Dollar staged a strong rebound towards the end of the week with support from some solid economic data as well as sharp surge in treasury yield on Friday. The headline NFP number of 36k growth was a disappointment, but markets focus were on the unemployment rate, which dipped sharply from 9.4% to 9.0%, the lowest level since April 2009. Indeed, the drop in unemployment from November's 9.8% to January's 9.0% was the biggest two-month decline since 1958.
The unemployment rate alone won't be enough to hold Fed back from executing the $600b QE2 program. Fed Chairman Bernanke has made it clearly that a sustained period of stronger job creation is needed before confirming firm establishment of recovery. But the sharp fall in unemployment rate does provide some food for thoughts and debates in the upcoming FOMC meetings.
Other data from US were also positive in general. ISM manufacturing index rose more than expected to 60.8 in January, hitting the highest level since 2004. ISM services index also beat expectation and rose to 59.4 in January, the strongest reading since 2005. One important development to note was the sharp rally in treasury yields on Friday. 10-yeidl yeidl jumped to highest level since last May while 30 year yield also surged to highes level since last April. Such development also provided strong support to the greenback.
Euro, on the other hand, was hammered down after less hawkish than expected ECB press conference. As expected, the ECB left the main refinancing rate unchanged at 1% as economic developments since the last meeting suggested interest rates remained 'appropriate'. While energy and commodity prices will continue to put upward pressure on overall inflation in the short-term, inflationary pressures over the medium to long term should remain contained. The euro fell after the announcement as investors were disappointed that the central bank did not sound more hawkish and suggested that inflation risks remained 'broadly-balanced'. Euro's strength has been driven by speculations that the ECB may signal tightening earlier than previously expected as CPI has overshot the central bank's target in recent months. More in ECB Kept Policy Rate at 1%, Remained Dovish Although Inflation Overshot.
Meanwhile, there were sharp disagreements among European leaders at the summit over the weekend over a German-led proposal, backed by France, on boosting competitiveness of weaker Eurozone countries. Germany's propsal called for closer co-ordination of tax, wage and pension policies, and is viewed as the price for an agreement to expand a bailout fund.
Elswhere, Sterling was resislient as supported by strong PMI manufacutring and services numbers. Canadian dollar also managed to strengthen with support of solid job market data. Aussie was also resilient as RBA signaled in its monetary policy statement that the unprecedented flood in December and January would not dampened the buoyant outlook for the economy.
Dollar index dipped to 76.88 last week but subsequent strong rebound indicates that a short term bottom is formed. We'd expect the index to stay above 76.88 for a while. Focus will now be on 78.78 support turned resiteance. As long as this level holds, we'd still favor the case that rebound from 75.63 is finished at 81.44 and expect some another fall to retest this low. However, sustained break of 78.78 will indicate that price actions from 81.44 are likely just a three wave consolidation pattern only and has possibly compelted at 76.88. In that case, rise from 75.63 would be resuming for another high above 81.44.
The benchmark 10 year yield finally had a decisive break out of recent range last week. Daily MACD is back above signal line, suggesting build up of momentum. We'd now expect a teset on 4.0 psychological level next in near term. And in that case, dollar would likely be lifted agains other major currencies with dollar index back nearer to 78.78 resisteance level.
Another development is the turn of fortune in Euro in crosses. EUR/AUD's steep decline and break of 1.3346 support indicates that reound from 1.2925 was completed at 1.3874 already. We're now bearish in the cross for a new low below 1.2925 for extending the long term down trend from 2008 high of 2.1127.
EUR/CAD's sharp fall last week dragged daily MACD below signal line, suggesting that rebound from 1.2775 is completed at 1.3776. We'd favor more downside ahead for 1.2775 first and break will extend fall from 1.4342 towards 1.2430/49 key support zone.
The Week Ahead
US economic data will take a back seat this week and main focus will be on Bernanke's testimony on economic, employment and budgetary issues to House Budget Committee on February 9. BoE rate decision will be the main focus in view of strong January inflation and surprised contract in Q4 GDP. Below are some economic data to watch for in the coming week.
- Monday: Australia retail sales; Japan leading indicators; Eurozone Sentix investor confidence, German factory orders; Canada building permits
- Tuesday: UK RICS House price balance; Swiss unemployment; German industrial production; Canada housing starts
- Wednesday: UK trade balance; Bernanke testimony
- Thursday: Australia employment; Swiss CPI; UK Manufacutring and industrial production; BoE rate decision
- Friday: UK PPI; Canada trade balance; US trade balance
USD/CHF Weekly Outlook
After edging lower to 0.9329 last week, USD/CHF staged a strong rebound to close at 0.9549. The break of the near term falling channel suggests that choppy fall from 0.9782 has completed at 0.9329 already. More important, the structure suggests that it's merely a correction to rise from 0.9300. Initial bias is on the upside this week for 0.9686 resistance first. Break will argue that rebound from 0.9300 is resuming for 1.0065 key resistance. On the downside, though, below 0/9465 minor support will flip intraday bias back to the downside for 0.9300/9329 support zone instead.
In the bigger picture, questions remain on whether USD/CHF has made a medium term bottom at 0.9300 after hitting 100% projection of 1.2296 to 0.9916 from 1.1729. Bullish convergence condition in 4 daily MACD does suggest so but the failure to sustain above 55 days EMA argues otherwise. Focus will be on 0.9782 resistance. Break there will now strongly suggest that 0.9300 is a medium term bottom and strong rally should be seen through 1.0065 resistance. However, break of 0.9329 will dampen the bullish case and bring down trend resume towards 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.