Markets headlines was dominated by Federal Reserve's surprised discount rate hike last week and dollar was given a brief boost. However, the greenback failed to sustain gain and ended the week mixed. Indeed, markets were overwhelmed by persistent strength in Australian dollar and Canadian dollar, as well as general weakness in European majors and Japanese yen instead. While markets' focus has temporarily moved away from Greece, it's believed that fiscal problem in Eurozone and UK continued to be the major force driving funds to countries with better fiscal health like Canada. In addition, Fed's discount rate hike further affirm the view that some' countries will start/continue to exit from stimulus measures and some, including Eurozone, UK and Japan will likely lag behind. This view triggered selling of yen against commodity currencies as well as dollar to seek yield and sent respective yen crosses sharply higher. These two factors will likely continue to be the major forces for the rest of Q1 and would probably continue in Q2.
Fed unexpectedly raised the discount rate, the rate charged to banks for direct loans, by 25bps to 0.75% last week, first discount rate hike since June 2006. The maturity on discount-window loans will be shortened to overnight too, effective March 18. While markets has been expecting exit moves from Fed this year, the timing was a bit of a surprise considering that it's just week after Bernanke outlined his exit plan. Fed emphasized that the changes were not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy. But markets have taken that as a signal Fed is preparing markets for more psychologically. Fed fund futures are indeed pricing full probability that Fed will hike the federal fund rates to 0.5% by November.
Another point to note is that according to CFTC's report, speculators increased net dollar long positions to $9.96b in the week ended February 16, which was the highest level since September 2008. Euro shorts also hit a fresh record low of 59,422 contracts.
On the data front, US housing market showed sign of improvement with NAHB housing market up from 15 to 17 in February. Housing starts rose to 591k in January with permits down less than expected to 621k. Industrial production rose 0.9% in Jan. Empire state manufacturing index rose strongly to 24.9 in February. Philly Fed index was up to 17.6 in February. PPI rose more than expected by 1.4% mom, 4.6% yoy with core PPI up 0.3% mom, 1.0% yoy. CPI rose 0.2% mom, 2.6% yoy in January with core CPI down -0.1% mom, up 1.6% yoy, below consensus.
German ZEW dropped less than expected from 47.2 to 45.1 in February but Eurozone ZEW deteriorated sharply from 46.4 to 40.2. Eurozone manufacturing PMI rose to 54.1 in February but services PMI dropped to 52.
UK posted first January deficit since at least 1993. Public sector net borrowing unexpected rose by GBP 4.3b versus expectation of -2.4b. The data raised concern that if the overshoot continued, the full-year forecast will be under threat and the deficit-to-GDP ratio could exceed 12.7% of Greece. Jobless claims unexpectedly posted 23.5k rise in January. It took the total number of workers claiming Job seeker's Allowance to 1.64 million, the highest since April 1997. Unemployment rate was unchanged at 7.8% in February. UK retail sales also disappointed by dropping -1.2% mom in January. CPI rocketed to 3.5% yoy in January, exceeding BoE's target range of 2-3%, but that was mainly due to temporary factors including rise in VAT to 17.5%, surge in oil prices of 70% and sharp deterioration of Sterling.
Japan Q4 GDP grew more than expected by 1.1% qoq, 4.6% annualized. However, the GDP deflator posted its biggest annual fall on record by -3.0% yoy, suggesting that the economy is still facing much deflationary pressure. BoJ left rates unchanged at 0.1% by unanimous vote today as widely expected. BoJ noted that economy in Japan is picking up but there is not yet sufficient momentum to support a self-sustaining recovery in domestic private demand. Also, the bank noted that deflation is a critical challenge and pledged to maintain extremely accommodative financial environment.
Canada CPI rose 0.3% mom, 1.9% yoy in January while core CPI beat expectation by rising 0.1% mom, 2.0% yoy. Retail sales rose 0.4% in December with ex-auto sales up 0.4% too.
The strength in commodity currencies was in sharp contrast to European majors.
We saw GBP/CAD took out last year's low of 1.6233 and dived to as low as 1.6060. GBP/AUD also broke January low of 1.7192. Both have resumed the longer term down trend. EUR/CAD also dived to as low as 1.4109 while EUR/AUD dropped to as low as 1.5059 as the down trends continued. We're talking about -6.4%, -5.0%, -4.8% and -3.5% drop in these crosses this month respectively. Such trends are expected to continue in medium term.
GBP/CAD should target 100% projection of 1.9299 to 1.6233 from 1.7890 at 1.4824 next.
GBP/AUD should be targeting cluster level at 61.8% projection of 2.0979 to 1.7326 from 1.8276 at 1.6018, 100% projection of 2.7092 to 2.0231 from 2.2877 at 1.6016, which are also close to 1.6 psychological level.
EUR/CAD is heading to 100% projection of 1.7499 to 1.5183 from 1.6006 at 1.3690.
EUR/AUD should fall further to 100% projection of 2.0385 to 1.7145 from 1.8098 at 1.4858 next.
While dollar will remain firm against European majors and Japanese yen in near term, it will likely be pressured against commodity currencies. Further rebound in crude oil and gold would be one of the major factors that contribute to the 'mixed' outlook in dollar. Crude oil's break of 78.04 resistance now put 83.95 high back into radar and we might see a retest of this level soon. Gold would probably following by decisively breaking 1126.4 resistance and have a test on 1227.5 high too. These developments would limit dollar's attempt to extend recent rally.
Looking at dollar index, the failure to sustain above 100% projection of 74.19 to 78.45 from 76.60 at 80.86 on Friday suggests that an intraday top formed and we'd expect some consolidations initially this week. Short term outlook remains bullish as long as 79.56 support holds and consolidations should be relatively brief. Above 81.34 will target next cluster region at 82.35/83.72 (161.8% projection of 71.49 to 78.45 from 76.60 at 82.35, 61.8% retracement of 89.62 to 74.19 at 83.72). However, a break of 79.56 will bring deeper correction towards 78.45 resistance turned support first before staging another rise.
The Week Ahead
Fed Chairman Bernanke will have his semiannual testimony on monetary policy before congressional pane this week. Markets focus will be on any hints on the timing of the next exit moves from Fed after last week's discount rate hike. And eventually, when will Fed starts to hike the fed fund rates. In addition, much focus will be on Q4 GDP revision from both UK and US.
- Tuesday: German Ifo business climate; US S&P/CS house price index, consumer confidence
- Wednesday: Japan trade balance; German Gfk consumer confidence, final GDP; US Bernanke testimony, new home sales
- Thursday: Swiss unemployment; German unemployment, Eurozone M3; US durable goods, house price index.
- Friday: Japan CPI; UK revised GDP; Eurozone
USD/JPY Weekly Outlook
USD/JPY's rise from 88.57 accelerated to as high as 92.14 last week. The strong break of 91.26 resistance indicates that fall from 93.74 has completed with three waves down to 88.57 already. The corrective structure in turn argue that rise from 88.57 is probably resuming the rally from 84.81. Initial bias remains on the upside this week and further rise should be seen to retest 93.74 resistance next. Below 91.18 minor support will turn intraday bias neutral and bring consolidations. But break of 90.56 support is needed to indicate that rise from 88.57 is finished. Otherwise, another rise is still in favor.
In the bigger picture, the strong rise from 88.57 suggests that whole medium term rally from 84.81 is still in progress for another high above 93.74. One important thing to note is that decisive break of 93.74 resistance will also have 55 weeks EMA (now at 93.42) firmly taken out too and that will be an important signal that whole long term down trend from 2007 high of 124.13 is over. In such case, focus will turn to 101.43 resistance for confirmation. Hence, much focus will now be on whether 93.74 resistance will be taken out decisively. On the downside, though, break of 88.57 will revive the case that long term down trend in USD/JPY is still in force and will put focus back to 84.81 low instead.
In the long term picture, downside momentum is clearly diminishing with monthly MACD back above signal line. However, there is no confirm mater of long term reversal yet. Down trend from 124.13 might still continue as long as 101.43 resistance holds and might extend further towards 79.75. Nevertheless, break of 101.43 resistance will break the lower high lower low pattern and will suggest that a long term bottom is in place. The trend should then reversed to continue the sideway pattern that started at 79.75 in 1995.