Geopolitical development in Middle East and North Africa was the main theme in financial markets last week as violence in Libya escalated. Swiss Franc strengthened across the board and jumped to new record high against dollar. Crude oil breached 100 level briefly on worry of supply disruption and, in a somewhat delayed manner, sent Canadian dollar to three year high against dollar. Australian dollar also managed to strengthen on strength in commodity prices. Euro and Sterling were supported by rate speculations initial. But Euro gave way after failing key near term resistance while Sterling dropped after renewed worry on growth. Dollar received no support from risk aversion. However, the dollar index seemed to stabilizing ahead of 76.88 key near term support level and we would probably see some recovery this week as oil consolidates around 100 level.
The strength in oil price was a major drive in dollar's weakness last week. In addition, markets worried that US will eventually be dragged into the picture of the turmoil in MENA. The greenback is also pressured as Fed is expected to lag behind other major central banks in policy stimulus removal. Economic data were not supportive neither with Q4 GDP growth revised down to 2.8% annualized, ex-transport durables dropped sharply by -3.6% in January. Nevertheless, there were some brighter spots as consumer confidence jumped to three year high while initial jobless claims continued to improve. Dollar's near term fate will very much depend on this week's testimony of Bernanke and the non-farm payroll report.
Euro was supported by speculation that ECB will toughen up its language on inflation this week. money markets are now pricing in that ECB will fully normalize liquidity by end of first half and that would push Eonia rate up from current 0.66% to above 1%, just slightly above ECB's main finance rate of 1%, back to normal condition. However, Euro lost steam against dollar ahead of key near term resistance of 1.3860 as focus turned to Ireland's election. Note that the main opposition party claimed a historical victory on Saturday. PM-elect Enda Kenny would now re-negotiate the terms of the bail-out package from EU/IMF and created some uncertainties in the markets.
Sterling soared initially as BOE minutes for the February meeting revealed policymakers are facing higher pressures to tighten monetary policies. Spencer Dale, after Andrew Sentance and Martin Weale, voted for increasing interest rates amid heightened inflationary pressures. Among the remaining 6 voting members, 5 voted to keep the Bank rate at 0.5% and the asset-purchase program at 200B pound while 1 favored extending the size of the program. More in BOE's Minutes Unveils One More Member Favors Tightening. However, the pound lost steam and was sold off in cross after surprised downward revision in Q4 GDP. Markets pared some of the aggressive rate hike bet after the data, expect only two BoE rate increase this year, with the third one pushed forward to Q1 2012.
Swiss Franc, Yen, and Canadian dollar were the three major winners last week as risk aversion dominated. While USD/CHF dropped to new record low, the swissy also looked strong in European crosses. We'd probably see EUR/CHF and GBP/CHF head towards record low in near term. USD/JPY was dragged down further by fall in US treasury yield. Canadian dollar followed crude oil higher and rose to three year high against dollar. This week's development in the Loonie will be important in determining whether the Loonie is building up momentum again, or was is just part of the choppy rise that started last may.
New Zealand dollar was the worst performer last week as the country's second-largest city Christchurch was devastated by a 6.3 magnitude earthquake. There were speculations that RBNZ would have a rate cut in next meeting in March even though the speculations cooled towards the end of the week. There was also some mild support after S&P assured that the country's credit ratings were not immediately affected by this week's deadly earthquake. Moody's also said earlier this week that it saw no immediate impact on the nation's credit rating following the earthquake.
After a week of volatile actions, financial markets are now facing some important levels. Dollar index formed a temporary low at 76.94, ahead of 76.88 key near term support. Bias is turned neutral and focus is now on 77.53 minor resistance. Break there will indicate that fall from 78.87 is over and consolidations from 76.88 is still in progress with rise from 76.94 as the third leg. In such case, dollar index should start a rebound in near term towards 78.87 resistance. Though, sustained break of 78.87 is still needed to confirm near term reversal. Or we'd still favor another fall through 76.88 towards 75.63 key support eventually.
S&P 500 posted its biggest weekly decline in three months. Indeed, the index faced strong resistance from medium term projection target of 61.8% projection of 666.79 to 1219.80 from 1010.91 and the development raised the prospect of near term reversal. Focus will be turned to 55 days EMA (now at 1283.87) this week. And is this support failed, we'd probably see deeper decline back to 1010.91/1219.8 support zone. And such development would be important to whether dollar could have a sustainable rebound.
The CRB commodity index should also be facing strong resistance at 100% projection of 262.07 to 320.35 from 293.95 at 354.10. Note that while crude oil built up strong momentum last week, the sharp retreat after breaching 100 psychological is taken as a sign that traders would possibly be taking profit above 100, which would in turn limit upside in near term. That is, we'd probably see crude oil consolidates around 100 for a while. Gold should also face strong resistance from 1432 record high and have a near term reversal.
The Week Ahead
On-going development in MENA will continue to be a main focus in the markets. In addition to that, there are a couple of market moving events. Reactions to Ireland election will be watched initially this week and focus will then turn to whether Trichet would step up the inflation rhetoric after ECB meeting as markets expected. RBA and BoC will also meet and attention will be on the post meeting statement as usual. From US, there will be Bernanke's semi-annual testimony plus a number of key economic data including the ISM indices as well as non-farm payroll. UK growth data will be watched for rate expectation adjustments.
- Monday: New Zealand trade balance; Japan industrial production, retail sales, housing starts; Eurozone CPI final; Canada GDP; US Personal income and spending, Chicago PMI, pending home sales
- Tuesday: Japan household spending, unemployment rate; Australia RBA rate decision, retail sales; China manufacturing PMI; Swiss GDP, SVME PMI; German unemployment, Eurozone CPI flash; UK manufacturing PMI; BoC rate decision; Bernanke testimony, ISM manufacturing
- Wednesday: Australia GDP; UK construction PMI; US ADP employment, Fed Beige Book
- Thursday: Australia trade balance; Swiss retail sales; UK PMI services; Eurozone retail sales, GDP, ECB rate decision; US jobless claims; ISM non-manufacturing
- Friday: US Non-farm payroll; Canada Ivey PMI
EUR/USD Weekly Outlook
EUR/USD rose further to 1.3837 last week but faced some resistance ahead of 1.3860 and retreated. A temporary top is at least formed and initial bias is neutral this week. As noted before, we're favoring the case that consolidations from 1.3860 is not over yet. That is, rise from 1.3427 is possibly the second leg of the consolidation. Hence, even in case of another rise, the pair would face strong resistance at 1.3860 and bring another fall. Below 1.3704 minor support will flip bias back to the downside for 1.3427 as the third leg consolidations. But after all, outlook in EUR/USD will remain cautiously bullish with 1.3253 cluster support (61.8% retracement of 1.2873 to 1.3860 at 1.3250) intact. Rise from 1.2873 is still expected to resume sooner or later. Meanwhile, decisive break of 1.3860 will confirm that rise from 1.2873 has resumed and should target 1.4281 high next.
In the bigger picture, main question remains on whether medium term correction from 1.6039 has finished with three waves down to 1.1875. The firm break above 1.35 psychological level again affirm the case that fall from 1.4281 was merely a correction only and whole rise from 1.1875 is still in progress. Also, note that break of 1.4281 will revive the case that medium term correction from 1.6039 was completed with three waves down to 1.1875 and the long term up trend might be resuming. On the downside, though, below 1.2873 will turn focus back to 1.1875 low.
In the long term picture, considering the five wave impulsive structure of the long term up trend from 2000 low of 0.8223 to 2008 high of 1.6039, price actions from 1.6039 are viewed as a correction only. Hence, firstly, we'd expect strong support between 61.8% retracement of 0.8223 to 1.6039 at 1.1209 and 1.1639 to contain downside. Secondly, we'd expect another high above 1.6039 eventually, after correction from 1.6039 is confirmed to be finished.