Dollar rebounded further last week with the support from renewed concern on the Eurozone debt crisis as well as strength in US treasury yields. Egypt's situation was a factor in driving safe haven flow to the dollar too but that should be resolved as Hosni Mubarak stepped down as president of Egypt and handed power to the military. The resignation ended Mubarak's 30-year rule and protests in Egypt over the past 3 weeks. One important development to note was indeed the extended weakness in Swissy and Yen, in the supposed risk-aversion environment, which might be a signal that investors are returning to carry trades on future interest rates expectations.
Dollar index jumped to as high as 78.69 last week but was still kept below key near term resistance of 78.78. Development in USD/JPY and USD/JPY suggests some more upside in the greenback. However, price actions in EUR/USD and GBP/USD are still looking corrective and thus, we're not confidence to say that dollar has bottomed yet. And we'll maintain that a sustained break of 78.78 level in the dollar index is needed to give us more confidence in the underlying strength of the greenback.
Portugal was in focus last week as the benchmark 10 year debt yield jumped to euro-era record of 7.64% on Thursday before ECB stepped in to intervene and pulled yield back. Nevertheless, yield still closed well above 7% level last week. No single event was the trigger for the jump in yield and it's believed that it's a signal that markets are getting increasingly impatient with the lack of concrete long term plan from EU to solve the debt crisis. Also, at current level, there deep concern that the funding cost for Portugal will be unsustainable. And indeed, 7% is a level where many believe to be a level where Portugal will eventually be forced to trigger a bailout from EU/IMF. This week, Portugal will offer EUR 0.75b to 1b in 12 month treasury bills and the event will be watched by the markets.
Fed Chairman Ben Bernanke told the Housing Committee last week that 'notable declines in the unemployment rate in December and January, together with improvement in indicators of job openings and firms' hiring plans, do provide some grounds for optimism on the employment front. Even so, with output growth likely to be moderate for a while and with employers reportedly still reluctant to add to their payrolls, it will be several years before the unemployment rate has returned to a more normal level'. Concerning inflation, he noted that 'we have recently seen increases in some highly visible prices, notably for gasoline. Indeed, prices of many industrial and agricultural commodities have risen lately, largely as a result of the very strong demand from fast-growing emerging market economies, coupled, in some cases, with constraints on supply. Nonetheless, overall inflation is still quite low and longer-term inflation expectations have remained stable'. These comments signaled the Fed will continue leave the policy rate at exceptionally low levels for an extended period of time. Moreover, the 600B asset-buying program announced in November, 2010 will be carried on until expiry in June 2011. The market had speculated the Fed may unwind QE2 earlier than scheduled over the past few weeks as US macroeconomic data showed signs of improvement.
BoE left the bank rate unchanged at 0.5% and the size of the asset purchase programme was held unchanged at GBP 200b. This is in line with general market expectation. No details are released from the statement. Instead, focus will turn to the latest inflation and output projections in the Inflation Report to be released on February 16. Also, minutes of the meeting will be released on February 23.
Aussie was sold off after mixed employment data The headline job growth beat expectation by increasing 24k in January while unemployment rate held steady at 5%, not bad. However, looking into the details, full-time employment dropped by -8k to 8.022m while part-time employment rose by 32k to 3.419m. The data add to speculation that RBA will be cautious in having another rate hike. Australian dollar is knocked down further by RBA Stevens' comments that hinted that the bank will be on hold at least until second half of the year. Stevens said the bank is ahead of the game on interest rates and it is reasonable to assume policy won't change for some time. Regarding market pricing of no change in rates in first half, Stevens said that's not a guarantee that this happens, but I'm fairly content with where we are.
Canadian dollar, on the other hand, jumped after data showed the country returned to trade surplus in December, after nine months of deficit. The CAD 3.0b surplus was the highest number since October 2008. Export rose sharply by 9.7% with energy products accounting for more than half of the growth. Import on the other hand, was up mildly by 0.7%.
The main question in dollar index's outlook is whether recovery from 76.88 is a correction or the start of another medium term rally. Before sustained trading above 78.78 support turned resistance, as well as 55 days EMA (now at 78.87), we'd still mildly favor that fall from 81.31 is not over yet. A break below 77.50 support will indicate that such recovery is completed and another round of dollar selling should start to push dollar through 76.88 support towards 75.63 support. However, sustained break of 78.78 will in turn shift favor to the case that price actions from 81.44 are merely consolidation to rise from 75.63 only. And rise from 76.88 could then be extending the medium term rally for another high above 81.44. So this week or two will be important for the upcoming direction.
The Week Ahead
An extremely busy calendar ahead with lost of growth and inflation data from around the world. Some events worth paying special attention to. From US, we'll have manufacturing, housing and inflation data, plus FOMC minutes and Bernanke testimony. Sterling has been struggling to find a direction against Euro recently as the speculations of rate hike flip-flop. BoE inflation report this week will provide updated projections on growth and inflation and would give some hints for BoE hike.
- Monday: New Zealand retail sales; Japan GDP; Eurozone industrial production
- Tuesday: RBA minutes; China CPI; BoJ rate decision; Germany GDP, ZEW economic sentiment, Eurozone GDP; UK CPI; US retail sales, Empire state manufacturing index, import prices, TIC capital flow, business inventories, NAHB housing market index
- Wednesday: UK nationwide consumer confidence, claimant count, unemployment rate, BoE inflation report; US new residential construction, industrial production, PPI, FOMC minutes; New Zealand PPI
- Thursday: Swiss ZEW; US CPI, Philly Fed survey, Bernanke testimony
- Friday: Japan minutes; UK retail sales; Canada CPI
USD/CHF Weekly Outlook
USD/CHF's rise from 0.9329 extended further last week and is back pressing 0.9782 resistance. As noted before, rebound from 0.9300 should be resuming. Initial bias remains on the upside this week and sustained break of 0.9782 will pave the way towards 1.0065 key resistance next. On the downside, below 0.9678 minor support will turn bias neutral and bring retreat. But downside should be contained above 0.9523 support and bring another rally.
In the bigger picture, the strong close above 55 days EMA on Friday affirm the view that USD/CHF has made a medium term bottom at 0.9300, on bullish convergence condition in daily MACD, after hitting 100% projection of 1.2296 to 0.9916 from 1.1729. Decisive break of 0.9783 resistance will confirm this case and bring rally through 1.0065 resistance to 38.2% retracement of 1.1729 to 0.9300 at 1.0228 next.
In the longer term picture, the break of 0.9634 confirms that long term down trend from 2000 high of 1.8305 has resumed. There are various interpretation of the price actions. But after all, USD/CHF should be resuming the set of impulsive fall from 1.8305 to 1.1288. Hence, we'd expect next long term target to be 61.8% projection of 1.8305 to 1.1288 from 1.3283 at 0.8946, which is close to 0.9 psychological level.