Swiss franc was broadly higher last week on safe haven flow, which was triggered by reports that Iranian warships would transit the Suez Canal en route to Syria. Dollar lagged behind on concern that US would be dragged into the picture if tension between Israel and Iran escalates. Indeed, the greenback weakened against other major currencies on various reasons in spite of solid US economic data. Technically, dollar index failed 78.78 key resistance last week and subsequent sharp fall suggests that the recovery stated earlier this month is likely over. Outlook in dollar is turned bearish and we'd expect more decline ahead.

The minutes of the January FOMC meeting unveiled that policymakers are more confident that the economic recovery would sustain and strengthened although the pace of improvement in the job market has been rather disappointing. It appeared the more hawkish members would tolerate QE2 to be carried out until expiry but they would not support additional measures. The new set of economic projections showed more upbeat forecasts on growth and employment outlooks while the prospect for inflation remained subdued. More in Fed Appears More Confident Over US Growth Outlook. Nevertheless, the minutes provided little support to dollar.

Euro was boosted by relief over Portugal's bond sales as well as hawkish comments from ECB officials. ECB executive board member Bini Smaghi said on Friday that as the economy gradually recovers and global inflationary pressures arise, the degree of accommodation of monetary policy has to be monitored and, if needed, corrected. When asked about whether ECB would raise rate this year, Bini Smaghi reiterated that the ECB's objective is to maintain price stability for the euro area as a whole. The comment alone shot EUR/USD up over 100 pips.

Portugal sold EUR 1b of 12 months bills last week, at the maximum intended amount. Demand was weaker than prior auction with bid-to-cover ratio at 1.9. Nevertheless, it's still at a healthy level. Yield rose to 3.987%, well below expectation of 4.3% and the record of over 5% hit in December. EU finance ministers agreed on the volume of the permanent lending facility of the European Stability Mechanism (ESM), which will be set up from 2013. The effective lending capacity will be raised from the current EUR 250b out of EUR 440 in the European Financial Stability Facility (EFSF) to level of EUR 500b, that is, a double. The details are expected to be discussed and agreed at the two summits in March.

BOE revised lower its growth forecasts despite higher inflationary outlook in the near-term. In its quarterly inflation report, the BOE unveiled the outlook that inflation will most likely fall a little below the target in the second half of 2012, but the risks relative to that most likely path are 'skewed to the upside'. Growth forecasts were revised lower as higher interest rate assumption (1%) was used and GDP growth in 4Q10 was weak. More in BOE Raised Inflation Forecasts, Yet Lowered Growth Outlook. Nevertheless, BoE Governor Kind said in an open letter to Chancellor of the Exchequer Obsborne, that there is a great deal of uncertainty about the medium-term outlook for inflation and there are real differences of view within the Committee. BoE hawk Sentance also noted that his judgment is that the upside risks to inflation are understated, and monetary policy would most likely need to be tightened fast and by more than the markets currently expect to bring the inflation back to target. The mixed messages kept EUR/GBP in range.

BoJ left rates unchanged at 0-0.1% as widely expected. The bank also upgraded economic outlook for the first time in nine months. As the bank noted in the statement, Japan's economy is gradually emerging from the current deceleration phase. This was an improvement from previous references to a pausing recovering. Meanwhile, the bank also noted that exports and production showed signs of resuming an uptrend as global growth started increasing again. Meanwhile, BoJ also pledged to maintain its loose monetary policy stance for the country to overcome deflation and return to a sustainable growth path with price stability,

RBA's minutes for the February largely echoed what Governor Glenn Stevens said before the parliament last Friday. Policymakers were comfortable to leave the cash rate unchanged at 4.75%. While floods that had occurred in December and January in eastern Australia would have strong impact on the economy in the near-term, it would not affect the central bank's monetary policy which focuses on the medium-term outlook for the economy. Dependent of economic indicators, we currently retain our view that the RBA will resume tightening in the second quarter. More in RBA Appears Comfortable With Current Stance

China raised the bank reserve ratios again, by 50bps this time, effective February 24, to curb lending and cool the economy. Analysts expect the move will lock up over USD 54b of funds from the markets. This is the second time PBoC raised reserve requirement ratio this year. Also PBoC hiked benchmark lending and deposit interest rates earlier this month. China raised reserve requirements six times and interest rates twice last year. And, this is not expected to be the end as more tightening is still expected by the markets as China needs to do more to bring inflation down to this year's target of 4%.

Technical Highlights

Dollar index's rejection by 78.78 key near term resistance and 55 days EMA last week bear technical significance. The development suggests that rebound from 76.88 is already completed at 78.87 and the corrective three wave structure in turn indicates that recent down trend is resuming. Initial bias remains on the downside this week and break of 77.5 minor support will further affirm this bearish case and should send dollar index through 76.88 support to 61.8% projection of 81.31 to 76.88 from 78.87 at 76.13 next. We'll remain bearish as long as 78.87 resistance holds.

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The Week Ahead

Other than the above mentioned reason, another reason for dollar's weakness was on worry of government shutdown. US House of Representatives passed on Friday a Republican-backed bill to cut at least $61b in federal spending this year. The cuts would face strong opposition from Democrats, in Senate and if no agreement is made when current spending authority ends March 4, the government will shut down. The situation would likely pressure the greenback until the situation is cleared.

Another main focus in the week will be on UK. Sterling is clearly firm against dollar and yen. However, it's still struggling in range against euro as expectation on rates changed almost everyday. This week's event would be important to determine whether EUR/GBP could break out of recent range. Those events include BoE minutes and public sector net borrowing and GDP revision.

  • Monday: Eurozone flash PMIs; German Ifo
  • Tuesday: UK public sector net borrowing; Canada retail sales; US consumer confidence
  • Wednesday: Swiss PPI; BoE Minutes; US existing home sales
  • Thursday: Swiss employment level; US jobless claims, durable orders, new home sales
  • Friday: Japan CPI; UK Gfk consumer confidence, UK GDP revision; German CPI, Eurozone M3; Swiss KOF; US GDP revision

USD/CHF Weekly Outlook

USD/CHF's fall from 0.9774 accelerated to as low as 0.9436 last week. The development suggests that recent price actions from 0.9300 are merely consolidations in the larger down trend and has possibly finished with three waves to 0.9774 already. Initial bias remains on the downside this week for 0.9300 low first. Break will confirm down trend resumption. On the upside, above 0.9538 minor resistance will turn bias neutral and bring recovery. But upside should be limited well below 0.9774 resistance and bring another fall.

In the bigger picture, USD/CHF failed to sustain above 55 days EMA again and recent development suggests that price actions from 0.9300 are merely consolidations in the larger down trend. That is, 0.9300 is not yet the bottom. Outlook will now be cautiously bearish as long as 0.9774 resistance holds. Decisive break of 0.9300 will confirm down trend resumption and target 61.8% projection of 1.8305 to 1.1288 from 1.3283 at 0.8946, which is close to 0.9 psychological level.

In the longer term picture, the break of 0.9634 confirms that long term down trend from 2000 high of 1.8305 has resumed. There are various interpretation of the price actions. But after all, USD/CHF should be resuming the set of impulsive fall from 1.8305 to 1.1288. Hence, we'd expect next long term target to be 61.8% projection of 1.8305 to 1.1288 from 1.3283 at 0.8946, which is close to 0.9 psychological level.

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