Markets were still in an indecisive mode. Disappointing
manufacturing and job data from US did send stocks and treasury yields
sharply lower last week. But corresponding strength was not seen in the
greenback. The lack of follow through buying, and Friday's reversal in
the dollar after taking out near term levels against major currencies
cast much doubt on the case that it has bottomed. The picture was also
complicated by the refusal to head lower in gold and crude oil. On the
other hand, the Japanese yen had a roller-coaster ride last week on
varying comments from Japan Finance Minister and ended the week mixed.
Swiss franc remained firmed against Euro in spite of another
intervention from SNB.
Dollar's strength in the early part of the week was partly fueled by
comments from world finance leaders on the concern of weakness of the
greenback. But after all, G7 finance chiefs didn't single out the
weakness of dollar for criticism and just stuck to similar stance that
"Excess volatility and disorderly movements in exchange rates have
adverse implications for economic and financial stability." The
statement released over the weekend could well disappoint dollar bulls
who hoped for a drastic change in language and may trigger some initial
selloff in the greenback this week.
On the other hand, Yen's spike higher last week was triggered by
comments from Japan Finance Minister Fujii that he supported a strong
yen policy. But the strength quickly faded after he reversed his
rhetoric. Over the weekend in G7 meeting, Fujii emphasized again that
if yen shows "excessive moves in a biased direction, we will take
action," leaving room for the government to intervene. Yen crosses
might recover further initially this week.
As mentioned before, expectations on economic data from US were
high. But after all the results were generally disappointing. In
particular, NFP missed the expectation much by showing -263k
contraction in the job markets in September while unemployment rate
also climbed to 26 year high of 9.8%. ISM manufacturing index also
unexpected dropped back to 52.6 in September, showing that the recovery
in manufacturing is losing momentum. Consumer confidence also
unexpectedly dropped to 53.1 in September. Nevertheless, consumer
spending rose slightly more than expected by 1.3% in August and was a
relatively brighter spot in US economy. Q2 GDP was revised higher from
-1.0% to -0.7% annualized contraction.
Data elsewhere were mixed. Germany unemployment rate dropped from
8.3% to 8.2% in September. But Eurozone unemployment rate rose to
decade high of 9.6% in August. UK CBI distributive trades unexpected
turned positive to +3 in September. Gfk consumer confidence also
improved remarkably to -16 in September. However, PMI manufacturing
missed expectation by dropping back to 49.5 in September. Japanese
Tankan large manufacturer index rose to -33 in Q3 while non-
manufacturing outlook rose to -24. Japanese CPI dropped -2.2% yoy in
August, inline with expectations. Manufacturing PMI improved to 54.5 in
September. Unemployment rate unexpectedly dropped to 5.5% in August.
Canadian GDP was flat in July, missing expectation of 0.5% growth.
Australian retail sales rose much more than expected by 0.9% mom in
August.
IMF raised forecasts for global economic growth in 2010 from 2.5% to
3.1% as more than 2T stimulus packages and demand in Asia helped the
world economy recovers. US is expected to grow 1.5% Eurozone is
expected to grow 0.3% while UK is expected to expand by 0.9%. In a
separate report from IMF, dollar's share of global currency reserves
dropped in Q2 to 62.8%, hitting the lowest level in a decade. The share
dropped from 65% in Q1 and 62.9% a year ago. On the other hand, Euro's
share rose to a record of 27.5%, up from Q1's 25.9%.
Looking at the charts, investors are generally moving further away
from a risk seeking mode to a risk averse mode. The sharp fall in US
stocks over the week was inline with our view that a short term top is
at least formed. S&P 500 is now 5% below September's high of 1080
after losing momentum on bearish divergence conditions in daily MACD.
The key focus is now on whether such decline would extend beyond 100
level which is close to medium term trend line as well as 55 days EMA.
At this moment, we're favoring more downside in stocks and are
cautiously anticipate break of the 1000 level. If that happens, it will
open up the possibility for deeper decline to at least have a test on
869/956 support zone in Q4 which will provide further support to dollar
and yen in general.
The sharp fall in treasury yield last week is also inline with the
view that investors are moving into safer assets. Yield on 10 year T
note indeed dropped to as low as 3.106 last week. Even though strong
rebound was seen that pushed yield to close at 3.22, there is no
structure change in recent down trend. We'd maintain that yield on ten
year note has topped out at 4.01 and it should continue to spiral down
going forward, which should give some additional support to yen
relative to dollar.
However, resilience in energies and precious metals are mixing up
the bullish picture of the greenback. In particular, crude oil rebound
strongly to close near to 70 level in spite of a bearish inventory
report. The refusal to head lower after taking out the medium term
trend line also dampens the immediate bearish view that it has topped
out at 75.0. While we're still cautiously bearish in crude oil, any
break of near term resistance at 73 level will put 75 high back in to
radar and we could see the a test of 75 in oil accompanied by a test of
75.83 low in dollar index.
Looking back at the dollar index, the recovery lost momentum and was
limited at 77.47 last week. While the break of medium term channel
resistance is another sign of bottom, momentum remains unconvincing so
far. We'll stay neutral initially this week and look at the post G7
reactions first. Further rise will be in favor as long as 76.50 minor
support holds and above 77.47 will pave the way to key resistance level
at 78.93 next. However, a break below 76.50 will put 75.83 back into
focus.
In the biggest picture, out preferred view didn't change. Fall from
89.62 has likely completed at 75.83 on bullish convergence conditions
in daily MACD, after hitting key support level of 75.89. Break of 78.93
resistance will confirm this case and will set the stage for at least a
strong rebound to 38.2% retracement of 89.62 to 75.83 at 81.09.
However, such view is far from being confirmed and a firm break of
75.83 will bring deeper fall to next key support level of 74.31.
Currency Heat Map Weekly View
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The Week Ahead
Initial focus of the week will be on reactions to the lack of
criticism on dollar weakness from G7 statement as well as Japan FM
Fujii's comment on intervention on Yen. Economic calendar is rather
light, in particular in US and main focus will then turn too three
central bank meetings, RBA, ECB and BoE.
RBA is widely expected to keep rate unchanged at 3.00% level this
week. Nevertheless, markets are speculating that RBA would start the
pave the way for a rate hike. Some economists are suggesting that the
rate hike might happen in November. One important thing to note is that
Aussie was sharply lower against dollar and euro last week and that was
an early sign of topping, at least in near term. So, even in case of a
change to hawkish stance in RBA, we'd prefer to see 0.8857 in AUD/USD
and 1.6512 in EUR/AUD to be firmly taken out before confirming
resumption in recent up trend. Otherwise, we're stay near term neutral
even in case of strong rebound.
ECB is always widely expected to keep rates unchanged at 1.00% this
week. ECB surprised the markets by allotting only EUR 75.2b in last
week's 12 month long-term refinancing operation. The amount was much
lower than markets' expectation of around EUR 100 to 200bn and raised
some speculations that ECB is starting to pave the way for exiting
non-standard monetary policies and would possibly hike next summer. The
speculation was somewhat immature at this point. Nevertheless, focus
will still be on hints from Trichet on the timing of policy reversal.
BoE is expected to leave rates unchanged at 0.50% and keep the
asset-purchase program unchanged. However, recent comments from King
suggest the bank is considering a cut in deposit rates, the interest
rate paid by BoE on commercial banks reserves held at the bank.
Sterling will be vulnerable to another sharp fall, in particular
against Euro, in case of some related announcement from BoE.
Important economic data to be released this week include:
- Monday: UK Services PMI; Eurozone Retail Sales; US ISM Manufacturing Index
- Tuesday: RBA Rate Decision; Swiss CPI; UK Industrial and Manufacturing Productions; Canada Ivey PMI
- Wednesday: Swiss Unemployment; Eurozone GDP Final
- Thursday: Australian Employment; BoE Rate Decision; ECB Rate Decision and Conference
- Friday: UK Trade Balance, PPI; Canadian Employment, Trade Balance; US Trade Balance
AUD/USD Weekly Outlook
After edging higher to 0.8857 initially last week, AUD/USD reversed
and dropped sharply to as low as 0.8567 before recovering. The break of
0.8585 support indicates that a short term top is at least formed at
0.8857 with bearish divergence conditions in 4 hours MACD and RSI.
Hence, while some consolidation might be seen initially this week,
upside of recovery is expected to be limited well below 0.8857 and
bring fall resumption. Below 0.8567 will target 0.8154/8468 support
zone first.
In the bigger picture, recent rally in AUD/USD is losing some
momentum with mild bearish divergence conditions in 4 hours daily MACD.
Hence, even in case of another rise, upside is expected to be limited
by 61.8% projection of 0.6284 to 0.8262 from 0.7702 at 0.8924 and bring
deep pull back. Sustained trading below medium term rising trend line
(now at 0.8573) will indicate that a medium term top is formed and
bring pull back to 0.7267/7702 support zone.
Nevertheless, note that the strength of the rise from 0.6008 argues
that AUD/USD is developing into another up trend. In other words, long
term correction from 0.9849 has possibly completed at 0.6008 already,
after being support slightly above 76.4% retracement of 0.4773 (01 low)
to 0.9849 (08 high). Hence, the anticipated medium term pull back is
expected to be contained by 0.7267/7702 support zone and bring rally
resumption to retest 0.9849 high eventually. Break of 0.7267 resistance
turned support is needed to indicate that whole rise from 0.6008 has
completed. Otherwise, we'll continue to favor the longer term bullish
case even in case of deep correction.
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