Much volatility was seen in Euro last week as the Greece drama continued. After initial selloff, the common currency did manage to stage an impressive rebound towards the end of the week on hope that Greece may finally receive emergency aid soon. Yen was equally volatility as countering force from risk appetite and falling treasury yields played on the currency. Commodity currencies were generally strong, as stocks reached new high and on strength in crude oil and gold. However, Canadian dollar lost some momentum after hitting parity against dollar and disappointing job report did no support to the Loonie. Meanwhile, dollar remained mixed.
There were a lot of central bank events last week. RBA raised rates by 25bps to 4.25% as widely expected and the post-meeting statement reiterated the central bank's hawkish stance. BoJ and BoE left rates and the quantitative easing program unchanged and were basically non-events. ECB also left rates unchanged at 1.0% last week. ECB President Trichet addressed questions about Greece's deficit problem. He said that 'default is not an issue for Greece'. The ECB also talked about the new collateral rules. The Governing Council has decided to keep the minimum credit threshold for marketable and non-marketable assets in the Eurosystem collateral framework at investment-grade level (i.e. BBB-/Baa3) beyond the end of 2010, except in the case of asset-backed securities (ABSs). In addition, the Governing Council has decided to apply, as of 1 January 2011, a schedule of graduated valuation haircuts to the assets rated in the BBB+ to BBB- range (or equivalent). This graduated haircut schedule will replace the uniform haircut add-on of 5% that is currently applied to these assets.
The FOMC minutes for March's meeting unveiled the Fed's dovish monetary outlook. While forecasts of real economic activities remained largely unchanged from previous meeting, policymakers were surprised by deceleration of inflation. At the same time, the Fed noted unemployment would be undermining recovery. Concerning the phrase 'extended period', the minutes indicated that it's not about calendar time but depended on evolution of the economy.
A couple of developments worth mentioning. Firstly, treasury dropped sharply last week after impressive auction results of 10 year notes, which had a bid-to-cover ratio at record of 3.72, which indicates strong demand for US treasuries. Yield on 10 year notes failed at 4% and dropped sharply to as low as 3.838%, which in turn dragged yen crosses sharply lower.
On the other hand, risk appetite remains strong with DOW pressing 11000 level while S&P 500 is heading to 1200 level. Strength in stocks will provide additional support to Australian dollar and Canadian dollar and pressure yen. Meanwhile, Gold also broke 1160 level last week and will likely provide more strength to Aussie in near term.
Dollar index's consolidation from 82.24 is still in progress and is set to extend further towards 79.51 in near term. As noted before, as the five wave sequence from 74.19 is already completed at 82.24, we'd expect some lengthy consolidations below 82.24 for a while before dollar index finally stage another medium term rise.
The Week Ahead
Any news from Eurozone on Greece development will continue to rock the markets. Intermarket relationship will also plan an important role. Yen will face countering forces from stocks and treasury yields. Gold will likely expect current rally towards 1186 and possibly above to 1200 level which will pressure the greenback. Crude oil will probably extends recent rally too. While Aussie is expected to continue the current rise, the fate of Canadian dollar will depend on whether it would sustain above parity against dollar. Also, beware of the number of important economic data to be released from US too.
- Monday: UK leading indicator; Canada housing starts; Fed budget
- Tuesday: UK RICS house price balance, trade balance; Canada trade balance; US trade balance, import price; New Zealand retail sales
- Wednesday: US CPI, retail sales, Bernanke testimony, beige book
- Thursday: Eurozone trade balance; US empire state manufacturing index, Philly Fed index, industrial production, TIC capital flow, NAHB housing market index
- Friday: Swiss PPI; Eurozone CPI; US building permits and housing starts, U of Michigan consumer sentiment
USD/CAD Weekly Outlook
USD/CAD reached as low as 0.9976 last week but drew support from parity and turned sideway. Initial bias is neutral this week and some more consolidations would probably be seen. But after all, break of 1.0302 resistance is needed to indicate that USD/CAD has bottomed. Otherwise, outlook remains bearish and more decline is still in favor. Below 0.9976 will target 0.9823 support next.
In the bigger picture, medium term decline from 1.3063 is still in progress. It's unclear whether such fall is resuming the long term down trend from 1.6196 (2002 high) or it's part of a consolidation pattern that started at 0.9056 (2007 low). In either case, fall from 1.3063 is now expected to continue towards 100% projection of 1.3063 to 1.0784 from 1.1723 at 0.9444 next. On the upside, break of 1.0779 resistance is needed to be the first signal that fall from 1.3063 is finished. Otherwise, outlook will remain bearish.
In the longer term picture, while long term down trend from 1.6196 (2002 high) has made an important low at 0.9056, the sustained trading below 55 months EMA again argues that the long term trend has not reversed yet. Fall from 1.3063 is either resuming the long term down trend or is part of a sideway consolidation pattern that started at 0.9056 (2007 low). We'll stay neutral for the moment until the fall from 1.3063 finally confirms whether it's impulsive or corrective in nature.