Dollar and yen benefited from European sovereign credit concerns last week and strengthened broadly. While we're not seeing decisive buying in then to push it through near term high against major currencies, dollar was additionally supported by solid data from US and break important near term resistance levels against Euro, Swissy and Sterling. The additional strength in the greenback can also be attributed to deeper fall in crude oil and gold last week which had them closed below 70 and 1120 level respectively. Aussie and Kiwi were relatively much more resilient in the wave of dollar buying. The Australian dollar was lifted by an unexpectedly strong employment report as well as solid data from China. Meanwhile, Kiwi benefited from RBNZ's shift of tone in its statement. After all, we believe that the case of medium term reversal in dollar continued to build up and some more strength in the greenback is anticipated in near term at least.
The worry of Dubai default was passed to concern on European debts last week. Fitch cut Greece's sovereign rating to BBB+ while S&P also put its A- rating on watch for downgrade. S&P also moved Spain's credit outlook to negative even though the rating was affirmed. There was a potential risk of downgrade on UK too but sterling somewhat stabilized against Euro after Moody's said ratings of Britain is not under threat of a downgrade right now. Euro and Swissy were the worst performer last week.
Fed Chairman Bernanke triggeredd to talk down the speculations of Fed hike last week and reiterated that Fed will keep rates low at an extended period. He said that the US economy may face formidable headwinds and inflation might subside while joblessness may fall at a pace that's slower than we would like. Nevertheless, markets continued to respond positive to US data and sent the greenback higher. Among the data from US, retail sales was exceptionally strong which rose 1.3% in November with ex-auto sales rose 1.2%. U of michigan consumer sentiment also beat expectation by rising to 73.4 in December.
Four central banks met last week, BoC, RBNZ, SNB and BoE. Rates were all left unchanged. Not special reactions were seen from the markets except RBNZ which turned a bit more hawkish and suggests that rate hike could be coming in earlier than previously expected. BoC reiterated its conditional commitment to keep rates unchanged till Q2 of 2010. SNB announced to purchases of corporate bonds. BoE left asset purchase target unchanged too.
In the pre-budget release, UK Chancellor of Exchequer Darling admitted that UK's recession was worse than expected by remained optimistic that UK economy will recover from recession next year as stimulus measures take hold. He expects growth to be between 1% and 1.5% in 2010, no change from March forecast. Regarding borrowing Darling lifted forecasts net borrow by just GBP 4b to GBP 707b by the 2013 financial year. But he remained optimistic that deficit will be halved over the next four years in an orderly way.
Looking at the charts, dollar index surged sharply to as high as 76.73 last week and is set to taken on 76.82 resistance. We'd anticipate a break there as equivalent levels in EUR/USD and USD/CHF were broken already. The sustained trading above 55 days EMA affirmed the case that the index has bottomed out in medium term at 74.19 already, on bullish convergence condition in daily MACD, after hitting 74.31 support. Decisive break of 76.82 will confirm the case that medium term fall from 89.62 has completed. The least bullish scenario will bring a correction to such medium term fall from 89.62 and target 38.2% retracement of 89.62 to 74.19 at 80.08. The most bullish is that whole three wave consolidations from 88.46 has completed at 74.19 too (77.69, 89.62, 74.19) and we'd be looking at the prospect of a rest of 89.62 high. It's still early to favor either case yet and we'd pay attention to the strength of the current rise from 74.19, as well as the ability to sustain above 55 weeks EMA (now at 78.94) for indications.
Looking at other markets, crude oil's sharp fall last week and sustained trading below the 55 days EMA affirm the case that medium term rebound from 33.2 has completed at 82.0 already, on bearish divergence condition in daily MACD. We'd expect further decline towards 58.32 cluster support (50% retracement of 33.2 to 82.0 at 57.6) in medium term and that should provide additional support to dollar. Such bearish view will remain as long as 79.04 resistance holds.
Gold's sharp fall from 1227.5 extended further last week and the precious metal closed below 1120 level at 1119.9. The rise from 931.3 should have made a top at 1227.5 already and correction from there is set to extend further as long as 1170.2 resistance holds. Nevertheless, strong support is expected at 1026.9/1072 support zone to bring rebound. Hence, short term bearishness in gold should provide some support to the rebound in greenback. However, the longer term fate of dollar will likely depend on whether gold would receive strong support at mentioned 1026.9/1072 support zone.
As noted before, while European currencies are generally weak, AUD and NZD are relatively resilient so far. Comparing the two, NZD seems to be even stronger. Last week's sharp fall in AUD/NZD confirmed that rise fro 1.1925 has completed at 1.2836 already, on mild bearish divergence conditions in daily MACD and RSI. We'd anticipate deeper fall in the cross to 61.8% retracement of 1.1925 to 1.2836 at 1.2273 and possibly below. In other words, we'd expect Kiwi to outperform the Aussie in near term.
The Week Ahead
A very busy week ahead with main focus on FOMC. While again there is no expectation on change of rates of 0-0.25%, focus will be on the statement, in particular, regarding the quantitative easing program. Inflation data will also be a focus of the week with UK, US, Canada scheduled to release CPI reports. From US, there will also be housing and manufacturing data. From Eurozone, confidence indicators will be the main focus with German ZEW and Ifo as well ass Eurozone PMIs.
- Monday: Japan Tankan; Eurozone industrial production, employment change
- Tuesday: RBA Minutes; UK CPI; German ZEW; US PPI, Empire state manufacturing, industrial production, TIC capital flow, NAHB housing market index
- Wednesday: Australia GDP; Eurozone PMIs; UK Job report; Eurozone CPI; US new residential construction, CPI, FOMC rate decision
- Thursday: UK retail sales; Swiss ZEW; Canada CPI; US Philly Fed index
- Friday: BoJ rate decision; German Ifo; UK public sector net borrowing; Eurozone trade balance
EUR/USD Weekly Outlook
EUR/USD's fell sharply to as low as 1.4585 last week and the break of of 1.4626 support indicates that a medium term top should be in place at 1.5143 already. Short term outlook will remain bearish this week as long as 1.4777 resistance holds and further decline should now be seen to 1.4483 cluster support (23.6% retracement of 1.2329 to 1.5143 at 1.4479) next. On the upside, touching of 1.4777 will indicate that a short term bottom is formed and bring consolidations. But upside should be limited by 1.4902 resistance and bring fall resumption.
In the bigger picture, current development indicates that EUR/USD should have topped out in medium term at 1.5143 already. We're talking about bearish divergence conditions in daily MACD and RSI and a break of 1.4626 support. Also, EUR/USD is sustaining below 55 days EMA with daily MACD turned negative too while weekly MACD has also crossed below signal line. Beside, the three wave consolidation pattern that started from 1.2329 should have finished too. Next focus is 1.3737 cluster support (50% retracement of 1.2329 to 1.5143 at 1.3736). Decisive break there will further confirm the bearish case and argue that whole medium term fall from 1.6039 is likely resuming for a new low below 1.2329. On the upside, above 1.5143 is needed to invalidate this view. Otherwise, outlook will now remain bearish.
In the long term picture, the lack of impulsive structure of the rise from 1.2329 argues that it's the second wave of the wide range correction that started from 1.6039. Another medium term decline could still be seen to 1.2329 and below. Break of 1.1639 support is possibly based on 100% projection of 1.6039 to 1.2329 from 1.5143. But downside will likely be contained by 61.8% retracement of 0.8223 to 1.6039). After all, the long term up trend from 0.8223 is set to resume after completing the three wave medium term correction from 1.6039.