Weekly Review and Outlook
Yen Could Extend Rally after Post Dubai Stabilization
The news that Dubai world sought to delay debt payments shocked the financial world last week and triggered massive flight to safety. Whether that is a significant turning point in global recovery or just an excuses for an overdue correction in risk sentiment is up for debate. But after all, the technical development in major financial markets did had some significant break through. We're talking about massive rally in Japanese yen which hit 14 year high against dollar and broad based fall in yen crosses. Dollar benefited from broad based selling in yen crosses and rebounded against major currencies except the yen after dollar index breached 74.31 support briefly. Asia stocks were hit hard with Nikkei dropped to as low as 9081 to further confirm medium term reversal. US stocks were relatively resilient as markets stabilized on Friday but the break of near term support in DOW and S&P 500 both indicated near term topping at least. While yen major consolidates initially this week as Asian markets recover, we'd extend further rally ahead, unless there is confirmed intervention from BoJ.
Regarding the strength in Japanese yen, we're talking about -4.47% fall in NZD/JPY, -3.77% fall in AUD/JPY, -2.91 fall in GBP/JPY and -2.84% fall in USD/JPY respectively. While there were some speculations of intervention, there was no confirmation so far. Japan Finance Minister Fujii described recent relentless rise in yen as one-sided and being harmful to the export-led economy of Japan. However, Fujii didn't indicate a return to intervention and just said that he may contact US and European officials and expressed his support for a G7 joint statement on currencies.
While dollar also managed to follow yen strength and rebounded last week, the strength in the greenback was somewhat limited by resilient in gold and crude oil. Gold dropped from new record high of 1195 to as low as 1130 but managed to pared much of the losses and rebounded strongly to close at 1174. Crude oil also dipped to as low as 72.39 but again managed to recovered back to price range to close at 76.05. While dollar managed to rebound further against Sterling, Aussie and even the Canadian dollar, the greenback is still kept below near term resistance against Euro and Swissy.
Fed minutes released last week showed policy voted unanimously for keeping the interest rate low at 0-0.25% and scaling back its purchase of agency debt from $200B to $175B. In the minutes, policymakers also revised up economic growth forecast while trimming unemployment rate outlook. Fed also reiterated the stance that rates will be kept near zero for an extended period as long as inflation expectations are stable and unemployment fails to decline. More importantly, the minutes described recent dollar depreciation as order indicating policy makers are willing to tolerate a weaker US currency.
There are also some other important developments to note. Firstly, ECB officials are believed to be debating whether to put an adjustable interest rate on December's 12-month loans and some of the market participants interpreted that as another signal of stimulus exit in 2010. Secondly, EUR/CHF dipped to as low as 1.5010 last week but rebounded strongly on SNB intervention. It looks like SNB is still determined to defend the 1.5 handle in EUR/CHF. Thirdly, Canadian dollar was boosted last week but news that Russian central bank will add the currency to its reserves and would probably be the more resilient commodity currency.
Looking at the charts, DOW hit some resistance at zone of 10334 and 10501, which are 50% retracement of 14198 to 6469 and 100% projection of 6469 to 8877 from 9093. While it's still early too call for medium term reversal, we'd expect some more pull back at least to 55 days EMA of 9950 in near term.
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Another point to note is the sharply rise in the volatility of VIX which serves as an indication of indecisive among investors. This could be an indication of reversal.
The sharp fall in Nikkei was incline with our expectation as a head and shoulder top pattern was completed already. We're looking at further fall beyond 9050 level towards 7021 in near term, which should provide support to the Japanese yen.
Gold's powerful rally to 1195 argues that it should be a wave three in a five wave sequence. Hence, we'd continue to expect resilience in gold that should keep any pull back well above 1072 resistance turned support. Gold's up trend should still be in force to 1258 projection target and hence, would continue to limit dollar's rebound.
Based on the above, we'd expect yen to extend recent rally against other major currencies with support from risk aversion and weakness in Nikkei. In case of reversal in US stocks, the greenback will likely be lifted too but after all, there won't be confirmation of massive reversal in dollar until gold tops.
Looking at the dollar index, while the rebound from 74.19 was strong, there is no clearly indication of reversal yet as 75.88 resistance remains intact. Another fall to below 74.19 could still be seen. However note that, dollar index would likely continue to lose downside momentum and stays inside the falling channel even in case of another fall. That's because conflicting intermarket forces would like be exerted on the greenback, risk aversion and strength in gold and thus would somehow limit downside momentum. Nevertheless, break of 75.88 resistance will be an important indication that fall from 89.62 has completed and will turn focus to 76.82 resistance for confirmation.
The Week ahead
A number of heavy weight events are scheduled this week. Two central banks are scheduled to meet. Markets generally expects RBA to raise rate but Aussie would be vulnerable in case of disappoint or if RBA issue a neutral statement. ECB will leave rates unchanged at 1.00% without a doubt and focus will remain on revised projections from ECB staff as well as whether ECB will add a spread at the December 12-month auction. From US, there will be ISM indices, ADP which leads to Non-Farm Payroll report on Friday. Bernanke will also testify on Thursday.
- Monday: Eurozone CPI; Canadian GDP
- Tuesday: RBA rate decision; Swiss GDP, SVME PMI; UK Manufacturing PMI; Eurozone unemployment rate; US ISM Manufacturing
- Wednesday: US ADP employment, Beige Book
- Thursday: Australia retail sales; UK Services PMI; Eurozone GDP, ECB rate decision; US ISM Non-manufacturing, Bernanke Testimony
- Friday: Swiss CPI; Canadian Job, Ivey PMI; US Non-Farm Payroll
GBP/JPY Weekly Outlook
GBP/JPY's sharp fall last week confirmed our bearish view that fall from 163.05 is still in progress and has resumed. Some support is seen after hitting 139.69 support and initial bias is neutral this week for some sideway consolidation. Nevertheless, recovery should be limited below 146.30 resistance and bring fall resumption. Below 139..2 will target 100% projection of 163.05 to 139.69 from 153.21 at 129.85 next.
In the bigger picture, medium term rebound from 118.18, which is a correction to the long term down trend from 07 high of 251.90, has completed with a double top reversal pattern (162.56, 163.05). Fall from 163.05 is tentatively treated as resumption of the long term down trend and should target a new low below 118.81. The bearish outlook will remains unchanged as long as 153.21 resistance holds.
In the longer term picture, fall from 251.09 is treated as resumption of multi decade down trend. Note that the fall from 215.87 is not treated as the fifth wave, but the third wave inside the third wave that started at 241.35. On resumption, the down trend will extend to 61.8% projection of 215.87 to 118.81 from 163.05 at 103.03 next, which is close to 100 psychological support.