Commodity currencies strengthened last week as risk appetites were boosted by solid economic data as well as strong corporate earnings. UK Q2 GDP was particularly impressive while Eurozone PMIs and German Ifo also posted nice upside surprises. Dovish comments from Bernanke's testimony triggered some intra-week selloff in risks but was quickly overshadowed by strong earnings report from blue chip companies. European bank stress test results were finally released on Friday but reaction was muted as much of the information was leaked out during the week already. Considering that US stocks has taken out previous week's high on Friday's rise, we'd expect risk appetite to continue initially this week and should take dollar index through 82 level.

The highly anticipated EU bank stress test showed that 7 out of 91 banks failed. Five of them are in Spain, one in Germany and one in Greece. The failed banks will need a total of EUR 3.5b of capital, which is much lower than market's expectation of EUR 30b. Also, this will mean that respective governments should have enough fund already and would need to tap the EU 440b stabilization fund. One thing to note is that all four UK banks tested passed, which suggests that they're relatively well placed to handle further periods of economic stress. While the test results were generally well received by markets, there are still some questions unanswered. Firstly, a scenario with a sovereign debt default was not included. Secondly, sovereign bonds held to maturity by banks are not included. Thirdly, some believe the pass mark of 6% capital-to-asset ratio of 6% was too low. Fourthly, liquidly was not measured. But in any case, this event risk is passed and euro will look for further direction going forward.

BoC raised raised the overnight rate by another +25 bps to 0.75% in July. The central bank also raised the bank rate and discount rate by +25 bps to 1% and 0.50%, respectively. Concerning economic outlook, BoC revised down its GDP forecasts for 2010 and 2011 to +3.5 and +2.9%, respectively. In April's MPR, the corresponding estimates were +3.7% and +3.1%. For 2012, growth was upgraded to +2.2% from April's projection of +1.9%. Both headline and core inflation will remain near 2% through 2012. In April, headline CPI for 2010, 2011 and 2012 were +2.1%, 2.2% and +2%, respectively while core CPI were expected to be +1.9%, +1.8% and +2, respectively. Nevertheless, as later shown in the Monetary Policy Report, the projects have taken into consideration of a gradual reduction in monetary stimulus and implied that BoC will continue tightening. Nevertheless, the pace would remain data dependent.

BoE minutes revealed that the MPC voted 7-1 to keep rates unchanged in July, with Andrew Sentance as the lone dissenter and voted for a 25bps hike again for the second consecutive time. The minutes noted that prospects for GDP growth had probably deteriorated a little over the month. Meanwhile margin of spare capacity was likely to bear down on inflation and bring it back to the target in the medium term once the impact of temporary factors had worn off. After all, the minutes suggested that BoE is in no hurry to remove policy stimulus. Nevertheless, Sterling was boosted strong by a strong retail sales and more importantly, Q2 GDP. GDP rose 1.1% qoq, 1.6% yoy comparing to expectation of 0.6% qoq, 1.1% yoy. This marked the third consecutive quarter of recover as the economy was supported by higher output by business services, finance and construction. The data also proved that UK is pulling out of recession quicker than most expected.

In his semi-annual testimony to Congress, Bernanke warned that even as the Federal Reserve continues prudent planning for the ultimate withdrawal of monetary policy accommodation, we also recognize that the economic outlook remains unusually uncertain, while financial markets have become less supportive of economic growth in recent months. Bernanke also said that housing market remains weak and it will take significant amount of time to restore the job market. Bernanke said that Fed remain prepared to take further policy actions to restore recovery.

Technical Highlights

DOW's break of 10407 resistance on Friday indicates that whole rebound from 9614 has resumed. We'd expect further strength in near term to 10594 resistance and above. Nevertheless, current rise is treated as part of the medium term consolidation/correction from 11258 and hence we'd expect strong resistance near to 11000 psychological level to limit upside.

Similar outlook is seen in FTSE where 5331 resistance is already broken. We'd expect rebound from 4790 to extend further in near term towards 5832 high. But again, such rally is treated as part of the consolidation/correction from 5832 only and hence, upside should be limited below this high and bring another medium term fall.

With 83.26 resistance intact, dollar index's correction from 88.70 is still in progress. A break of 82.08 low would likely be seen in near term and the correction should target mentioned key support level of 80.04, which is close to 80 psychological level as well as 61.8% retracement at 79.73. Nevertheless, downside should be contained there to conclude the correction and bring rebound.

Developments in yen crosses generally suggest that recent consolidation is still in progress. In AUD/JPY will stay above 71.86 support for a while and we'd possibly see stronger rise to 80.85 resistance. Though, there is no change in the view that price actions from 71.86 are merely consolidations to fall from 88.04. Hence, we'd look for selling opportunities above 80.85 for another medium term fall to 71.86 and below.

CAD/JPY also managed to hold above 81.58 support and recovered. Some more recovery would likely be seen in near term but we'd expect upside to be limited by 86.40 resistance and bring fall resumption. Decline from 94.46 is expected to have a test on 78.52/79.89 support zone at least.

Risk appetite will likely support commodity currencies further in near term. AUD/NZD is staying in range and would possibly continue so, suggesting that relative strength between the two might not be apparent. Nevertheless, Canadian dollar would likely underperform for a while. AUD/CAD's rebound from 0.8576 extended further last week and should continue to target s 61.8% retracement of 0.9912 to 0.8576 at 0.9402, which is also close to 100% projection of 0.8576 to 0.9108 from 0.8867 at 0.9399. Decisive break there will confirm that whole correction from 0.9912 has completed at 0.8576 and target a retest on 0.9912 high.

The Week Ahead

Risk appetite is expected to continue initially this week which should give some more pressure to dollar and yen. Nevertheless, the sustainability of risk rally will very much depend on the upcoming economic data, which features consumer confidence, durable goods, Fed's beige book, and more importantly, Q2 GDP from US. Australian inflation data will also be a key focus. While RBA might not hike rate in August during an election campaign, strong Q2 inflation data will definitely solidify the case of another hike in September. RBNZ will also meet this week and is expected to remove policy accommodation by raising the OCR by 25bps to 3.00%.

  • Monday: Australia PPI; US new home sales
  • Tuesday: German Gfk consumer sentiment, Eurozone M3; US conference board consumer confidence
  • Wednesday: Australia CPI; US durable goods, Fed Beige Book; RBNZ rate decision
  • Thursday: UK nationwide house price, Gfk consumer confidence; Japan CPI, unemployment
  • Friday: Eurozone CPI, unemployment; Swiss KOF; Canada GDP; US GDP advance

AUD/USD Weekly Outlook

AUD/USD's choppy rise from 0.8066 extended further last week and reached as high as 0.8969. Initial bias remains on the upside this week for 0.9380/9404 resistance zone. But we'd expect upside to be limited there to bring another fall to continue the medium term consolidation. On the downside, below 0.8859 minor support will turn intraday bias neutral first. Further break of 0.8632 will argue that AUD/USD might have topped out and flip back to the downside for 0.8315 support instead.

In the bigger picture, note that a medium term top is in place at 0.9404. Price actions from there are viewed as consolidation/correction to medium term up trend from 0.6008. Such consolidation/correction will continue below 0.9404 for a while and the path could be choppy and unpredictable. Though, note that a break of 0.8315 will argue that such correction is going to extend deeper to beyond 0.8066 support, possibly to 0.7702 key support.

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.