What to look for in the week ahead

The Week Ahead updated September 5, 2008

The USD surge continues; no end in sight

New levels to watch in EUR, GBP, and AUD

Reserve Bank of New Zealand rate decision

Hurricanes and 9/11 anniversary may roil markets

Key data and events to watch next week

The USD surge continues; no end in sight

So much for the period of consolidation I was expecting last week. The USD surge has continued and the persistence of USD price gains remains as forceful as the early phase of the USD rebound. Price action continues to point to massive position liquidations, as USD pullbacks remain exceptionally shallow and new highs occur with little seeming relationship to data releases or other time-specific events. In simpler terms, asset managers are still looking to unload long EUR, GBP, AUD positions and ultimately get short those currencies, preferably on bounces in those pairs. When better levels to sell at fail to materialize, these funds are forced to go to market and sell into weakness at successively lower levels.

Many analysts are continuing to look for some slowing to the USD rally or some consolidation to develop and I fell into that trap last week. Instead of trying to anticipate a bottom in EUR/USD or a top in the USD, I'm going to operate on the basis of "I'll know it when I see it." And right now, I'm seeing very little in the way of signs of a USD top. The best that I can see are some doji patterns on daily candlesticks from Friday in the US dollar index and USD/JPY. But doji patterns (where the daily open is nearly identical to the daily close) are neutral and only potential warning signs of a reversal; traders need to wait for confirmation signaled by a daily close beyond the doji extreme point in the opposite direction of the trend. For example, in the USD index, the trend has been up, so a daily close below the low of the doji candle could confirm a reversal.

Key inter-market relationships continue to support the USD advance, which in turn reinforces some of those markets' moves. Oil prices are below the 200-day moving average at 111.51 and remain at risk of dropping below the $105/bbl level, setting up potential to take out the psychologically significant level of $100/bbl and decline further. Gold has dropped back below the daily Tenkan line (fastest moving line) in daily Ichimoku charts and is closing below the cloud on weekly Ichimoku charts, highlighting the prospect of more significant declines ahead. US Treasuries were bought on flight-to-quality desperation as asset managers dumped overseas assets and looked to park money in the most secure bond available. Also, this past week saw significant market talk that hedge funds were paring asset holdings in anticipation of large redemptions, a Street euphemism for withdrawals, for the September quarter end. It seems unlikely that such asset sales have already run their course in the first week of September and I would expect more to come.--Brian Dolan

New levels to watch in EUR, GBP, and AUD

In last week's update, I highlighted key levels to watch in EUR/USD, GBP/USD and AUD/USD for signs that further declines were unfolding. In each pair, those key levels were broken and the targeted declines were met or exceeded. Below are snapshots of those same currency pairs with new levels to watch.

EUR/USD: Broke below the key 1.4500/50 level and losses exceeded my projected target of 1.4300. Importantly, EUR/USD is closing below weekly trendline support at 1.4470/80, marking that area as the new 'sell on rally' level. The 100-week moving average at 1.4192 looks to have contained the downside for the time being and a break below that level will likely trigger further weakness to the 1.4000/50 zone of round-number, psychological support. Below sees even longer-term weekly trendline support at 1.3850/70. Additionally, EUR/USD is closing below 1.4358, which is the 38.2% retracement of the move higher from Nov. 2005 lows at 1.1640 to the recent all-time highs at 1.6038. The close below the 38.2% level ultimately targets a drop to the 61.8% retracement at 1.3319, but the 50% level (1.3838) happens to coincide with weekly trendline support at 1.3850/70, so that level may prove more significant as support.

GBP/USD: Collapsed below the supports I highlighted last week and reached the measured move objective from the 'head and shoulders' pattern at 1.7530 (Friday's low was 1.7538). Cable is below any moving average or retracement you would care to think of. The next downside objective is simply a zone of support between 1.7200/80. This area is marked by trendline support off lows from late 2005/early 2006 and a symmetrical decline equivalent to the drop from 1.9750 to 1.8520, which would target 1.7280. The 1.7850/7900 area is key trendline resistance that offers potential selling levels.

AUD/USD: Succumbed below 0.8500 and exceeded my projections to 0.8280 and nearly reached the next target at 0.8000 (Friday's low was about 0.8030). Perhaps significantly, AUD/USD is closing above the 200-week moving average at 0.8090. Also, Fibonacci support comes in at 0.8103 (61.8% retracement of the rise from March 2006 low of 0.7016 to the recent all-time high at 0.9861), making this area the trigger to a likely decline below 0.8000. Weakness below these levels likely signals further declines to the spike low of August 2007 around 0.7680 next. Key trendline resistance in the 0.8300/30 area offers potential selling opportunities.--Brian Dolan

Expect some Kiwi volatility with RBNZ on deck

Before I get to the RBNZ outlook, beware that RBA Governor Stevens is set to give his semiannual economic testimony on Sunday evening at 2300GMT and his comments could have significant spillover impact on Kiwi. Now, the Reserve Bank of New Zealand is due to announce next Wednesday at 2100GMT and the market expectation is that the bank will reduce the benchmark interest rate by -25bp to the 7.75% level. We agree with the market outlook but would also note the risk that the bank decides to cut a more aggressive -50bp in an attempt to nip the economic slowdown in the bud. Retail sales have slowed to an annual rate of just 2.4% in 2Q08 after running at 6.5% last year. Meanwhile, the housing market remains in the dumps and this is weighing heavily on consumer confidence. The Westpac Banking consumer confidence index plunged to 81.7 in 2Q from 96.5, to the lowest level since September 1991. Inflation does remain high at 4.0%, though this still leaves the real benchmark interest rate well in positive terrain and gives the RBNZ a great deal of room to take rates lower at a relatively quick pace. One way or the other, we expect some good price action in Kiwi to result.