Markets were pretty steady last week until concern of Greece deficit contagion across Europe intensified on Thursday and rocked financial markets around the world. Credit-default swaps on the debt of Greece, Spain and Portugal rose to record highs today amid concern that European governments will struggle to fund their deficits. There were even talks in the market that Greece's problem is a 'dressed rehearsal' for US and UK, which also have huge budget deficits. MSCI World index dropped 2.2% to 1095.4 while DOW breached 10,000 level twice before closing at 10,012.23. Dollar managed to ride on risk aversion with dollar index closed above 80 level and the Japanese was also broadly higher across the board. Nevertheless, DOW's refusal to give away 10,000 level and late Friday's pullback in risk aversion argues that flight-to-safety fund flow has possibly peaked in near term and we might see the markets stabilize a bit in near term.
One point to note is that data released from CFTC on Friday showed that speculative accounts built a record net euro short position and flipped their net yen short position to a net yen long as per February 2. Speculators increased their euro short position to -43,741 contracts from last week's short of -39,539, which was in sharp contrast to record net euro long of +119,538 contracts seen May 15, 2007. Speculative accounts had a net yen long of +7,135 contracts, comparing to to the net yen short of -4,347 contracts seen last week and the December 1 position of +56,907 contracts, which was the largest net yen long of 2009.
Employment data released last week reminded the markets that global recovery is still fragile. US job market contracted -20k in January versus expectation of 20k expansion. December's figure was also revised down from -85k to -150k. Unemployment rate dropped from 10.0% to 9.7%, which was the best number in five months. However, that was largely due to a sharp increase in the number of people giving up looking for work as number of 'discouraged job seekers' rose to 1.1 million in January from 734,000 a year ago. New Zealand unemployment rate surged sharply from 6.5% to 7.3% in Q4. Nevertheless, Canadian employment data showed much better than expected expansion of 43k in January, the fourth gain in six months. Unemployment rate also dropped to 8.3%.
ECB kept its main refinancing rate unchanged at 1%. The introductory statement was very similar to the one released 3 weeks ago. The central bank believed current rates remain appropriate and risks to economic outlook are broadly balanced. Concerning gradual phase-out of extraordinary stimulus measures, the ECB said more details will be given in March. Concerning Greece's 3-year plan to reduce budget deficit, the President said it 'steps in the right direction' but 'they must fix the goals that they have set for themselves'.
BoE left rates unchanged at 0.50% and paused its GBP 200b asset purchase program as widely expected. The bank said in the accompanying statement that the current interest rate would continue to impart a substantial monetary stimulus to the economy for some time to come. Meanwhile, the committee will continue to monitor the appropriate scale of the asset purchase program and further purchases would be made should the outlook warrant them.
As a surprise to the market, the RBA announced to keep the overnight cash rate unchanged at 3.75%, following 3 consecutive hikes last year, as policymakers would like to gauge the impact of previous hikes and stimulus withdrawal. RBA noted that lenders in Australia has generally raised rates a little more than the cash rate over recent months and loan rates have risen by close to a percentage point. The bank would seek to hold the cash rate steady for the moment to see the impact of these changes to the economy. Nevertheless, the bank maintained a tightening bias that if economic conditions evolve broadly as expected, the Board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term.
Looking at the charts, DOW's recover was limited by 55 days' EMA and fall from 10729.89 resumed. 10,000 psychological level is so far still stubbornly held but we'll expect it to be taken out decisively eventually. Whole medium term rebound from 6469.9 has completed at 10792.8 and we expect a correction to 38.2% retracement at 9102 at least.
VIX, the fear index, also made another high at 29.22 before settling at 26.11. It showed that investors' anxiety continue to build up which supports the view of more correction in stock markets.
img class=hand onload=resizeImg(this,450) src=http://www.actionforex.com/images/stories/contributors/actionforex/vix20100206w1.gif border=0 alt= />
Crude oil's decline resumed last week and the break of trend line support argues that whole medium term rise from 33.2 has completed at 83.93 already. Short term weakness to 68.59 support next and break there will confirm medium term reversal for key cluster support at 58.32 (50% retracement of 33.2 to 83.95 at 58.58) next.
While some consolidations might be seen initially this week, we'd expect risk aversion to come back sooner or later which bring another round of selloff in stocks and commodities. This should give dollar and yen another boost later in the month. Dollar index rose sharply to as high as 80.68 last week before closing at 80.26. Mentioned target of 38.2% retracement of 89.62 to 74.19 at 80.08 was already met. As noted before, our favored view is that consolidation from 88.46 has completed with three waves down to 74.19. Rise from 74.19 is possibly resuming the long term up trend from 70.70. Decisive break of 100% projection of 74.19 to 78.45 from 7.60 at 80.86 will suggest that such rise is developing into an impulsive move and will further affirm this case. In any case, we'll stay bullish in dollar index as long as 78.68 support holds.
Meanwhile, we'd also continue to favor yen a bit more than dollar. Developments in EUR/JPY and GBP/JPY are clearly supporting the more decline towards important lows of 112.10 and 118.81 made in 2009. USD/JPY's fall from 93.74 resumed last week and should be in progress towards 87.36 support next. AUD/JPY also displayed clear weakness last week by falling sharply to as low as 76.19. The break of 76.54 support indicates that whole medium term rebound from 55.11 has made a top at 86.71 on bearish divergence condition in daily MACD and RSI. We'd expect further decline towards 70.74 cluster support next (50% retracement of 55.11 to 86.17 at 70.64). Break of 80.68 is needed to be first sign of bottoming or outlook will remain bearish.
The Week Ahead
Risk aversion will remain the dominant driving force in the markets and Greece, Portugal and Spain will continue to dominate headlines. Nevertheless, some important economic data will also be released this week which would drive much volatility. BoE quarterly inflation report on Wednesday will be a highlight of the week and will provide some hints on the timing of stimulus withdrawal. Thursday will bring Australian employment report. Aussie was pressured much after RBA left rates unchanged and disappointing retail sales. A bad job report will give Aussie additional pressure. China CPI will also be released and any stronger than expected readings will raise speculations for further tightening which will lift risk aversion across Asian markets. US retail sales will provide a sense on the momentum of economic recovery. New Zealand retail sales will also be watched. The week will wrap up with Q4 GDP reading from Eurozone.
- Monday: Swiss unemployment, retail sales; Eurozone Sentix investor confidence; Canada housing starts
- Tuesday: UK RICS house price balance, trade balance, US wholesale inventories
- Wednesday: UK industrial and manufacturing production, BoE quarterly inflation report; Canada trade balance; US trade balance
- Thursday: Australia unemployment; Swiss CPI; US retail sales; New Zealand retail sales
- Friday: Eurozone Q4 GDP flash; US U of Michigan consumer sentiment
EUR/JPY Weekly Outlook
EUR/JPY fell sharply to as low as 120.69 last week and the strong break of 124.35 support further affirm our view that medium term rebound from 112.10 has already completed at 139.21. Initial bias remains on the downside this week and sustained trading below 61.8% projection of 134.36 to 124.73 from 126.96 at 121.00 will set the stage for 100% projection at 117.33 next. On the upside, above 123.28 minor resistance will turn intraday bias neutral and bring consolidations. But upside should be limited below 129.96 resistance and bring fall resumption.
In the bigger picture, medium term rebound from 112.10, which is treated as a correction to long term down trend from 2008 high of 169.96, should have completed at 139.21 already, after multiple failure to sustain above 55 weeks EMA. Current decline is tentatively treated as resumption of the down trend and should target a new low below 112.10. On the upside, break of 126.88 support turned resistance is needed to be the first signal of bottoming. Otherwise, medium term outlook will remain bearish.
In the long term picture, up trend from 88.96 (00 low) has completed at 169.96 and made a long term top there. Fall from 169.96 should develop into a three wave correction with first wave completed at 112.10, second wave completed at 139.21. Current fall is likely the third wave and should extend beyond to 61.8% projection of 169.96 to 112.21 from 139.21 at 103.45 or further to 100 psychological support next.
img class=hand onload=resizeImg(this,450) src=http://www.actionforex.com/images/stories/contributors/actionforex/eurjpy20100206w4.gif border=0 alt=EUR/JPY Monthly Chart - Forex Newsletters, Forex Outlook, Forex Review, Forex Signal />