Markets were still in an indecisive mode. Disappointing manufacturing and job data from US did send stocks and treasury yields sharply lower last week. But corresponding strength was not seen in the greenback. The lack of follow through buying, and Friday's reversal in the dollar after taking out near term levels against major currencies cast much doubt on the case that it has bottomed. The picture was also complicated by the refusal to head lower in gold and crude oil. On the other hand, the Japanese yen had a roller-coaster ride last week on varying comments from Japan Finance Minister and ended the week mixed. Swiss franc remained firmed against Euro in spite of another intervention from SNB.

Dollar's strength in the early part of the week was partly fueled by comments from world finance leaders on the concern of weakness of the greenback. But after all, G7 finance chiefs didn't single out the weakness of dollar for criticism and just stuck to similar stance that Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. The statement released over the weekend could well disappoint dollar bulls who hoped for a drastic change in language and may trigger some initial selloff in the greenback this week.

On the other hand, Yen's spike higher last week was triggered by comments from Japan Finance Minister Fujii that he supported a strong yen policy. But the strength quickly faded after he reversed his rhetoric. Over the weekend in G7 meeting, Fujii emphasized again that if yen shows excessive moves in a biased direction, we will take action, leaving room for the government to intervene. Yen crosses might recover further initially this week.

As mentioned before, expectations on economic data from US were high. But after all the results were generally disappointing. In particular, NFP missed the expectation much by showing -263k contraction in the job markets in September while unemployment rate also climbed to 26 year high of 9.8%. ISM manufacturing index also unexpected dropped back to 52.6 in September, showing that the recovery in manufacturing is losing momentum. Consumer confidence also unexpectedly dropped to 53.1 in September. Nevertheless, consumer spending rose slightly more than expected by 1.3% in August and was a relatively brighter spot in US economy. Q2 GDP was revised higher from -1.0% to -0.7% annualized contraction.

Data elsewhere were mixed. Germany unemployment rate dropped from 8.3% to 8.2% in September. But Eurozone unemployment rate rose to decade high of 9.6% in August. UK CBI distributive trades unexpected turned positive to +3 in September. Gfk consumer confidence also improved remarkably to -16 in September. However, PMI manufacturing missed expectation by dropping back to 49.5 in September. Japanese Tankan large manufacturer index rose to -33 in Q3 while non- manufacturing outlook rose to -24. Japanese CPI dropped -2.2% yoy in August, inline with expectations. Manufacturing PMI improved to 54.5 in September. Unemployment rate unexpectedly dropped to 5.5% in August. Canadian GDP was flat in July, missing expectation of 0.5% growth. Australian retail sales rose much more than expected by 0.9% mom in August.

IMF raised forecasts for global economic growth in 2010 from 2.5% to 3.1% as more than 2T stimulus packages and demand in Asia helped the world economy recovers. US is expected to grow 1.5% Eurozone is expected to grow 0.3% while UK is expected to expand by 0.9%. In a separate report from IMF, dollar's share of global currency reserves dropped in Q2 to 62.8%, hitting the lowest level in a decade. The share dropped from 65% in Q1 and 62.9% a year ago. On the other hand, Euro's share rose to a record of 27.5%, up from Q1's 25.9%.

Looking at the charts, investors are generally moving further away from a risk seeking mode to a risk averse mode. The sharp fall in US stocks over the week was inline with our view that a short term top is at least formed. S&P 500 is now 5% below September's high of 1080 after losing momentum on bearish divergence conditions in daily MACD. The key focus is now on whether such decline would extend beyond 100 level which is close to medium term trend line as well as 55 days EMA. At this moment, we're favoring more downside in stocks and are cautiously anticipate break of the 1000 level. If that happens, it will open up the possibility for deeper decline to at least have a test on 869/956 support zone in Q4 which will provide further support to dollar and yen in general.

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The sharp fall in treasury yield last week is also inline with the view that investors are moving into safer assets. Yield on 10 year T note indeed dropped to as low as 3.106 last week. Even though strong rebound was seen that pushed yield to close at 3.22, there is no structure change in recent down trend. We'd maintain that yield on ten year note has topped out at 4.01 and it should continue to spiral down going forward, which should give some additional support to yen relative to dollar.

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However, resilience in energies and precious metals are mixing up the bullish picture of the greenback. In particular, crude oil rebound strongly to close near to 70 level in spite of a bearish inventory report. The refusal to head lower after taking out the medium term trend line also dampens the immediate bearish view that it has topped out at 75.0. While we're still cautiously bearish in crude oil, any break of near term resistance at 73 level will put 75 high back in to radar and we could see the a test of 75 in oil accompanied by a test of 75.83 low in dollar index.

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Looking back at the dollar index, the recovery lost momentum and was limited at 77.47 last week. While the break of medium term channel resistance is another sign of bottom, momentum remains unconvincing so far. We'll stay neutral initially this week and look at the post G7 reactions first. Further rise will be in favor as long as 76.50 minor support holds and above 77.47 will pave the way to key resistance level at 78.93 next. However, a break below 76.50 will put 75.83 back into focus.

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In the biggest picture, out preferred view didn't change. Fall from 89.62 has likely completed at 75.83 on bullish convergence conditions in daily MACD, after hitting key support level of 75.89. Break of 78.93 resistance will confirm this case and will set the stage for at least a strong rebound to 38.2% retracement of 89.62 to 75.83 at 81.09. However, such view is far from being confirmed and a firm break of 75.83 will bring deeper fall to next key support level of 74.31.

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Currency Heat Map Weekly View

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The Week Ahead

Initial focus of the week will be on reactions to the lack of criticism on dollar weakness from G7 statement as well as Japan FM Fujii's comment on intervention on Yen. Economic calendar is rather light, in particular in US and main focus will then turn too three central bank meetings, RBA, ECB and BoE.

RBA is widely expected to keep rate unchanged at 3.00% level this week. Nevertheless, markets are speculating that RBA would start the pave the way for a rate hike. Some economists are suggesting that the rate hike might happen in November. One important thing to note is that Aussie was sharply lower against dollar and euro last week and that was an early sign of topping, at least in near term. So, even in case of a change to hawkish stance in RBA, we'd prefer to see 0.8857 in AUD/USD and 1.6512 in EUR/AUD to be firmly taken out before confirming resumption in recent up trend. Otherwise, we're stay near term neutral even in case of strong rebound.

ECB is always widely expected to keep rates unchanged at 1.00% this week. ECB surprised the markets by allotting only EUR 75.2b in last week's 12 month long-term refinancing operation. The amount was much lower than markets' expectation of around EUR 100 to 200bn and raised some speculations that ECB is starting to pave the way for exiting non-standard monetary policies and would possibly hike next summer. The speculation was somewhat immature at this point. Nevertheless, focus will still be on hints from Trichet on the timing of policy reversal.

BoE is expected to leave rates unchanged at 0.50% and keep the asset-purchase program unchanged. However, recent comments from King suggest the bank is considering a cut in deposit rates, the interest rate paid by BoE on commercial banks reserves held at the bank. Sterling will be vulnerable to another sharp fall, in particular against Euro, in case of some related announcement from BoE.

Important economic data to be released this week include:

  • Monday: UK Services PMI; Eurozone Retail Sales; US ISM Manufacturing Index
  • Tuesday: RBA Rate Decision; Swiss CPI; UK Industrial and Manufacturing Productions; Canada Ivey PMI
  • Wednesday: Swiss Unemployment; Eurozone GDP Final
  • Thursday: Australian Employment; BoE Rate Decision; ECB Rate Decision and Conference
  • Friday: UK Trade Balance, PPI; Canadian Employment, Trade Balance; US Trade Balance