Top 5 Current Last Change(Pips) Change(%)
AUDJPY 65.28 61.95 +333 +5.10%
EURAUD 1.9554 2.0500 -946 -4.84%
GBPAUD 2.0438 2.1319 -881 -4.31%
AUDUSD 0.7111 0.6832 +279 +3.92%
NZDJPY 53.71 52.04 +167 +3.11%

One of the most important developments in thin holiday trading of the past two weeks is the strong rebound in commodity currencies, which is particular apparent in the Australian dollar. That could be attributed both to rebound in commodity prices last week, as well as return of risk appetite as also seen in the stock markets. Aussie was the biggest winner last week, having over 5% gain in AUD/JPY, over 4% gain against Euro and Sterling and nearly 4% against the greenback. The Canadian dollar, to a lesser extend, also rode on rebound in crude oil prices and closed the week higher in general. Another important development is the reversal in EUR/GBP and GBP/JPY which argues that the pound should have at least made a short term bottom in these crosses after persistent weakness in Q4. Dollar strengthened against major rivals Euro and Yen that sent the dollar index higher but was pressured against commodity currencies.

Having said that, the main focus as the year starts will indeed be on the development in the stock markets. DOW's strong rally on the first trading day in Jan sent it through prior resistance of 9026 and reached as high as 9034. The rebound from Nov's low of 7450 is likely resuming for 9653 resistance. Having said that, we'd expect that rally in stock markets in early part of Jan to provide further boost to the commodity markets. Judging from the reactions in forex markets so far, Aussie, Kiwi and Loonie will likely benefit most from rally in stocks and commodities. Sterling will likely gain on short covering rally too. Yen, Swissy and Euro will be the main losers as risk aversion recedes while the greenback will remain mixed.

Nevertheless, note that the DOW's rise from 7450 is treated as a correction in the larger down trend for the moment and will likely be limited by mentioned 9653 resistance (38.2% retracement of 13136 to 7450 at 7622). This is consistent with the view that current rally in AUD/USD and AUD/JPY are merely part of consolidations that started at 0.6008 and 55.11 respectively. Hence, the above mentioned trend is expected to reverse in latter part of Jan. A strong break of 9653 in DOW is needed to change this view.

As for the dollar index, technically speaking, rebound from 77.69 has resumed after taking out 81.62 resistance. As mentioned before, we still favor the case that the sharp fall from 88.46 is merely a correction in the larger up trend and should have completed at 77.69 after meeting 61.8% retracement of 71.31 to 88.46 at 77.86. Focus remains on 83.11 cluster resistance (50% retracement of 88.46 to 77.69 at 83.07) and sustained break will confirm this case and bring rally to retest 88.46 high. A break below 79.63 support is needed to invalidate this view or otherwise, short term outlook in dollar will remain bullish, even though strength will mainly be manifested against Euro and Yen in near term.

Elsewhere, EUR/GBP should have made a short term top at 0.9798 with bearish divergence condition in 4 hours MACD and RSI. Sustained trading below the short term rising trend line (now at 0.9511) will confirm that case that rise from 0.8234 has completed and bring deeper correction to 50% retracement of 0.8234 to 0.9798 at 0.9016, which is close to 0.9 psychological level before resuming the up trend. On the upside, a break above 0.9799 high is now needed to confirm upside momentum, otherwise, short term risk will remain on the downside.

The Week Ahead

As mentioned above, the development of risk appetite/risk aversion will be the main focus this week. Having said that attention will be paid to a number of important economic data out of US including ISM non-manufacturing index and Non-Farm Payrolls. Markets expect some mild improvement in the services sector with the ISM index up from 33.0 to 34.3 in Dec. Job markets are expected to show further deterioration by another -475k contraction with unemployment rate climbing further from 6.7% to 6.9%. However, the most important thing to note is markets' reaction as both stocks and dollar seem to be quite indifferent to poor economic data recently. FOMC minutes will also be released on Tuesday.

From Eurozone, main focus will be on Dec Flash HICP which is expected to drop further from 2.1% to 1.8%, below ECB's target of 2%. Trichet has made it clear that the the 'sole' needle of the compass of ECB is price stability and by that it means HICP inflation below 2%, close to 2%. Markets opinion on whether ECB will cut rates in Jan is divided even though Trichet has signaled a pause. Other data include finalized services PMI, unemployment and retail sales.

BoE is widely expected to cut rates again by 50bps to 1.50% on Thursday. Other data to focus on include Services PMI, manufacturing production and industrial production as well as PPI.

Other key events include Swiss SVME PMI, CPI , Canadian PPI, Ivey PMI as well as job report.

GBP/JPY Weekly Outlook

GBP/JPY dived further to as low as 129.71, just inch above mentioned key long term support of 129.32 and rebounded strongly. Break of short term trend line resistance is taken as the first indication that fall from 165.02 has completed. Also, considering that we have been expecting such decline to conclude at 129.32 level, short term outlook is turned neutral for the moment. On the upside, break of 134.35 resistance will add much credence to the case that a short term bottom is at least formed. Further break of 139.19 resistance will confirm this case and bring strong rise towards 165.02 key medium term resistance. On the downside, while another fall cannot be ruled out, break of mentioned 128.92/129.32 support zone is now needed to confirm downside momentum. Otherwise, short term outlook remains neutral at worst.

In the bigger picture, as mentioned before, the fall from 215.87 is treated as a five wave sequence (184.47, 197.42, 139.02, 165.02) and the fifth is expected to be contained by mentioned 128.92/129.32 support zone ( 61.8% projection of 197.42 to 139.02 from 165.02 at 128.92). We have noted that the diagonal triangle (or falling wedge) look of the fall from 165.02 as well as bullish convergence conditions in daily MACD and RSI are both supporting this case. Break of 139.19 resistance will confirm this case and strong rebound should then be seen towards first medium term resistance at 165.02 at least. On the downside, however, sustained break of 128.92/129.32 will pave the way to 100% projection target at 106.62.

In the longer term picture, as discussed before, the corrective nature of the rise from 129.32 (95 low) to 251.09 suggests that it's merely a consolidation in the longer term down trend. The strength of the decline from 251.09 is also consistent with the view that it's resumption of the multi-decade down trend. Such decline should develop into a five wave structure. Note that the decline from 215.87 is not treated as the fifth wave, but the third wave inside the third wave that started at 241.35. Hence, while a medium term bottom is expected around 129.32 low, the down trend is still expected to continue after completing the anticipated consolidation.