Dollar Soared against Yen on Yields, Euro on Greece
The three most traded currencies, dollar, euro and yen dominated the markets last week with dollar boosted higher by substantial weakness of the other two. Euro was shot down by uncertainty of the Greece situation and dived to 10 month low against dollar and record low against Swissy and Aussie. The common currency recovered after a final agreement from EU on a financial package for Greece with IMF involvement, but the recovery was so far mild against dollar and Swissy. Japanese yen also fell broadly and deeply on expectations of further monetary easing from BoJ as deflation persists. Yen was also additionally weak against the greenback on rising treasury yields which saw yields on 10 year note jumped sharply through December's high of 3.93 before settling back at 3.855. Commodity currencies also weakens sharply towards the end of the week as respective Euro crosses rebounded strongly follow Greece news.
Euro was sold off broadly on concern of split opinion among European leaders on the idea of bringing IMF to provide financial assistance to Greece. EUR/USD dived through 1.3443 support to resume medium term down trend from 1.5143 and reached as low as 1.3266 before recovering. EUR/CHF also extended recent decline and has finally took out 2008 low of 1.4315 decisively to resume the long term down trend. The common currency then finally got a breathe towards the end of the week on news that EU leaders have agreed on a joint European-IMF financial aid package, proposed by France and Germany, to help Greece as the last resort assistance. The package involves substantial IMF financing and a majority of European financing in form of coordinated bilateral loans. ECB President Trichet endorsed the plan and said it's a workable solution. However, investors are still with the lack of details from the agreement, and uncertainty even on when and how the mechanism will be triggered. Also, ned with the lack of details from the agreement and are unconvinced whether Greece can manage its fiscal reconstruction. while some believe IMF's involvement could speed up Greece's fiscal reconstruction, some also see the risk of extremely strict conditions would harm the Greek economy. Euro's recovery against dollar and swissy were mild. But the rebound against commodity currencies, including Aussie and Loonie, was quite impressive and the cross price actions helped send AUD and CAD lower against dollar towards the end of the week.
The Japanese yen was under much pressure too as data showed CPI stayed negative at at -1.1% yoy in February. The data suggested that it's still a long way to go before Japan pulls out of deflation and triggered speculations that BoJ would continue to be the only major central banks that's still expanding monetary easing. The bank doubled the amount of loans offered to commercials banks for three months at 0.1% rate to 20T JPY earlier this month. It's believed that BoJ will introduce another similar six month funding scheme in the next few months.
Another factor that contributed to yen's weakness, in particular against dollar, was the development in bond markets. Worries about US burgeoning debt level drove the yield on the 10-year Treasury bond to its highest level in 9 months after a succession of poorly received debt auctions. More importantly, another important sign that demand for government debt might finally be waning came as the 10-year US swap rate fell below the 10-year Treasury yield for the first time ever. The sharp surge in treasury yield during the week took USD/JPY sharply higher, and other yen crosses followed.
CFTC report released last week showed, up to March 23, Euro short in speculative accounts rose to new record of -74,917 contracts, comparing to the prior record net euro short of -74,511 contracts on March 9 and record net euro long of +119,538 in May 2007. Net yen longs dropped sharply fro +65,920 contracts to +15,197 contracts.
The volatile price actions last week triggered breakout in some markets which bear important technical implications. Firstly, dollar index decisively broke 81.34 resistance to as high as 82.24 before retreating. The development clearly left whole medium term rise from 74.19 in five waves impulsive structure (78.45, 76.60, 81.34, 79.51, ?). From a near term point of view, the current rise from 79.51 might exhaust dollar bulls as the index hit 82.63 resistance and a near term top might be around the corner as the five wave sequence completes. However, such impulsive structure affirms our long term bullish view that the tide has turned for the greenback and rise from 74.19 is resuming the long term rally from 2008 low of 70.70. Therefore, any set back from now on will be treated as correction and we'd extend dollar's up trend to continue further another high above 89.62 eventually.
Secondly, USD/JPY's sharp rally last week indicates that whole rise from 2009 low of 84.81 is resuming for another high above 93.74 resistance. Such development will have 55 weeks EMA decisively taken out. Together with bullish convergence condition in weekly MACD and RSI, such development will strongly suggest that USD/JPY's medium term trend has reversed and we should then see much stronger rally through 100 level. Such development would likely provide additional support to dollar.
Thirdly, the outlook in yen was indeed quite mixed from a broader perspective. CAD/JPY is clearly bullish after it took out this year's high of 90.57 to resume the medium term up trend. However, AUD/JPY and NZD/JPY are still limited below recent high. Outlook in EUR/JPY and GBP/JPY is still bearish. The key to overall development in yen would probably be in EUR/JPY. As long as 125.22 cluster resistance holds in EUR/JPY, bearish outlook in the cross will remain intact and this will likely keep GBP/JPY bearish too. In that case, upside in other yen crosses (except USD/JPY) will possibly be limited and that would provide added resilience to dollar's rally. However, decisive break of 125.22 will complete a head and shoulder reversal pattern in EUR/JPY and we should trigger more selloff in yen in general and eventually align yen crosses' outlook.
The Week Ahead
One of the main focuses this week will be on any further development in the Greece situation and on whether Euro could sustain the recovery. We'd believe that no news is indeed the best news for Eurozone but any comment that deviates from the EU agreement would possibly trigger more sell off in euro, in particular against dollar and Swissy. US non-farm payroll, please ISM manufacturing index will also be closely watched by the markets. A strong NFP number is already well priced in and hence, we'd need a really strong number to give dollar sustainable boost. A number of important data will be released this week too. It seems that markets have acceptable further easing from BoJ and that should be priced in. Hence reactions to Japanese data would likely be skewed towards the downside.
- Monday: Japan retail sales; Eurozone confidence indicators; US personal spending and income
- Tuesday: Japan unemployment rate; UK GDP final; US consumer confidence
- Wednesday: Australia retail sales; Eurozone CPI flash, unemployment rate; Swiss KOF; US ADP employment, factory orders; Canada GDP
- Thursday: Japan tankan survey; Australia trade balance, Swiss SVME PMI, UK manufacturing PMI; US ISM manufacturing
- Friday: US non-farm payrolls
EUR/USD Weekly Outlook
EUR/USD dived to as low as 1.3266 last week before recovering. With 4 hours MACD staying above signal line, initial bias is neutral this week and some sideway trading might be seen. Nevertheless, upside should be limited by 1.3570 resistance and bring fall resumption. The strong break of 1.3443 support last week confirmed that whole medium term fall from 1.5143 has resumed. Below 1.3266 will target 61.8% projection of 1.4578 to 1.3443 from 1.3817 at 1.3116 next.
In the bigger picture, fall from 1.5143 is apparently developing into a five wave impulse (1.4217, 1.4578, 1.3443, 1.3817, ?). Current decline from 1.3817 might be the fifth wave of this sequence and could draw some support from 1.3 psychological level and turn EUR/USD into consolidation. But after all, the medium term bearish outlook will remain unchanged even in case of rebound. That is, the three wave consolidation from 2008 low of 1.2329 has completed at 1.5143 already and fall from there is resuming whole down trend from 2008 high of 1.6039. Such decline is expected to break through 1.2329 low eventually.
In the long term picture, long term up trend from 2000 low of 0.8223 has made an important top at 1.6039 in 2008. Subsequent price actions are so far viewed as a correction only, in form of three waves. First wave has completed at 1.2329 while secondly should have completed at 1.5143. Fall from 1.5143, as the third wave of correction, is in progress and should extend to 1.1639 support, and possibly further to 100% projection of 1.6039 to 1.2329 from 1.5143. Nevertheless, we'd expect strong support from 61.8% retracement of 0.8223 to 1.6039 at 1.1209 to conclude the correction and bring another long term up trend.
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