The market moving events in the early part of last week was overshadowed towards the end by Egypt's turmoil. Safe haven assets, including Dollar, Swiss Franc and Japanese Yen staged strong rebound on late Friday. Gold and crude oil also pared much of earlier losses. In particular, yen's rebound was impressive considering earlier selloff triggered by S&P downgrade. Nevertheless, these moves were exaggerated by thin liquidity on a Friday as well as the second last trading day of January. While we're expecting more upside in Swissy, Yen and Dollar in the initial part of this week, we won't be surprised to see the markets reverse once again towards the end of the week.
The financial markets made dramatic changes on Friday as protests in Egypt escalated. Equities plunged while safe-haven assets including the US dollar, bonds and gold jumped amid risk aversion. Oil prices also rebounded strongly as investors worried that protests will spread to the Middle East, affecting oil shipment from the OPEC. The unrest in Egypt follows an uprising in Tunisia 2 weeks ago. The chaos in Tunisia was driven by people's anger over rise in food prices, high unemployment rate and corruption. These problems have also been shared by people in Egypt. Protests happening in Cairo, Alexandria, Suez and many other cities in the country have caused casualty and President Hosni Mubarak to appoint a new government. Egypt is the most populous Arab state and the market worries protests in Egypt, if spread to other Arab countries, will have huge impacts to the world.
The most noticeable change in the January FOMC meeting was the unanimous vote for maintaining the Fed funds rate unchanged at 0-0.25% and the asset-purchase program at $600B until June 2011. The situation was widely anticipated as Kansas City Fed President Thomas Hoenig, who had dissented the accommodative monetary policy since the beginning of last year, was not a voting member this year. Despite the rotation of voting members, the accompanying statement was largely the same as the December one. While acknowledging slight improvements in the growth and inflation outlook policymakers remained concerned about the absence of a meaningful drop in unemployment. More inNew Fed Delivers Old Stance. On the data front, the US economy grew at annualized rate of 3.3% in Q4, below expectation of 3.5% but still solid. Price index, though, rose a mere 0.3% comparing to expectation of 1.7%. The volatile durable goods orders were disappointing and dropped -2.5% in December with ex-transport orders up 0.5%. Initial jobless claims also jumped sharply back to 454k.
Japanese yen was sold off sharply in the middle of the week after S&P surprised the markets by cutting Japan's AA sovereign debt rating for the first time since 2002. After the cut, Japan's rating is now at AA-, the fourth highest level alongside with China. S&P said in a statement that Japan's government debt ratios -- already among the highest for rated sovereigns -- will continue to rise further than we envisaged before the global economic recession hit the country and will peak only in the mid-2020s. Meanwhile, S&P said that the government lacks a coherent strategy to address these negative aspects of the country's debt dynamics. BoJ left rates unchanged at 0-0.1% as widely expected. The bank raised 2010 fiscal year GDP forecast from 2.1% to 3.3%, which is inline with the government's 3.1% projection. CPI are projected to drop 0.3% in 2010 fiscal year, comparing to -0.4% in the projection released three months ago. 2011 projection for CPI was also raised from -0.1% to 0.3%. After all, there is no change in markets' view that BoJ won't be raising rates before end of 2012.
Sterling was also under some pressure after terribly poor Q4 GDP which raised fear that UK economy is re-entering into recession, or even worse stagflation. Q4 GDP unexpectedly dropped -0.5% qoq and dragged yoy rate down to 1.7%. The figures were much worse than expectation of 0.5% qoq, 2.6% yoy. The coldest weather in a century hampered services and retails while construction sector also slumped. More worryingly, the contraction in GDP came before Prime Minster David Cameron steps up the austerity plan. Meanwhile considering that CPI just reached an uncomfortably high level of 3.7% yoy in December, the data raised the fear of UK reentering into seventies style of stagflation. Afterwards, Sterling pared some of the post-GDP losses after BoE minutes revealed that an additional member voted for a rate hike in January. Andrew Sentance called for gradual removal of policy accommodations since last June. This time, Sentance was joined by Martin Weale and both considered that the continued elevated rate of inflation, which was forecast to persist, posed a significant risk to inflation expectations and hence to the medium term outlook for inflation. Meanwhile, for some of the other seven members who voted to leave rates unchanged, the decisive was finely balanced. Nevertheless, some members feared that a rate hike in January would case expectations of a relatively sharp tightening of monetary policy and have a detrimental impact on confidence and activity. Meanwhile, Adam Posen once again voted for expanding the asset purchase program by another GBP 50b.
Canadian dollar was stuck in range for most of the week despite weak inflation data. Though, noticeable weakness was seen on Friday after BoC Governor Mark Carney warned that persistent strength in the Loonie is a threat to economic growth. Regarding fiscal policy, Carney emphasized that importance to get back to sustainable fiscal plans in Canada even though we start with the strongest fiscal position in the G-7.
Australia dollar continued to stuck in range against Dollar last week. There was some pressure after Australia CPI unexpectedly slowed from 2.8% yoy to 2.7% yoy in Q4 after marking a 0.4% qoq rise. This was much weaker than consensus of 0.8% qoq, 3.0% yoy rise in CPI. Also, the government expressed the interest to hike taxes for funding the flood rebuilding costs. Prime Minister Julia Gillard said she'd like to raise AUD 1.8b from taxes to pay part of the AUD 5.6 reconstruction bill after the Queensland flood.
As expected, the RBNZ left the OCR unchanged at 3% in January. Despite disappointment in some economic data (3Q10 GDP unexpectedly contracted while retail sales continued to struggle), the central bank appeared less dovish than we and the market had anticipated. That said, today's statement does not change our outlook on New Zealand and we retain the view that the central bank will not resume tightening until 2H11. RBNZ Remained Upbeat In Outlook While Holding OCR Unchanged.
Dollar index dropped further to as low as 77.60 last week but continued to lose downside momentum during the process. Bullish convergence condition in 4 hours MACD and Friday's recovery suggests that a short term bottom is in place. Initial bias should be mildly on the upside this week for further recovery. But after all, outlook will remain bearish as long as 79.17 resistance holds. Current development favors the case that rebound from November's low of 75.63 was already over at 81.44. Below 77.60 will bring another fall to retest this low. Nevertheless, above 79.17 will revive the case that such rebound from 75.63 is still in progress and would bring stronger rise to 81.31/44 resistance zone first.
The Week Ahead
Here is a summary of the key events to watch this week.
- Sunday: New Zealand trade balance, Japan industrial production
- Monday: Eurozone CPI; Canada GDP; US personal income and spending; New Zealand labor cost index
- Tuesday: Australia house price index; China manufacturing PMI; RBA rate decision; UK nationwide house price index, manufacturing PMI; Swiss retail sales, SVME PMI; German employment data, EUrozone manufacturing PMI, unemployment rate; US ISM manufacturing
- Wednesday: Eurozone PPI; ADP employment; New Zealand employment
- Thursday: Australia trade balance; Swiss trade balance; Eurozone PMI, ECB rate decision; UK services PMI; US ISM non-manufacturing
- Friday: RBA monetary policy statement; Canada employment, Ivey PMI; US non-farm payrolls
EUR/CHF Weekly Outlook
Current development suggests that EUR/CHF's rebound from 1.2401 has finished at 1.3067 already. Initial bias is cautiously on the downside this week for 1.2724 support first. Break will confirm this bearish case. Also, in such case, the larger down trend would likely be resuming for another low below 1.2401, with next target at 61.8% projection of 1.3833 to 1.2401 from 1.3067 at 1.2182. On the upside, however, above 1.3000 minor resistance will dampen this view and bring another rise to extend the correction to above 1.3067 instead.
In the bigger picture, whole down trend from 1.6287 (2007 high) is still in progress and in any case, medium term outlook will remain bearish as long as 1.3833 resistance holds. The current down trend would likely continue through 1.2 psychological level towards 100% projection of 1.5138 to 1.2765 from 1.3833 at 1.1460, which is close to long term projection level at 1.1516.
In the long term picture, fall from 1.6827 should be resuming whole down trend from 1993 high of 1.8234. Sustained trading below 1.3 psychological level will send the cross further lower to 138.2% projection of 1.8234 to 1.4391 from 1.6827 at 1.1516.