Risk appetite was given a boost last week on generally positive economic data, which in turn translated in to broad based reversal in the Japanese yen. DOW managed to extend recent rally to close at 10566.2, 213 pts up. Nasdaq even managed to rose to new high of 2327 before closing at 2326. Commodity currencies were impressively strong with Canadian dollar and Australian dollar broadly up against other major currencies. Crude oil rode on strength in stocks and climbed to as high as 82.07 before closing at 81.50. Dollar was mixed and remained in range against Euro even though it did rebound strongly against the Japanese yen. Current development suggested that more upside would be seen in stocks and commodities, which might give some pressure to the greenback and yen in near term.
Highlighting economic data released from US last week, Non-farm payroll showed less than expected contraction of -36k in February. More importantly, unemployment rate was unchanged at 9.7% versus consensus of 9.8%. Initial jobless claims dropped to 469k. Factory orders rose 1.7% in January. ISM non-manufacturing index rose to 53 in February but ISM manufacturing index dropped to 56.5. Pending home sales dropped -7.6% mom in January. Personal spending rose more than expected by 0.5% in January but income growth missed expectation.
ECB left the main refinancing rate unchanged at 1% while fine-tuning the funding operation frameworks. The ECB staff's forecast on 2011 GDP was modestly revised upward. Focus of the press conference was on the gradual phasing-out of our non-standard operational measures. ECB announced LTROs will return to variable rate starting April 28, 2010. 'Allotment amounts in these operations will be set with the aim of ensuring smooth conditions in money markets and avoiding any significant spreads between bid rates and the prevailing MRO rate'. Moreover, the 6-month LTRO to be allotted on 31 March 2010 will be fixed at the average minimum bid rate of the MROs over the life of this operation - same case as the 12-month LTRO of December 16, 2009. The return to variable rate was as what we expected. Greece announced a EUR 4.8b austerity plan last week. The measures are split with EUR 2.4b in new revenues from tax hike and EUR 2.4b in spending cuts. After all, Euro was bounded in range against dollar and underperform commodity currencies in last week's trading.
Bank of England left rates unchanged at historical low of 0.5% today. The GBP 200b asset purchase program was also on hold for a second month. No detail was revealed in today's short statement and markets will look forward to the minutes to be published on March 17 instead. UK nationwide consumer confidence hit a two year high of 80 in February, much better than expectation a fall to 71. PMI services rose strongly to a two year high of 58.4 in February. Sterling was also under much pressure on speculation more quantitative easing from BoE down the road, as well as political uncertainty in UK. Investors worried that inconclusive result in this year's general election, would result in a hung government which would not be able to implement measures needed to cut UK debt, nor revive the economy.
Japanese yen was sharply lower on improved risk appetite. There were additional pressure from speculation that BoJ might discuss more monetary easing measures in the coming meeting on March 15, which aims at lowering short term interest rates. Also, LIBOR for three month yen loans dropped below dollar for the first time since August, which made yen the most attractively priced currency for carry trades than dollar.
Commodity currencies were generally strong as boosted by risk appetite. Canadian dollar received additional support from stronger than expected GDP growth of 0.6% mom in December as well as an upbeat BoC statement. Bank of Canada left rates unchanged at 0.25% as widely expected and reiterated the conditional commitment to be on hold until end of Q2. Nevertheless, the bank did acknowledged that level of economic activity in Canada has been slightly higher than the Bank had projected in the latest MPR. Also core inflation has been slightly firmer than projected too.
RBA restarted the tightening cycle today by raising key interest rate by 25bps to 4.00%. In the accompanying statement, Governor Stevens said that the decision was a further step in the process of bringing interest rate closer to average. The bank expects growth to be close to trend and inflation close to target over the coming year. Retail sales released today show stronger than expected growth by 1.2% mom in January.
Looking at the charts, DOW extended the rebound from 9835.09 and closed strongly at 10566.20. The development kept the medium term rising channel intact and indicates that whole rally from last year's low of 6469.9 is still in force. Rise from 9835.09 could be the fifth wave of the rally and would likely make a new high above 10729.89 before topping in medium term.
Crude oil also extended to rebound from 69.50 and closed strongly at 81.50 last week. The development also kept the medium term rising channel intact and argues that another high above 83.95 would be seen before topping.
Dollar index continued to stay in established range below 81.34 high last week as consolidations continued. Such sideway trading might extend for a while as the greenback would remain mixed, with strength against yen, weakness against commodity currencies and steadiness against Europeans. We'd expect downside of the consolidation to be contained by 79.56 cluster support (38.2% retracement of 76.60 to 81.34 at 79.52) and finally bring rally resumption to 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).
The Week Ahead
Commodity currencies would probably remain the center of focus this week as stocks could strengthen further. As mentioned during the week, New Zealand dollar was the relatively weak commodity currency and is the last one to consider for risk appetite trades. Market's focus will be on whether this week's RBNZ rate decision as well as retail sales data would change such outlook.
Outlook for Canadian dollar is a bit tricky. The technical picture in AUD/CAD does suggest more upside in Canadian dollar. However, we're slightly preferring 1.0205 to hold in USD/CAD while AUD/USD is expected to make a new high. So, at least one of these expectations is wrong. The key would probably lie in this week's job reports from Australia and Canada. We'd likely know whether AUD or CAD would be the strongest commodity going forward.
- Monday: Swiss unemployment, retail sales; Canadian housing starts
- Tuesday: UK RICS house price balance, trade balance; Swiss CPI
- Wednesday: UK industrial and manufacturing production; US wholesale inventories; RBNZ rate decision
- Thursday: Japan GDP final; Australian job report; SNB rate decision; Canada trade balance; US trade balance; New Zealand retails sales
- Friday: Canadian job report; US retail sales, U of Michigan consumer sentiment
AUD/USD Weekly Outlook
AUD/USD managed to regain strength towards the end of the week and resumed recent rally by taking out 0.9084 resistance on Friday. Initial bias remains on the upside this week and stronger rally is in favor towards 100% projection of 0.8577 to 0.9070 from 0.8802 at 0.9295 next. On the downside, below 0.8977 will turn intraday bias neutral again. But after all, break of 0.8802 support is needed to indicate that rise from 0.8577 is finished. Otherwise, another rise would still be expected.
In the bigger picture, the sustained trading above 55 days EMA (now at 0.8975) suggests that correction from 0.9404 has completed with three waves down to 0.8577 after hitting medium term rising channel support as well as 23.6% retracement of 0.6008 to 0.9404. In other words, whole rally from 0.6008 might be set to resume for another high above 0.9404. If we treat the rise from 0.8577 as the fifth wave in the rise from 0.6008 with equal length as the first wave from 0.6008 to 0.7267, upside target will be 0.9836, which is close to 2008 high of 0.9849. On the downside, break of 0.8802 support is needed to be the first signal to revive the case that AUD/USD has already topped out. Otherwise, we'll remain cautiously bullish in AUD/USD.
In the longer term picture, long term correction from 0.9849 has likely completed at 0.6008 already, after being supported slightly above 76.4% retracement of 0.4773 (01 low) to 0.9849 (08 high). Rise from 0.6008 is possibly developing into a new up trend which extend the long term rise from 0.4773. We'll continue to favor the long term bullish case as long as 0.7702 support holds and expect an eventual break of 0.9849 high. However, a break of 0.7702 support will firstly argue that whole rise from 0.6008 has completed. Secondly this will open up the case that AUD/USD is in phase of a long term consolidation and will gyrate in the large range of 0.6008/0.9849 for some time.
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