US Dollar Canadian Dollar Exchange Rate Forecast

USDCAD Monthly Technical Forecast

The market has been in the process of mounting a significant rally out from the historic lows set by 0.9060 in November 2007. It now appears that a fresh higher low is in place by 1.1465 (November 2008 low) to be confirmed on a break back above 1.3020. The late February break of a multi-week triangle pattern strengthens constructive outlook with the breach of triangle resistance now projecting a measured move objective over the coming months back to challenge the 1.4000, 2004 highs. We would however recommend that longer-term bulls proceed with caution, with the monthly RSI now crossing above 70.

USDCAD Fundamental Outlook/Interest Rate Forecast

The Bank of Canada lowered its benchmark rate to 0.50% which erased any yield advantage that it had over the Fed Funds rate. An aggressive statement following the rate decision has markets expecting another 40 bps worth of easing from the central bank. As expectations for the Fed Funds Rate remain plus 41, the spread continued to indicate bullish USD/CAD sentiment.

Although further easing is generating a bullish bias, recent price action indicates that the relationship between interest rate expectations and price action has faded. However, we do expect the relationship between commodity prices in particular oil will continue to hold its influence over the Canadian dollar.

US Dollar Swiss Franc Exchange Rate Forecast

USDCHF Monthly Technical Forecast

A fresh higher low is now sought out above the 0.9635 March 2008 historic lows at 1.0370 (December 2008 lows), to be confirmed on a break back above the 2008 highs from November 2008 at 1.2300. The 50-Month SMA by 1.1900 had managed to cap rallies in February, but we look for this level to be overcome in March to open a direct retest of 1.2300. Above 1.2300 exposes 1.2775 (October 2006 highs) and then the 2005 highs by 1.3290 further up. The 10-Month SMA has crossed back up through the 20-Month to provided added confirmation for bullish bias. Ultimately, only back under 1.1000 gives reason for concern.

British Pound US Dollar Exchange Rate Forecast

GBPUSD Monthly Technical Forecast

There was some mild room for optimism in February with the inability to extend below the previous multi-year trend lows by 1.3500 from January, finally ending a sequence of 6 consecutive monthly lower lows. However, the pair did manage to post a 7th consecutive monthly lower high and 7th consecutive monthly negative close to keep the intense bear trend firmly intact. Key levels to watch in March will be 1.4990 and 1.4000 (February high/Psychological). A sustained break back below 1.4000 will expose a direct retest of the 1.3500 multi-year lows from January, and then 1.3000 further down, while back above 1.4990, will delay bearish momentum and suggest that a meaningful base is in place. It is worth noting that the pair is the most overextended of any major pairing and as such, building longer-term positions at current levels would not be recommended. A close look at the monthly RSI confirms with the oscillator now sitting at life-time lows by 15.

GBPUSD Interest Rate Forecast

The British Pound continued its decline against the dollar after the BoE cut its benchmark interest rate to 1.00% from 1.50% which was the lowest since its inception in 1694. As the pound’s yield advantage disappeared it continued to lose ground to the dollar, but the rate of decline slowed as the spread between the BoE overnight rate and US Fed funds Rate fell from -96 to -53. However, interest rate expectations have lost their ability to reflect growth prospects as they approach zero and may lose their ability to predict future price action. Indeed, the BoE and other central banks have had to revert to off balance sheet measures as growth prospects continue to decline which is starting to be reflected in currency valuations.

The central bank has already asked for permission from Prime Minster Gordon Brown to embark on quantitative easing and is expected to begin by printing 50-150 billion pounds to buy assets. Although markets may see interest rate expectations become flat following another rate cut by the BoE, it wouldn’t reflect the dour outlook for growth which could lead to more sterling weakness.

Euro US Dollar Exchange Rate Forecast

Euro/US Dollar Monthly Technical Forecast

After posting life-time highs by 1.6040 in July 2008, the market has reversed course sharply to undergo some significant pullbacks reaching 1.2330 (2008 low, October) thus far ahead of the latest multi-month consolidation. It now looks as though a lower top is firmly in place by 1.4720 (December 2008 high) to be confirmed on a break back below 1.2330. Below 1.2330 will open a fresh downside extension towards initial support by 1.2000-1.2130 (psychological barriers/100-month SMA/50% fib retracement of major 0.8230-1.6040 move), and then to the 1.1640, November 2005 lows further down. Only back above February's high by 1.3095 delays bearish structure.

Euro/US Dollar Interest Rate Forecast

The correlation between the EUR/USD and interest rate outlook continued to weaken as the single currency gradually fell throughout the month despite a slight improvement in interest rate expectations. The ECB refrained from further easing in February which kept market expectations in check as President Trichet in January made it clear that the next policy meeting to watch would be the March “rendezvous”. Risk appetite has been the main driver of price action for the EUR/USD and that correlation is expected to remain under current market conditions.

Nevertheless, traders will focus on the upcoming policy rate decision as it may give insight into the state of the European economy as concerns have emerged that troubles in Eastern Europe will negatively impact their western counterparts. Credit Suisse overnight index swaps are predicting 43 bps of further easing over the next twelve months by the ECB versus expectations that the Fed will raise rates by 41 bps. This is primarily based on the belief that the U.S. economy is best poised to emerge from the current crisis and a dour outlook from President Trichet would reinforce this sentiment. However, an aggressive rate cut by the ECB could minimize the impact of future interest rate expectations and leave risk appetite as the sole driver of future price action.

US Dollar Japanese Yen Exchange Rate Forecast

Written by Joel Kruger, Technical Currency Analyst; John Rivera, Currency Analyst; David Song, Currency Analyst

USDJPY Monthly Technical Forecast

Despite the latest sharp monthly reversal off of the 87.15 matched trend lows from December and January, the market remains confined to a prominent downtrend with the current rebound merely classed as corrective. A daily double bottom has been triggered, and ultimately we project additional gains back towards the 104.00 area (measured move objective/20-Month SMA), from where a fresh lower top is sought ahead of the next downside extension back below 87.15 to expose the 79.70 historic lows from April 1995.

US Dollar/Japanese Yen Interest Rate Forecast

The US Dollar/Japanese Yen pair continues to be unaffected by interest rate expectations between the Federal Reserve and the Bank of Japan. Traditionally risk sentiment has driven price action for the pair with risk aversion flows favoring the Yen. However, that relationship disappeared in February as the USD/JPY rallied despite a large sell off in global equity markets. A year-over-year fourth quarter contraction of 12.7% in GDP for the Japanese economy has put its safe-haven status in doubt.

The token 2 bps increase in Japanese interest rates expectations over the next twelve months based on Credit Suisse overnight index swaps, reminds us that the BoJ has traditionally kept rates near zero. Therefore, with the Fed funds rate expected to increase by 41 bps, we could see the Yen resume its position as a funding currency which could add to its weakness going forward.

US Dollar – Japanese Yen Valuation Forecast

The Japanese yen remains overvalued against the greenback even after posting an 8.32% loss during the month, and the USDJPY is likely to push higher over the near-term as the economic downturn in the world’s second largest economy intensifies. The dire outlook for future growth has certainly battered the profound correlation between the yen and the stock markets, and as the low-yielding currency’s safe-haven status comes under question, the dollar-yen is expected to strengthen further over the following month to retrace the sell-off from 2008.

What is Purchasing Power Parity?

One of the oldest and most basic fundamental approaches to determining the “fair” exchange rate of one currency to another relies on the concept of Purchasing Power Parity. This approach says that an identical product should cost the same from one country to another, with the only difference in the price tag accounted for by the exchange rate. For example, if a pencil costs €1 in Europe and $1.20 in the US, the “fair” EURUSD exchange rate should be 1.20. For our purposes, we will use the PPP values provided annually by the Organization for Economic Cooperation and Development (OECD). We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar. Currencies overvalued against the Dollar are denoted in RED, while those that are undervalued are denoted in GREEN.

Japanese Yen May Fall Further on Broken Risk Link, Disappointing Data

At the start of this past week, many were wondering if the Japanese yen had lost its safe-haven status, as the currency pulled back sharply despite broad declines in the stock markets.

Japanese Yen May Fall Further on Broken Risk Link, Disappointing Data

Fundamental Outlook for Japanese Yen: Bearish

- Japanese trade data shows that exports fell by a record 45.7 percent in January
- Japanese economy continues to deteriorate rapidly as industrial output, household spending fall sharply
- Japanese Yen - Losing Its Safe Haven Status?

At the start of this past week, many were wondering if the Japanese yen had lost its safe-haven status, as the currency pulled back sharply despite broad declines in the stock markets. While the tide turned on Thursday night as the Japanese yen started to recoup some of its losses, the currency still ended the week down quite a bit: -4.6 percent versus the US dollar, -3.77 percent against the British pound, and -3.5 percent against the euro and Swiss franc. This certainly leaves us with a cautious stance on the Japanese yen since its correlation with risk trends may still be falling apart, and as a result, those looking for a more reliable correlation should look toward the US dollar, as it was easily the biggest gainer in a week that saw steady declines in the S&P 500 to the lowest levels since December 1996.

Looking ahead, there will only be a few economic indicators released that will be worth noting. On March 1, Japanese labor cash earnings are forecasted to remain exceptionally low at -1.2 percent in January from a year earlier, marking the third straight month of negative results. Japanese consumption has been very low for a long time, as there was little to no wage growth to provide for an increase in discretionary income. When you consider that labor earnings have recently been steadily declining, it becomes clear that there is almost no impetus for households to spend and support the economy.

On March 4, Japanese capital spending (excluding software) is projected to fall for the seventh straight quarter in Q4, as the annual rate may plunge by the most in 11 years at a rate of 17.0 percent. Businesses, which depended heavily upon robust foreign demand, have had to come to terms with the impact of the appreciation of the Japanese yen and the global economic slowdown/recession, as the latest figures from January show that exports fell 45.7 percent from a year earlier. With the Japanese government and economists all of the world forecasting that global growth will time quite some time to recover, businesses have no reason to invest in their operations and if anything, they are looking to cut away any and all excess fat. Overall, readings in line with expectations will signal what many already anticipate: that the Japanese recession will only deepen during the first half of 2009. – TB

Euro Forecast at Risk Ahead of European Central Bank Rate Decision

Written by David Rodriguez, Quantitative Analyst

Euro Forecast at Risk Ahead of European Central Bank Rate Decision

Fundamental Outlook for Euro This Week: Bearish

- Dismal German GDP data sends euro to bottom of trading range
- German IFO economic sentiment falls to fresh record low
- Forex trading markets next look to European Central Bank rate decision

The Euro traded lower against the US dollar on an incredibly volatile week of trade, but the true fireworks are likely to come on a heavy string of economic event risk in the week ahead. Both the Euro Zone and the US economy have a key number of reports due within a short span, and markets are likely to force substantial moves in the Euro/US Dollar on any unexpected developments. Overall FX market momentum supports further euro losses and US dollar gains. Yet it will be important to watch any potential shifts in the week ahead.

Intense intraday volatility in the Euro/US Dollar could intensify on the coming week’s critical European Central Bank interest rate decision and several other second-tier releases. Consensus forecasts call for the ECB to cut its benchmark interest rate by 50 basis points to fresh record-lows of 1.50 percent, but uncertainty surrounding the event means that markets will force euro volatility regardless of the outcome. Overnight index swaps (OIS) currently price in a dead-certain 25 basis point cut and a 50 percent chance of a full 0.50 percentage point move. Regardless of the outcome, markets will pay very close attention to ECB President Jean Claude Trichet’s Question and Answer session following the announcement. The typically candid central banker already telegraphed a March rate cut in the same Q&A session following the January move, but questions remain as to whether the ECB will truly continue cutting rates to record lows. If there is any indication that the ECB will set an effective floor on its benchmark rate target, the euro would likely benefit vis a vis the low-yielding US dollar.

The euro will otherwise trade off of further financial market and macroeconomic developments—especially as they relate to Euro Zone stability. Wide European sovereign debt spreads underline the state of unease for many member countries, and ongoing fears of political fallout from the financial crisis bodes poorly for the euro itself. Recent rhetoric suggests that Germany and other major economies stand ready to bail out those countries at risk. Traders have nonetheless punished the euro for perceived instability, and any further deterioration in EMU affairs could send the EUR even lower against major counterparts.

US Dollar Testing 3-Year Highs as NFPs and Nationalization Loom

The world’s most liquid currency ended the week in a precarious technical and fundamental position. For those watching the charts, the Dollar Index closed Friday just off a three-year high. And, making sure to keep market participants engaged until liquidity returns on Monday, fundamental traders are debating the appeal of a currency that represents a ballooning recession, a market-wide demand for safety and the dawn to a period of nationalization.

US Dollar Testing 3-Year Highs as NFPs and Nationalization Loom

Fundamental Outlook for US Dollar: Bullish

- The US government moves one step closer to nationalization with a 36% stake in Citi
- With global rates falling to zero and recession spreading, is the dollar is taking the top safe haven spot from the yen?
- Growth contracted more than expected and the fastest pace in 26 years according to GDP revisions

The world’s most liquid currency ended the week in a precarious technical and fundamental position. For those watching the charts, the Dollar Index closed Friday just off a three-year high. And, making sure to keep market participants engaged until liquidity returns on Monday, fundamental traders are debating the appeal of a currency that represents a ballooning recession, a market-wide demand for safety and the dawn to a period of nationalization.

Looking ahead to next week and beyond, with so many major fundamental themes evolving throughout the markets; the dollar will have decide which driver will take precedence. The most pressing (and novel) concern for the greenback is the US government’s trend towards nationalization. The stakes were raised this past Friday when it was announced that the Treasury was taking a 36 percent stake in Citi – the world’s largest financial firm. This was a blatant move by officials after a series of questionable steps towards government stewardship that includes: seizing control of Freddie Mac and Fannie Mae; taking over insurance giant AIG after extending it a $150 billion credit line; and announcing that loans from the tax payers coffers will now come with the price of convertible preferred shares from those lending. In normal markets, such a move would spark fear that investor equity could vanish and returns could be dampened. However, it is obvious that we are not experiencing normal market conditions. Global growth is cooling, returns are shrinking, risk of financial seizures is high and many of the world’s largest economies are adopting a similar policy. At this point, the government likely sees this intervention as necessary to ensuring further financial time bombs don’t revive the financial crisis and send the nation into a tailspin that it cannot pull out of; and the markets may agree.

How long the dollar can hold out as the headwinds to free-market economics increase is debatable. One key determinant for the currency is its status as a safe haven. Since the plunge in Japanese GDP numbers led investors to rethink the viability of the yen as a reliable asylum for capital, we have seen investors head towards the US dollar to purchase Treasuries and other low-risk, American assets. Clearly, this dynamic depends upon the presence of risk. There are plenty of indicators and signs to support the proliferation of fear; but ultimately this market driver is a product of sentiment. Should the balance of risk/reward invert and the S&P 500 reverse course, there is little need for a safe haven whose economic recovery will be stifled by its government’s presence.