The Japanese yen staged a strong rally last week on risk aversion as disappointing data from US triggered much concern on the underlying strength of recovery. Continuous worry on Greece's fiscal problem also held investors back from riskier assets in general. However, in spite of all the problems in Greece and talk of Spain, and new record low in speculative short positions, Euro was rather resilient last week, as especially in commodity currency crosses. On the other hand, selling focus seems to have turned to sterling which dropped through recent lows against major currencies, on concern of even worse fiscal situation and economic outlook in UK. Dollar attempted to resume recent rise but failed as pressured by recovery in Euro as well as resilience in commodities. We'd expect some more consolidation in the greenback in near term but overall develop still favors more upside in dollar going ahead.
Last week's CFTC report showed speculative accounts pushed Euro shorts into new record of -71,623 contracts on February 23, comparing to -59,422 contracts the week before. The February 23 net euro position was in contrast to the record net euro long of +119,538 contracts seen May 15, 2007.
The Fed Chairman Ben Bernanke's semiannual testimony was inline with market expectation. While the Chairman acknowledged improvement in economic condition, he noted the job market remains quite weak while inflationary pressure will continue to stay subdued. Concerning monetary policy, Bernanke repeated that 'economic conditions -including low rates of resource utilization, subdued inflation trends, and stable inflation expectations -are likely to warrant exceptionally low levels of the federal funds rate for an extended period'.
So what is the meaning of 'extended period'? Chicago Fed Evans' comment might give some light on this topic. Evans said that an extended period of time could be defined as the next six months, or about the time it takes for three or four meetings of the central bank's rate-setting FOMC. In that case, we could be looking at rate hike from Fed in late Q3, early Q4, which is inline with some market expectations. Kansas City Fed Hoenig said that he'd want rates to go back to a more normal level sooner rather than later.
Economic data fro US were generally very poor. Conference Board consumer confidence dropped nearly 10 points to 46 in February, the lowest reading since last april. Jobless claims rose sharply to 496k which raised the odds that it might surpass the 500k market again in near term. Both data argues that recovery in the job market might be losing momentum once again. Durable goods orders rose 3.0% in January but that was largely due to aircraft orders. Ex-transport orders have indeed dropped -0.6%. Housing data were also poor with new home sales dropped to a record low of 309k annualized rate while existing home sales dropped sharply to 5.05M annualized rate in January, a seven month low. Q4 GDP was received up to 5.9% annualized but caught little attention.
Greece remained center of focus in Eurozone news. Standard & Poor's said it may cut Greece's rating again by the end of March on doubt of the country's ability to cut down the huge budget deficit due to weakness in the economy as well as political opposition. Moody's Investors Service also said that sovereign debt rating of Greece would be cut within months if it appears there are significant deviations from the plan to cut fiscal deficit. Nevertheless, there were rumors that Germany is considering whether to buy Greek bonds through state-owned bank KfW Group, easing fears that Greece will have trouble tapping the market for much-needed financial support, including a planned bond offering next week.
Looking at the charts, while Euro managed to stay above recent low of 1.3443 against dollar and recovered against Australian and Canadian Dollar, Sterling's weakness persisted. GBP/USD dropped through recent low and dived to as low as 1.5151 while GBP/JPY also resumed down trend to as low as 134.64. EUR/GBP's strong break of 0.8841 resistance and sustain trading above the near term trend line resistance suggests that the tide has turned and Sterling will underperform Euro for at least a while.
GBP/CAD's down trend resumed after brief recovery and we'd expect more downside going forward to 100% projection of 1.9299 to 1.6233 from 1.7890 at 1.4824 next.
GBP/AUD also resumed the down trend after brief recovery and further fall is still expected to cluster level at 61.8% projection of 2.0979 to 1.7326 from 1.8276 at 1.6018, 100% projection of 2.7092 to 2.0231 from 2.2877 at 1.6016, which are also close to 1.6 psychological level.
GBP/CHF's sharp fall last week also suggests that sideway consolidation from 1.6115 has finished and we should see a break of 1.6115 support in near term to resume the whole fall from 1.8111 to 100 projection of 1.8111 to 1.6115 from 1.7110 at 1.5114, which is close to 2008 low of 1.5111.
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Development in commodities will continue to be a major factor in that of dollar in general. The greenback has so far struggled to break out of range against Canadian Dollar and Australian dollar thanks to resilience in crude oil and gold. Crude oil is holding comfortably above 55 days EMA at 76.69 in spite of last week's sharp retreat. The rise from 69.50 is still in favor to extend further towards 83.95 high.
On the other hand, it's possibly that Gold's correction from 1227.5 is finished at 1044.5 after touching 61.8% retracement of 931.3 to 1227.5 at 1044.4. A break of 1131.5 resistance will solidify this case and bring retest of 1227.5 high.
Strength in commodities will likely continue to limit dollar's upside in near term. Dollar index's failure below 81.34 last week suggests that more sideway consolidation could be seen first and deeper retreat cannot be ruled out. But after all, we'd expect strong support from 79.56 cluster support holds (38.2% retracement of 76.60 to 81.34 at 79.52) to conclude the consolidation and bring rally resumption. Break of 81.34 will confirm that whole rise from 74.19 has resumed for next cluster region at 82.35/83.72 (161.8% projection of 71.49 to 78.45 from 76.60 at 82.35, 61.8% retracement of 89.62 to 74.19 at 83.72). However, a break of 79.56 will bring deeper correction towards 78.45 resistance turned support first before staging another rise.
The Week Ahead
It will be an extremely busy week ahead with loads of important data plus four central bank meetings. We're not expecting much from BoC, BoE and ECB. But opinion on whether RBA will hike is divided and watch out for volatile price actions post announcement. The main focus would indeed be on economic data from US and UK. Disappointment from heavy weight data from US like the ISM indices as well as non-farm payroll would likely strength the current broad based rally of Japanese yen. meanwhile, disappointing data from UK will solidify the weakness in sterling. Another major focus will be on whether Euro will end the short squeeze correction this week to resume recent down trend against dollar.
- Monday: Swiss SVME PMI; Eurozone manufacturing PMI final, unemployment rate; UK manufacturing PMI, Canada GDP, RMPI and IPPI; US Personal income and spending, ISM manufacturing
- Tuesday: Japan unemployment rate; Australia retail sales, RBA rate decision; Swiss GDP; Eurozone CPI estimate; BoC rate decision
- Wednesday: Australia GDP; Eurozone PMI services final, retail sales; UK services PMI; US ADP job report, ISM non-manufacturing, Fed's Beige Book
- Thursday: Australia trade balance; Eurozone GDP revision; BoE rate decision; ECB rate decision; Canada building permits, Ivey PMI; US pending home sales, factory orders
- Friday: UK PPI; US Non-farm payroll
USD/JPY Weekly Outlook
USD/JPY sharp fall from 92.14 last week indicates that rebound from 88.57 is completed and revived the case that whole decline from 93.74 is still in progress. Intraday bias remains on the downside this week for 88.57first. Break will confirm this case and target 87.36 support next. Break there will also confirm that whole from 84.81 was finished and the larger down trend would likely be resuming in such case. On the upside, above 89.50 minor resistance will turn intraday bias neutral and bring recovery. But another fall is still in favor as long as 90.35 resistance holds.
In the bigger picture, note that USD/JPY is now back below 55 days EMA (now at 90.44) and continue to stay below 55 weeks EMA (now at 93.42). The bearish case that longer term down trend from 124.13 is still in force remains in favor. Break of 87.36 support will solidify this case and target a new low below 84.81, possibly to 1995 low of 79.5. On the upside, note that decisive break of 93.74 resistance will also have 55 weeks EMA (now at 93.42) firmly taken out too and that will be an important signal that whole long term down trend from 2007 high of 124.13 is over. In such case, focus will turn to 101.43 resistance for confirmation.
In the long term picture, downside momentum is clearly diminishing with monthly MACD back above signal line. However, there is no confirmation of long term reversal yet. Down trend from 124.13 might still continue as long as 101.43 resistance holds and might extend further towards 79.75. Nevertheless, break of 101.43 resistance will break the lower high lower low pattern and will suggest that a long term bottom is in place. The trend should then reversed to continue the sideway pattern that started at 79.75 in 1995.