Action Insight Weekly Review and Outlook
Dollar Made a Short Term Top, Focus Turns to FOMC
The most important development in the forex markets last week was the late pull back in both the dollar and the yen. Markets seemed to be confused by the impact of news events, from the bailout of Fannie Mae and Freddie Mac to the sale of Lehman Brothers. There were talk of return of risk appetite which may have a point considering that NZD/JPY ended the week nearly flat despite a surprised 50bps cut from RBNZ. However, considering DOW is still limited well below last month's high of 11867, this case of improving investors sentiment is not convincingly strong. There were also increased speculation of a rate cut from Fed by year end. Indeed, interest rate futures are pricing in 40% chance of a 25bps cut from Fed by December, up from nearly zero chance last month. But after all, it's the relative rates expectation that really important and there is still not change in the view that major economies outside the US will slow in a faster pace and thus forcing respective central banks to cut further too.
So what's being the pull back in dollar and yen? It's believed that it's profit taking on uncertain outlook ahead of key levels that triggered the late sell off. As mentioned during the week, Dollar Index hit the psychological resistance at 80 but failed to sustain above. EUR/USD was just too close to an important medium term support at 1.3851. GBP/USD was close to long term fibonacci support of 1.7421. AUSD/USD was supported by 0.8 level. In addition to that, oil has just drawn support from 100 level which gold is also supported by key medium term support at 732. Also, yen crosses rebounded on profit taking on the possible positive effect of Lehman's sale on the stock markets.
However, after all, the medium term outlook were unchanged. While some pull back in the greenback and yen might be see in near term, the overall medium term up trends are both expected to resume after finishing the correction.
Looking ahead, FOMC rate decision and statement will take center stage this week. Some key economic data will also be released including CPI inflation from US, Eurozone and UK; housing market data from US; Germany ZEW; BoE minutes, UK employment and retail sales. However, intermarket relationship will remain dominant to the development in the Forex markets in near term.
On the data front, US headline sales unexpectedly dropped for the second consecutive month by -0.3% in Aug versus expectation of 0.2% growth. Jul's data was also revised down from -0.1% to -0.5%. Ex auto sales dropped sharply by -0.7% versus expectation of -0.2%. Headline PPI dropped -0.9% versus consensus of -0.5%. Yoy rate retreated back from 9.8% to 9.6%. Core PPI rose 0.2% with yoy rate up from 3.5% to 3.6%. Trade deficit surged sharply to -62.2b in Jul, back above -60b level on stronger rise in imports by 3.9%. Export rose 3.3%. Import prices dropped much more than expected by -3.7% mom in Aug, dragging yoy rate to 16%. Pending home sales dropped more than expected by -3.2% mom in Jul. Wholesale inventories rose more than expected by 1.4% in Jul. Jobless claims remain elevated at 445k, staying above the four week moving average which climbed from 439k to 440k.
EU Commission revised growth forecasts in Eurozone down from 1.7% to 1.3% this year. Inflation forecasts was up from 3.6% to 3.1%. Industrial production dropped more than expected by -0.3% in Jul, dragging yoy rate sharply lower to -1.7%. Q2 employment grew 0.2% qoq, 1.2% yoy. Germany trade surplus came in much narrower than expected at 13.9b on much stronger than expected rise in imports by 7.4% mom. Exports dropped -1.7% mom.
In the Treasury Committee Hearing, BoE Governor King said that prospect for growth has deteriorated and sharp reduction in money and credit is bearing down the UK economy. King stress that the bank "will not and cannot solve the shortage of funding in finance bank lending" over the long term. The know dove Blanchflower said that growth prospect have deteriorated in the past month and warn that there will be a large increase on unemployment.
National Institute for Economic and Social Research said that GDP in the three months through August will drop 0.2%, first contraction in at least a decade. UK PPI was weaker than expected. Input PPI dropped from 29.3% yoy to 26.0%, output dropped from 10.3% to 9.7%. Core PPI dropped from 6.8% yoy to 6.4% yoy. Industrial production dropped more than expected by -0.4% mom, -1.9% yoy in Jul. Manufacturing production dropped -0.2% mom, -1.4% yoy RICS house price balance improved a bit from -83% to -81%. BRC retail sales monitor showed -1.0% contraction. Trade deficit widened to -7.67b in Jul.
Swiss jobless rate climbed to 2.4% in Aug.
Japan Q2 GDP annualized growth. was revised slightly higher from -4.0% to -3.0%. Industrial production was up from 2.0% to 2.4% yoy in Jul. Economic watch DI dropped to 28.3 in Aug. Machine Tools orders dropped -14.2% yoy. Domestic CGPI moderated slightly from upward revised 7.3% yoy to 7.2% yoy in Aug. Trade surplus narrowed slightly from 252b to 232b in Jul. Current account surplus widened more than expected to 1531.8b. Leading indicators improved slightly to 91.6.
Canadian housing data were solid. Building permits surprised on the upside by rising strongly by 1.8% in Aug, above expectation of -0.5% fall. Housing starts also rose to 211k level in Aug. New housing price index rose 0.1% as expected. Trade surplus came in narrow than expected at 4.9b in Jul.
RBA Governor Stevens said in the opening statement to House Economics Committee that growth outlook for the Australian economy is subdued in the near term. Household spending and demand has slowed. Housing markets has softened. Credit growth slowed markedly. Inflation will remain uncomfortably high in near term and may peak at 5% but should moderate gradually back to the bank's target of 2-3% next year. Australia retail sales recovered much less than expected by 0.1% in Jul only. Though, employment was strong with 14.6k growth. More surprisingly, unemployment rate dropped from 4.3% to 4.1% in Aug.
The 50 bps cut from RBNZ to bring OCR down to 7.5% was a surprise to the markets which expected a 25bps cut only. In the accompanying statement, RBNZ Governor Bollard said that "medium-term inflation pressures" is expected to "ease" and it's now appropriate to move to a less "restrictive stance". The cut is "warranted in light of tightness of credit conditions" and the time to take to "affect actual interest rates faced by households". New Zealand retail sales dropped more than expected by -0.8% in Jul.
The Week Ahead
FOMC rate decision and announcement will be the main event in a week of a jam packed calendar this week. Fed is widely expected to be on hold at 2.00%. Markets are starting to speculate that Fed will cut again by the end of this year after unemployment rate surged to 6.1% in Aug and with other economic data showing few signs of a turnaround. Inflation is expected to ease in the coming months on falling commodity prices and the turmoil in the financial markets is still on. Indeed interest rate futures are now pricing in 40% chance that Fed will cut by 25bps by the end of this year, up from nearly no change in Aug. Hence, markets will be particularly focused on whether Fed will lean towards an easing bias again in the accompanying statement after this week's meeting.
A number of important economic data will also be released from the US this week, including Consumer Price Index, regional Fed survey from New York and Philadelphia and industrial production and new residential construction.
German ZEW and Eurozone final HICP inflation will be main feature from Eurozone. Trade balance will also be released.
It's also an important week in UK with focus on Aug CPI, employment report and retail sales. More importantly, BoE minutes will be released.
In addition to Fed, BoJ and SNB will also announce rate decision this week and are expected to be on hold at 0.5% and 2.75% respectively. From Switzerland, focus will also be on combined PPI, retail sales and ZEW index.
RBA minutes will also be featured.
EUR/USD Weekly Outlook
EUR/USD dived further to as low as 1.3881 last week but rebounded strongly towards the end to close to week just slightly lower. Touching of 1.4236 resistance, with bullish convergence condition in 4 hours MACD and RSI, indicates that a short term bottom is likely in place, after drawing support from key medium term support at 1.3851 (50% retracement of 1.1639 to 1.6038 at 1.3839). Short term outlook is turned neutral for the moment with bias on the upside. Further rebound should be seen this week to correct whole fall from 1.6038, targeting 1.4629/4908 resistance zone. Though, upside is expected to be limited there and bring fall resumption.
In the bigger picture, medium term up trend from 1.1639 has completed at 1.6038, after a double top reversal pattern (1.6019, 1.6038) and subsequent decisive break of medium term rising trend line support. While a short term bottom is likely in place and corrective rebound should be seen, the whole decline from 1.6038 is still expected to extend further after completing the correction. Sustained trading below 1.3851 will indicate that fall from 1.6038 has resumed to next target of 61.8% retracement of 1.1639 to 1.6038 at 1.3319 first. On the upside, sustained break of double top neckline resistance at 1.5284 is needed before considering that decline from 1.6038 has completely finished.
In the longer term picture, the case of completion of multi year up trend from 0.8223 (00 low) is also building up with monthly MACD turning below signal line and RSI breaking it's up trend. Though, it's early to conclude yet for the moment with EUR/USD still holding above 55 months EMA (now at 1.3331.) Focus will be on whether monthly MACD will break it's up trend and whether key fibo support of 38.2% retracement of 0.8223 to 1.6038 at 1.3053 for further evidence.
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