The Japanese yen weakened broadly last week as solid economic data from China boosted investors' optimism for recovery and risk appetite. S&P 500 broke January's high of 1150 briefly before closing 1149.99. Nikkei also managed to rise 382 pts to close at 10751. There were also additional pressure to yen from speculation that Bank of Japan will expand monetary easing in the week's meeting. Swiss franc was surprisingly strong after event risk of Swiss National Bank meeting past. Canadian dollar also surged towards the end of the week on solid employment data from US.
Dollar dropped broadly last week on improving risk appetite with dollar index closed below 80 level again. The greenback is now near to a critical make or break level technically (to be discussed below). We're still anticipating dollar to bottom soon to complete recent consolidations, considering that crude oil is losing much upside momentum after breaking 80 level while gold is also extending recent fall from 1145.8. CFTC report showed that dollar's net long position fell from $5.58b to $3.99b in the week ended March 9 but Euro shorts rose to another record of 74551 contracts. However, we'll pay very close attention to 79.56 level in dollar index and strong break there will possibly trigger much sharper selloff in the greenback.
There were speculations that BoJ will discuss additional monetary easing in this week's two-day policy board meeting to fight against deflation. The main proposal under considering would be an expansion of the banks' funds-supply operation, which had lent close to JPY 10T by the end of February. It's believed that BoJ is considering doubling the level to JPY 20T.
SNB left the 3-month LIBOR target range unchanged at 0.00-0.75% and intended to keep the lower part of the target range at around 0.25%. The SNB also reiterated the stance to act 'decisively to prevent an excessive appreciation of the Swiss franc against the euro'. In light of recent economic recovery, the central bank also revised up its real GDP growth and inflation forecasts. Swiss franc built up momentum after the meeting gave no surprise to the markets. EUR/CHF dived to as low as 1.4559 on Friday and is set to break February's pre-intervention low of 1.4577 this week.
Canadian dollar also finally broke out of five month range against dollar on solid employment report from Canada. Job growth exceeded expectation by rising 20.9k in February while unemployment rate also dropped to 8.2%. Canadian dollar is set to march to parity against dollar.
RBNZ left the OCR unchanged at 2.5% as widely expected and reiterated the comment on starting to remove policy stimulus around the middle of 2010. However, RBNZ sounded a bit dovish by saying that growth is expected to be subdued relative to previous recoveries, as households are still cautious, credit growth remaining subdued, and business spending is weak. There were expectations that RBNZ would hike by 25bps in June and every meeting thereafter until the end of the year. But traders scaled back bets the chance of any hike earlier than June and bet that rises after that would be gradual, with one or two hikes thereafter priced out.
Looking at the charts, dollar index dropped to as low as 79.69 last week. Price actions from 81.34 are still treated as sideway consolidation in the larger rally only and we're expecting strong support from 79.56 cluster support (38.2% retracement of 76.60 to 81.34 at 79.52) and finally bring rally resumption. However, note that decisive break of 79.56 will give two very bearish signals. Firstly, dollar index will be sustaining below the medium term trend line that start from 2009 low of 74.19. Secondly, dollar index could have completed a head and shoulder top reversal pattern (ls: 80.75, h: 81.34, rs: 80.88). In such case we would see much deeper fall to 76.60/78.45 support zone at least.
In case of more weakness in dollar and yen, commodity currencies are expected to continue to outperform European majors. And as discussed before, we'd still be favoring Canadian dollar. Technically, AUD/CAD's rebound above 0.9197 level has been weaker and weaker. We'd continue to anticipate an eventual break of 0.9197 to resume the fall from 0.9912 towards t 100% projection of 0.9912 to 0.9197 from 0.9629 at 0.8914, which is close to 38.2% retracement of 0.7164 to 0.9912 at 0.8862.
The Week Ahead
Focus this week will be on whether dollar could finally find some support, how far yen would weaken and on whether SNB would step in to intervene again. A number of important economic data from US will be released which would impact investor's appetite. Yen will likely remain pressured ahead of BoJ meeting as speculations on more monetary easing continues but it should be the post meeting reactions that would define the trend. Sterling somewhat lagged behind other major currencies in the rebound against dollar and pound traders will look into this week's BoE minutes, job report and money supply data on the chance for further easing from BoE. Canadian dollar need to have strong CPI and retail sales report to enforce its trend towards parity against dollar.
- Monday: Swiss PPI; US Empire state manufacturing, TIC capital flow, industrial production, NAHB housing market index
- Tuesday: RBA Minutes; German ZEW, Eurozone CPI; US import price, new residential construction; FOMC rate decision
- Wednesday: BoJ rate decision; UK job report, BoE Minutes; US PPI
- Thursday: UK M4 money supply; Swiss ZEW; US CPI, current account, Philly Fed index, leading indicators
- Friday: German PPI; Canada CPI, retail sales
EUR/CHF Weekly Outlook
EUR/CHF finally built up some momentum last week and dived to as low as 1.4559 after SNB meeting. Initial bias remains on the downside this week and break of 1.4557 will confirm that whole fall from 1.5880 has resumed and should target 1.4315 low next. On the upside, above 1.4630 will turn intraday bias neutral and bring consolidations. But recovery attempt should be limited by 1.4820 resistance and bring further decline.
In the bigger picture, whole decline form 1.5880 is still in progress and should target a retest of 1.4315 low eventually. Some interim rebounds are possibly due to SNB intervention. But after all, sustained break of 1.5 psychological level is needed to confirm that the cross has bottomed. Otherwise, outlook will remain bearish and we'd still favor more decline even in case of strong rebound.
In the long term picture, the corrective three wave structure of the rise from 1.4391 to 1.6827 is arguing that fall from 1.6827 is resumption of long term down trend from 1.8234. EUR/CHF's failure to take out 55 weeks EMA suggests that whole fall from 1.6827 is still in progress. Sustained break of 1.4577 support will affirm this case and bring another low below 1.4315 to resume the long term down trend.