Japanese strengthened broadly last week on the back of risk aversion as Nikkei dropped through October's low of 9628 to close at 9497. Dollar lagged behind initial as US stocks extended rally and gold marched further to new record high of 1153. Nevertheless, the greenback caught up towards the end of the week on stock and gold pared earlier gains. Commodity currencies are hardest hit, with NZD/JPY, AUD/JPY and CAD/JPY dropped -3.58%, -2.89% and -2.68% respectively which NZD/USD, AUD/USD also dropped over -2%. Nevertheless, while Euro also weakened against dollar it's relatively resilient as supported by strength in commodity crosses as well as the sharp rally in EUR/GBP.
The correlation between stocks, commodities will continue to play an important role in the currency markets. Yen is expected to remain firm in general as supported by further weakness in Nikkei as the head and shoulder top reversal pattern is confirmed. However, as mentioned before, dollar fate will continue to be dependent on the development in Gold. While some upside is in favor in the greenback, it's strength would likely be limited before Gold tops.
The Organization for Economic Cooperation and Development raised growth forecast for 2010 from 0.7% to 1.9%. US growth is projected to be 2.5%, up from 0.9%. Eurozone growth is expected to be 0.9% versus 0%. Japan growth is forecast to be 1.8%, up from 0.7%. For 2011, global growth is projected to be 2.5%. OECD acting chief economist Jorgen Elmeskov said there are now numbers that support a recovery in motion. Nevertheless, the optimism was not transferred to positive investor sentiments.
Fed chairman Bernanke said last week that significant economic challenges remain and reiterated that rates will be kept exceptionally low for an extended period. Nevertheless, traders were somewhat more nervous about Bernanke's comment that Fed's policy will ensure that dollar is strong and dollar's recent fall basically halted since then.
ECB President Trichet said last week that ECB could soon be pulling off some of its extraordinary measures to ensure they don't cause an inflation threat even though it's still early to say that the crisis is over. The comment added some pressure to stock markets towards the end of the week and helped lifted the greenback and Japanese yen.
The BOE minutes for November's meeting indicated that although the MPC members voted unanimously to keep the policy rate at 0.5%, there were 3 different opinions regarding extension of the asset purchase program. Moreover, the minutes also mentioned possibility of lowering remuneration rate on reserve as a means to ease monetary conditions. Sterling was sharply lower against dollar, euro and yen as markets are also deeply concerned with the ballooning budget deficit of UK.
BoJ left rates unchanged at 0.1% as widely expected. The bank raised economic assessment and said that recovery is picking up due to various policy measures taken at home and abroad. Nevertheless, a self-sustaining recovery remains weak. Nevertheless, Japan Deputy Prime Minister Naoto Kan urged BoJ to extend support on monetary policy front in overcoming deflation or falling prices could pose risks to sustainable recovery.
RBA Minutes said that further gradual adjustment in the cash rate would most likely be appropriate over time, though the pace of the adjustment remained an open question. The minutes raised questions on whether RBA would hike again in December. And there are speculations that even if RBA does continue the tightening cycle in December, there would be a pause in Q1. Aussie's rally halted after the minutes and weakened sharply on risk aversion towards the end of the weak.
Looking at the charts, one important development to note is that Nikkei fell sharply to as low as 9497 last week and moved further away from the head and shoulder neckline support. As mentioned before, medium term rise from 7021 should have completed at 10767 already and further decline should at least be seen in near term for a test on 9050 support. Also, we're looking at the prospect of further fall to retest 7021 level in medium term. Such development should provide further boost to Japanese yen. Even though yen crosses, with the exception of USD/JPY, are still held above November's low, last week's sharp fall does support the case that fall from October's high is resuming. We'd anticipate break deeper decline in yen crosses in general in the coming few weeks.
At this point, there is no confirmation of topping in US stocks yet even though some pull back was seen last week after making another 2009 high. However, as mentioned before, we're anticipating strong resistance in DOW in the current resistance zone, 100% projection of 6469 to 8877 from 8093 at 10501 and 50% retracement of 14198 to 6469 at 10334. Hence some pull back should at least be seen for test on 55 days EMA at 9878.
Outlook in gold remains bullish for the moment and recent up trend could still be in progress towards 100% projection of 681 to 1007.7 from 931.3 at 1258. A break below 1127 near term support is needed to be the first signal of topping.
Dollar index's break of 75.76 resistance last week indicates that fall from 76.82 has completed and serves as the first indication that it has bottomed out. Focus is now on 76.82 resistance and a firm break there will affirm the bullish case by completing a double bottom reversal pattern (74.94, 74.68). Note again that such development will indicate that medium term fall from 89.62 has completed the five wave sequence already and will pave the way for strong rebound to 78.33/81.47 resistance zone at least. However, there is not confirmation of the bullish case yet. In particular, note that price actions in EUR/USD and USD/CHF are not convincingly supporting the case of reversal yet. Meanwhile, dollar index is now still limited well below 76.82. It's believed that developments in gold and US stocks will be crucial to whether dollar can finally reverse and stage a noticeable rebound.
The Week Ahead
Liquidity will likely be much reduced considering there holidays in Japan and US this week. But volatility will probably increase much considering the string of market moving events in a relatively thinner market. GDP reports from US and UK will be two of the main events. In addition, markets will pay close attention to FOMC minutes and the string of data from Japan towards the end of the week.
- Monday: Eurozone PMI manufacturing and services; Canadian retail sales; US existing home sales
- Tuesday: Germany GDP, Ifo; US GDP, consumer confidence, house price index, FOMC minutes.
- Wednesday: Japan trade balance; German Gfk consumer sentiment; UK GDP; US durable goods, personal income and spending, new homes sales
- Thursday: German CPI, Eurozone M3
- Friday: Japan CPI, unemployment, retail sales; Eurozone confidence indicators'; Swiss KOF
GBP/JPY Weekly Outlook
GBP/JPY fell sharply to as low as 146.43 last week, just inch above 146.36 support. The development is inline with the view that rebound from 139.72 has completed at 153.21 already and fall from there is still in progress. Initial bias will remain on the downside this week and break of 146.36 will bring fall resumption towards 144.51 support first and then 139.69 support next. On the upside, above 148.38 minor resistance will turn intraday bias neutral first and bring consolidation. But recovery is expected to be limited well below 150.30 resistance and bring fall resumption.
In the bigger picture, the bearish outlook remains unchanged. That is, 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 after completing the rebound from 139.69. We'll hold on to the bearish view as long as 61.8% retracement of 163.05 to 136.69 at 154.12 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.