Euro was sold off sharply last week on the drama of Greece bailout. Just as markets thought there's already an agreement reached between Eurozone countries on the way to provide financial aid to Greece, Germany came out and said that it's illegal to support such a plan and called for IMF's involvement. Greek Prime Minister Papandreou then set a deadline for EU leaders to craft a financial-aid mechanism for his nation by their March 25-26 summit in Brussels. EC President Barroso then said that immediate action is needed to help Greece and further complicated the matter by suggesting a system of co-ordinated bilateral loans from European partners. From every angle, investors are clearly dissatisfied with the ongoing uncertainty on the Greece situation and dumped the common currency across the board. We'd talking about -238 pips fall in EUR/USD and -218 pips fall in EUR/JPY. More importantly, EUR/CAD dropped to a 27 month low of 1.3629 while EUR/AUD tumbled to record low of 1.4718. Euro even failed to gain against the weak pound.
One of the more significant developments last week was the free fall in EUR/CHF. While Euro's weakness was one factor that sent the EUR/CHF cross lower, it's SNB's turn in tone that fueled that acceleration of the fall. SNB board member board member Jean-Pierre Danthine said that Swiss firms and consumers should prepare for rising borrowing costs and exchange rates set freely by the market. The comment triggered sharp buying in the Franc on speculation that SNB is done with the intervention. The trend was established and Swiss Franc continued to gain even though Danthine then clarified that it's too early to counter last week's statement. The SNB will counter an excessive appreciation of the Swiss franc. EUR/CHF dropped to as low as 1.4318, just inch above 2008 low of 1.4315.
Dollar managed to rebound strong towards the end of the week on rate speculations. There were talk in the markets that Fed will have another discount rate hike from Fed before next meeting on April 28. Historically, the discount rate is 1% above the target fed fund rates and current at 0.75%, there is certain room for another hike for the normalization. FOMC left policy rate unchanged at 0-0.25% as widely expected last week and retained the pledge to keep interest rates at current low level for an 'extended period'.
Reserve Bank of India surprised the markets by raising the benchmark reverse repurchase rate from record low of 3.25% to 3.50% last week and markets perceived that as just the first step in policy reversal. The actions also triggered speculations that other central banks, in particular china, will start to follow and increased risk aversion towards the end of the week and boosted dollar and yen.
Under the pressure from the government and dismal inflation outlook, the Bank of Japan announced to double the size of the fixed-rate funds-supplying operation against pooled collateral (the fixed-rate operation) to 20 trillion yen. The duration is maintained at 3 months. At the same time, policymakers left the uncollateralized overnight call rate to at around 0.1%.
Pound was lifted by stronger than expected employment report last week but that support was brief. Sterling was then dragged down by euro and fell sharply against dollar and yen, as well as commodity currencies towards the end of the week.
Aussie and Loonie were rather resilient. Canadian dollar indeed managed to rise sharply, rising on stronger than expected inflation and retail sales data. While BoC reiterated the conditional commitment to keep rates unchanged at 0.5% till of Q2, the data triggered speculation that BoC would be forced to normalize rates sooner than expected.
Broad based Euro weakness is still expected in near to medium term, against dollar, yen and especially the commodity currencies. EUR/CAD dropped to as low as 1.3629 last week and has already met mentioned target of 100% projection of 1.7499 to 1.5183 from 1.6006 at 1.3690. Current down trend is expected to continue to 2007 low of 1.3285 in near term and possibly further to 2000 low of 1.2430. A break above 1.4102 resistance is needed to be the first sign of stabilization or outlook will remain bearish.
EUR/AUD is still trading well inside the medium term falling channel and the down trend extended further to as low as 1.4176 last week. We'd expect further decline to 138.2% projection of 2.0385 to 1.7145 from 1.8098 at 1.3620 next. We'll stay bearish in the cross until we see sustained break of the falling channel.
Comparing AUD and CAD, we'd still prefer CAD even though AUD/CAD continues to be bounded by converging range. We'd anticipate downside break out sooner or later to send AUD/CAD through 0.9197 support to 38.2% retracement of 0.7164 to 0.9912 at 0.8862.
Dollar index staged a strong rebound after drawing support from mentioned 79.56 cluster support (38.2% retracement of 76.60 to 81.34 at 79.52) and thanks to weakness in Euro. Consolidation from 81.34 might completed at 79.51 already. We expect more upside this week to retest 81.34 high and break will confirm medium term up trend resumption towards 82.63 resistance next. Though, a break of 80.23 minor support will delay the bullish case and bring more consolidation first.
Also, in the bigger picture, consolidations from 88.46 should have completed with three waves down to 74.19. Rise from there is tentatively treated as resumption of the long term rise from 70.70. We'll now stay bullish as long as 79.51 support holds.
The Week Ahead
Development in the Greece situation will remain the center of focus. EU summit on March 25/26 will be under much attention and the Euro could only get support unless there is something concrete about the way to provide financial assistance to Greece. No more uncertainty would be tolerated and the common currency would likely be sold off further if there isn't anything solid announced after the summit.
In addition, markets will focus on speeches from a number of central bankers. SNB Chairman Hildebrand will speak on Tuesday and focus will be on any reference to ending of intervention. BoC Governor Carney will speak on Wednesday and focus will be on chance of removing policy accommodations before end of Q2. A number of Fed officials will speak too including Bernanke, Kohn, Pianalto, Warsh, Bullard and Tarullo.
- Tuesday: UK CPI; US Existing home sales
- Wednesday: Japan trade balance; Eurozone PMIs, German Ifo; UK annual budget release; US durable goods orders; New Zealand GDP
- Thursday: German Gfk consumer confidence; M3 money supply; UK retail sales; New Zealand trade balance
- Friday: Japan CPI; US GDP final;
EUR/CHF Weekly Outlook
EUR/CHF's fall accelerated last week and reached as low as 1.4318, just inch above 1.4315 key support. Initial bias will remain on the downside this week and sustained trading below 1.4315 will target 1.4 psychological level next. On the upside, above 1.4406 minor resistance will turn intraday bias neutral and bring recovery. But upside should be limited below 1.4533 resistance and bring fall resumption.
In the bigger picture, current decline in EUR/CHF should be resuming larger term down trend from 1.6827. Sustained trading below 1.4135 (2008 low) will confirm this case and should target 61.8% projection of 1.6368 to 1.4315 from 1.5138 at 1.3869 next. On the upside, break of 1.4557 spike resistance is needed to be first signal of bottoming. Otherwise, outlook will remain bearish.
In the long term picture, fall from 1.6827 should be resuming whole down trend from 1993 high of 1.8234. We'd expect such down trend to extend towards 100% projection of 1.8234 to 1.4391 from 1.6827 at 1.2984 in the longer run.