We had a lot of noises in the markets recently. The US debt ceiling debate remained a major focus as the drama dragged on before the August 2 deadline. Moody's warned earlier in the month of a possible US downgrade. But the rating agency said in a statement on Friday that the triple A rating would likely be kept if the government could continue to pay bond-holders even if a deal can't be reached by the deadline. The Greece situation seems to be solved by markets' focus turned to Spain now as Moody's warned of a Spain downgrade. IMF also said in a report that outlook in Spain is "difficult" with risks "elevated" and the country is still in "danger zone". These noises triggered much volatilities in the markets but under these volatilities, there are trends.
And, the trends that really worth noting are, firstly Dollar, Euro and Sterling are staying in range against each other for the moment. Dollar is a bit weaker against the other two. Sterling also seems to be building momentum against euro. But, they're kept in range as each region has its own problems. Growth in US and UK was dismal. US real GDP grew at 1.3% annualized pace in Q2, substantially below market expectation of 1.7%. Prior quarters figure was also revised down from 1.9% to a very poor 0.4%. UK Q2 GDP grew a mere 0.2% qoq. Outlook in both US and UK reflect fragility in economic recovery and would likely prompt Fed and BoE to add stimulus if situation worsens. Eurozone CPI unexpectedly moderated to 2.5% yoy in July, reducing the need for ECB to continue tightening while the region is still in the middle of the never-ending peripheral debt crisis. The trends between the three currencies are indeed, not too clear.
Secondly, Swiss France and Gold are both strong on safe haven demand. Swiss franc extended the long term up trend and made new record high against Dollar, Euro, and Sterling last week. Gold also jumped to record high against Dollar at 1637. Investors are still in deep concern on the debt problems across the Atlantic. Swiss Franc and gold would likely remain strong in near term ahead.
Thirdly, with all the talk about US downgrade, long term treasuries were still strong. Considering sluggish growth, risk aversion as well as possible reversal in stocks, US treasuries remained one of the preferred place for funds. Yield on 10 year and 30 year bonds both hit fresh low for the year last week. The strength in US bonds, weakness in yields, helped drive USD/JPY lower last week, taking EUR/JPY and GBP/JPY with it. The medium term down trend in yields are confirmed and we'd possibly see 10 year yield heading back to lower side of the range near to 2.35% while 30 year yield would possibly head towards 3.50% level Such development will likely support the Japanese yen further.
Fourthly, Aussie and Kiwi are both strong in spite of risk aversion in the equity markets, both supported by resilience in their economy, strength in the Asia Pacific region as well as commodity prices. The stronger than expected Q2 CPI reading in Australia killed unjustified talk of rate cut from RBA. Instead, markets are back to consensus that the bank would indeed be forced to raise rate again by the end of the year and such expectations boosted Aussie to new record high against dollar. In the post meeting statement, RBNZ delivered clearly the attention to remove the post-earthquake 50 bps insurance cut as 'current global financial risks recede and the economy continues to recover'. It's very likely that the rate hike will place in as soon as September. More in RBNZ may Increase Interest Rates in September. While also a commodity currency, trend in Canadian dollar is not clear, in particular as weak data cooled speculation of BoC hike in near term.
So in short, we're not too enthusiastic on trades in EUR/USD, GBP/USD and EUR/GBP. Instead, we'd be more interested in going long Swiss Franc and Yen on days of risk-off, and long on Aussie and Kiwi on days of risk-on.
GBP/CHF's long term down rend resumed last week and dived to new record low of 1.2880. Current fall should continue in near term and target 161.8% projection of 1.5691 to 1.4168 from 1.5183 at 1.2719 next.
In the larger picture, we'll stay bearish as long as July's high of 1.3697 holds and expect the down trend to continue to 61.8% projection of 2.4965 to 1.5112 from 1.8113 at 1.2024 in medium term, which is close to 1.2 psychological level.
NZD/USD's up trend accelerated further last week and made new record high at 0.8797 so far. We're staying bullish in the pair and expect the up trend to extend to 100% projection of 0.4890 to 0.7632 from 0.6560 at 0.9302 in medium term. Key short term support is last week's low of 0.8611 while the medium term key support level is 0.7975.
Canadian dollar is clearly the weaker one among commodity currencies. AUD/CAD's strong rally last week suggests that pull back from 1.0555 has already finished at 1.0124. Current rise should extend through 1.0555 high in near term to target 61.8% projection of 0.9605 to 1.0555 from 1.0124 at 1.0711.
In the larger picture, we'll stay bullish in AUD/CAD as long as 1.0124 holds and expect further rise to 100% projection of 0.7168 to 0.9913 from 0.8589 at 1.1333.
The Week Ahead
US debt ceiling outcome will be one of the major focuses on early part of the week. Four central banks will meet this week, RBA, ECB, BoE and BoJ and all are expected to stand pat. The main market moving one would be RBA and the statement could send Aussie further higher if it delivers a hawkish tone. Meanwhile a number of economic data would be released during the week.
As noted before, firstly Euro, Sterling and Dollar are so far kept in range against each other and the development among these crosses will very much depends on the PMIs and US job data. Also, these data would be important to determine the level of risk aversions and thus determine whether Swiss Franc or Aussie/Kiwi are the preferred currency to go long against dollar, euro and sterling. There are also a number of important data to determine how far the Aussie could go, including Australia retail sales, housing, trade balance and more importantly, China manufacturing PMI. New Zealand dollar bulls will look into New Zealand job data too. Meanwhile, also note that Canadian job data is also featured which could trigger some volatility in CAD crosses even though we don't expect it to change the larger trend.
- Monday: China Manufacturing PMI; Eurozone manufacturing PMI, unemployment rate; UK manufacturing PMI; US ISM manufacturing
- Tuesday: RBA rate decision, Australia building approvals, house price index; Swiss retail sales, SVME PMI; UK construction PMI; Eurozone PPI; US personal income and spending
- Wednesday: Australia retail sales, trade balance; Eurozone services PMI final, retail sales; UK services PMI; US ISM non-manufacturing, factory orders; New Zealand employment
- Thursday: BoE rate decision; ECB rate decision; US jobless claims
- Friday: RBA monetary policy statement; BoJ rate decision; Swiss CPI; UK PPI; Canadian employment, building permits, Ivey PMI; US non-farm payroll
USD/CHF Weekly Outlook
USD/CHF's down trend extended further last week and made new record low at 0.7848. Initial bias remains on the downside this week for medium term projection level at 0.7797. Break will target 161.8% projection of 0.8519 to 0.8081 from 0.8277 at 0.7568 in near term. On the upside, above 0.7918 minor resistance will turn bias neutral and bring consolidations. But recovery should be limited below 0.8081 support turned resistance and bring down trend resumption.
In the bigger picture, long term down trend from 1.1730 is still in progress and there is no signal of reversal yet. Such decline is expected to extend to 100% projection of 1.1730 to 0.9462 from 1.0065 at at 0.7797. Break will pave the way to 138.2% projection at 0.6931 which is close to 0.7 psychological level. On the upside, break of 0.519 resistance is needed to be the first sign of medium term bottoming or we'll stay bearish in the pair.
In the longer term picture, long term down trend from 2000 high of 1.8305 is still in progress. 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. The current down trend might now be targeting next projection level of 100% projection of 1.8305 to 1.1288 from 1.3283 at 0.6266.