The development in EU's help to Greece's fiscal problem remained the center of attention last week. But markets were dissatisfied with the lack of a solid plan from EU other than a pledge and Euro was sent broadly lower. EU finance ministers will meet again this week but may yet again disappoint the markets, which are looking for a plan with a number. Indeed, there were clear opposition to financial aid to Greece in Germany, which is supposed to lead the rescue. A television poll in Germany showed 71% of German voters are against providing financial help for Greece and political pressure would likely refrain German prime minister Merkel from taking any further steps. Eurozone GDP growth was also very disappointing and showed merely 0.1% qoq rise in Q4. In any case, Euro will likely remain pressured in near term.
Markets elsewhere were generally mixed. Risk aversion receded as stocks consolidated. China's PBoC surprised the markets by raising bank reserve requirements for the second time in a month to curb lending. But that triggered just some ripples in the markets and DOW still managed to close above 10,000 psychological market again. Dollar and yen were generally in consolidation mode, following stocks. Though, dollar was a bit stronger as Fed Chairman Bernanke outlined the exit plan last week and suggested that the discount rate might be raised before long.
Australian dollar and Canadian dollar were exceptionally strong last week. Aussie pared back much of recent loss last week after release of job market report. The job market in Australia expanded strongly by 52.7k in January while unemployment rate dropped from 5.5% to 5.3%. Aussie's strength was felt across the board, in particular against Euro with EUR/AUD took out recent low of 1.5416 and reached as low as 1.5336.
On the other hand, Canadian dollar was supported by it's relatively healthy fiscal position as well as strong rebound in crude oil. Canada is perceived by the markets as having little sovereign risk and a relatively much lower fiscal deficit and has benefited by recent wave of risk aversion on sovereign concerns. In addition, crude oil rebounded strongly last week and was just shy of 76 level and helped supported the Loonie. EUR/CAD extended recent down trend to as low as 1.4254 last week.
While the financial markets were somewhat stabilized last week as expected, there is no change in our view that investors will become more risk averse going down the road. Indeed, DOW's price actions from this month's low of 9835 are clearly corrective in nature and we believe that the fall from 10729 is not completed yet. We'd anticipate that such decline will resume sooner or later in February and should target 38.2% retracement of 6469.9 to 10729.89 at 9102.59 in Q1.
Gold's recovery from 1044.5 is also corrective in nature and we'd expect it to end sooner or later below 1126.4 resistance and bring anther fall towards 100% projection of 1227.5 to 1075.2 from 1163 at 1010.7.
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Dollar index managed to edge higher to 80.75 last week but that was largely driven by weakness of Euro. GBP/USD is still holding above recent low of 1.5534 which Australian dollar and Canadian dollar have indeed rebounded more than expected against the greenback. We'll remain cautiously bullish in the dollar index as long as 79.57 support holds. But sustainable rally in dollar would require stocks and gold to resume recent down trend. Otherwise we might yet see more sideway trading in the dollar index first. After all, we'd expect dollar index to hold above 78.45 and stage another rise to 82.63 resistance eventually.
The Week Ahead
Asian markets would probably be quieter than usual with China and Hong Kong on Chinese New Year holidays. US will also start the week with Presidents Day on Monday while Swiss markets are closed for Carnival for the week. The climax of Greece problem might have temporarily passed and focus would turn to economic data from US, in particular housing market data which would have a great impact on the timing of Fed's exit. UK job data, money supply and retail sales would also be closely watched as there is so far no conclusion on whether BoE is done with quantitative easing yet. Eurozone ZEW and PMIs would probably drive the Euro further down south in case of disappointments.
Monday: Japan GDP; Swiss CPI; New Zealand PPI
Tuesday: UK CPI; German ZEW; US Empire state manufacturing, TIC capital flow; NAHB housing market index
Wednesday: BoE minutes, UK job report; Eurozone trade balance; US new residential construction, import prices, industrial production, FOMC minutes
Thursday: BoJ rate decision; UK M4 money supply; Swiss ZEW; Canada CPI; US PPI, Philly Fed survey, leading indicator
Friday: Eurozone PMIs; UK retail sales; Canada retail sales; US CPI
EUR/USD Weekly Outlook
EUR/USD's recovery was limited by 1.3838 last week and recent decline extended further to as low as 1.3531 so far. Initial bias remains on the downside this week and further fall is expected towards 61.8% retracement of 1.2329 to 1.5143 at 1.3404 first. Break will target 161.8% projection of 1.5143 to 1.4217 from 1.4578 at 1.3076 next. On the upside, above 1.3695 will turn intraday bias neutral first. But short term outlook will remain bearish as long as 1.3838 resistance holds. However, break of 1.3838 will argue that a short term bottom is formed and bring stronger rebound.
In the bigger picture, three wave rise from 1.2329 is treated as consolidation to fall from 1.6039 only and should have completed at 1.5143 already. Fall from 1.5143 is tentatively treated as resumption of the whole down trend form 1.6039 and should target a new low below 1.2329. Break of 1.4217 resistance is needed to be the first signal of medium term bottoming. Otherwise, outlook will remain bearish even in case of strong rebound.
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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