factors for the EUR.

9.    JPY- Bank of Japan Interest Rate Announcement, Fri., Oct. 7, around 12:00 am, ET.

Although the U.S. dollar has managed to stay above record lows, many other currency majors have already broken lower against the yen. With the currency’s strength likely to continue as a result of risk aversion and the flight to safety, the Bank of Japan might be forced to take further measures to curb the yen’s gains. After the Ministry of Finance beefed up it’s intervention fund by another 15 trillion yen last week, the Bank of Japan could follow suit by keeping the benchmark rate in the record low target band between 0%-0.10% and might decide to expand its ultra-accommodative monetary policy, while “carefully watching” the “one-sided moves” of the yen.

10.    USD- U.S. Non-Farm Payrolls and Employment Situation Report, one of the most important indicators of economic health, measuring the number of new jobs created or lost in the world’s largest economy, Fri., Oct. 7, 8:30 am, ET.

After a sequence of dismal summer labor market reports, traders will delve into all economic data throughout the month of October for signs of strength or weakness ahead of the Fed’s next meeting on November 1-2. The U.S. Non-Farm Payrolls might instill some cautious optimism with consensus forecasts expecting the U.S. economy to add up to 80K jobs in September- a much better reading than the non-existent, zero job creation in August. The unemployment rate would likely remain at 9.1% as a reminder that the road to recovery will be a long one. Another weak employment report would reinforce the Fed’s gloomy outlook on the economy and could re-open the door to QE3.