The upcoming global central bank calendar is full next week as four of the major currency central banks meet between March 4 and March 6. On March 4, the Bank of Canada meets along with the Reserve Bank of Australia. Canada is expected to cut rates by 25 basis points while Australia is expected to hike rates by as much as 50 basis points. On March 5, the Reserve Bank of New Zealand is rumored to be raising rates 25 basis points. Finally, on March 6 the Bank of England is expected to cut borrowing rates by 25 basis points. The market is factoring in a 50 basis point cut by the Fed. If the equity markets start out poorly next week, do not be surprised by a pre-emptive 25 basis point cut by the Fed ahead of the March 7 unemployment number, followed by 25 â€“ 50 basis points on the 18th.
Week in Review
Bernanke's Congressional testimony highlighted the negative sentiment in the U.S. economy. He emphasized that the Fed's role is to prevent an economic slowdown while keeping an eye on inflation. His primary concerns are the housing slump, deteriorating credit markets and unemployment. At this time, he thinks the gains in inflation are medium term concerns caused by food and energy prices. He is paying particular attention to the price of crude oil. His comments indicated an almost certain 50 basis point cut at the next Fed meeting on March 18. The recent action by the Fed also made it clear that they just do not care about the USD at this time. In fact, late in the week there were hints that they favored a weak Dollar to cut into the trade deficit.
Overseas, the Eurozone released mixed reports on inflation. With inflation slowly creeping higher, the ECB remains firm on its stance to fight it. Do not expect any action by the ECB concerning interest rates. Look for them to keep rates at 4.0%, the level since June. In other news, ECB President Trichet is likely to comment on the Euro's strength, as all indications are it should begin to cut into European exports. Keep an eye out for reports of a slow down by Eurozone exporters.
Friday's news once again confirmed the deterioration in the U.S. economy. The fear in the market is that a recession is imminent. The market is definitely anticipating another round of aggressive cuts in interest rates. The February Chicago PMI report handed the Dollar the worst news on Friday as it fell to 44.5, well below the expected decline to 49.7. This was below the January figure of 51.5 and the psychological level of 50.
The EURUSD surged to another new all-time high. The market is nearing short-term overbought status, which could set up a corrective move down to 1.4839 or 50% of its last rally. In front of this possible downside target is the old top at 1.497, which is now new support. Look to buy on dips only.
In the USDCAD, profit-takers hit the market following a week where the Loonie reached a 3-month high. The steep sell-off in equities also made traders less risk adverse, deciding instead to shore up profits at current levels. Canada's account balance fell into a deficit position in 4Q 2007, as reported on Friday, for the first time since 1999. Monday watch for the 4Q Gross Domestic product report to show some slowing down as the U.S. weakness spreads north. On March 4, the BOC is expected to cut rates 25 basis points. On the technical side, the USDCAD remained inside of a major range of .9055 to 1.034. This set-up a normal profit taking area at the 50% price of .9717. Look for a possible retracement to .9953 to 1.000 before new sellers emerge.
The inside day in GBPUSD was just part of a lackluster trade this market has been going through since the breakout rally earlier in the week at 1.996. If the rally is for real, then look to buy a pullback to 1.9667 to 1.959.
The upside target of this current set-up remains 2.02 to 2.04. Look for the BoE to cut rates 25 basis points next week. The GBP was the weakest among the majors as subprime concerns weight heavily at this time.
The weakness in Asian and U.S. equity markets prompted carry trade unwinding causing the Yen to rally sharply higher against the USD. The next downside target is 101.67 the low in January 2005. On the upside, look to sell a rally back to 105.62 to 106.18. There was no BOJ intervention at 105 as rumored for weeks.
The USDCHF remained weak as the market made multiple year lows. Key support comes in at 1.02. On the upside, look to sell a short-covering retracement back to 1.04 to 1.07. Stock market pressures could lead to more buying in the Swiss market.
Despite the strong rally this week, the NZD closed the week lower, indicating a near-term top. This market is very vulnerable to a near-term correction, as support does not come in until .7798 to .7700. Expectations are for a rate hike this week to keep pace with inflation.
The AUDUSD fought off attempts to sell it off as profit-takers hit the market hard near the 24-year high. Traders have been buying on dips so do not be surprised by a healthy pullback to .9185 to .9111. The RBA is expected to raise rates by 50 basis points, which has already been factored in the price. Look for a buy the rumor; sell the fact scenario to develop. Any cut less than 50 basis points will also cause a sell-off.
Along with the multiple central bank policy meetings next week, the U.S. reports unemployment on Friday, March 7. Early guesses are 5.0% from 4.9% in January. Non-Farm Payrolls are expected to rise slightly by 35K. This is going to be a big report especially since the Fed does not meet until March 18. Market turmoil early in the week along with a bad unemployment number could force the Fed to make an emergency cut.
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