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Weekly Forex Market Commentary

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The US economic calendar will start on Tuesday with the release offset of significant set of data

Mon, Jul 14 2008, 07:28 GMT
by Cornelius Luca

GFT (Global Forex Trading)

Past Week's Data and Events

Geopolitical and systemic risk, along with the fundamental change in energy costs, pressured the dollar during the past week, but only the euro and the Australian dollar surged. Sunday brought some sort of solution to the problem, so the US currency has a good chance to make at least a minor recovery. But keep an eye on the shaky S&P 500.

United States
The dollar has been on the defensive during the past week amid a growing load of significant problems, but may now be on the rebound.

The US stocks have been under pressure amid deep concern about the stability of Fannie Mae and Freddie Mac. The dollar tanked last Monday to reflect the plunge of Freddie Mac and Fannie Mae on NYSE on concern these two leading mortgage-finance companies may need to raise more capital; Lehman Brothers analysts had said Fannie Mae will add $46 billion of capital and Freddie Mac $29 billion. The extension of both the Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF) calmed down the market only briefly.

The New York Times then reported on Friday that the government was considering taking over these GSEs if their funding problems worsen. But Treasury Secretary Paulson nixed the idea for the time being.

On Sunday, however, the Treasury and Federal Reserve produced sweeping steps to support Fannie Mae and Freddie Mac and attempt to avoid a potential meltdown in global financial markets. The Fed said both companies could access its discount window for emergency cash and the Treasury said that it would temporarily increase its line of credit to them, as well as purchase equity in them, if necessary.

The dollar had also hit by the deterioration of the Iran crisis. After that country’s extremist government attempted to display its defense capabilities by firing some missiles, Israel Air Force was reported to be practicing in Iraqi airspace in preparation for a potential strike on Iran. Great! That’s all we need when the economy is weakening by the day and the oil price is rising by (nearly) the hour! And should there be a lull in the Middle East, the Nigerian “rebels” will make sure the oil price cannot decline. It’s a win-win situation – but only for the long oil specs!

Crude oil fell on long liquidation on Monday and Tuesday after Iran expressed confidence in talks with western governments on the country's nuclear program and the dollar gained before a G8 meeting.

There was little impact from news that the index of pending home re-sales fell 4.7 percent in June following an upwardly revised 7.1 percent gain in April, according to the National Association of Realtors.

New applications filed for unemployment insurance fell by a seasonally adjusted 58,000 to 346,000 for the week ending July 5, from a three-month high of 404,000. That was a fluke; it will worsen again this week.

The trade deficit shrank unexpectedly to $59.8 billion in May from a slightly downwardly revised report of $60.5 billion for April. Don’t worry, it will widen for the following months. Exports rose 0.9 percent, while imports rose 0.3 percent to a record $217.3 billion.

There was no reaction to news that the University of Michigan Consumer Sentiment Index edged up to 56.6 in July from 56.4 in June.

The Eurozone
The euro/dollar surged to a 2 ½-month high and demand for euro crosses accelerated the upmove. It was a run away from the dollars, pounds and yen, but the regional economy is struggling. The pair should make at least a temporary pullback.

German industrial production contracted 2.4 percent in May, the most since February 1999, from April, when it declined an upwardly revised 0.2 percent (from -0.8 percent).

Output at French factories and utilities fell 2.6 percent in May, the biggest decline since October 2005.

Italian industrial production plunged 1.4 percent on the month in May, the sharpest decline in eight months, while the April’s report was revised downward to 0.4 percent from an original reading of +0.7 percent. The output fell 4.1 percent on a yearly basis from an upwardly revised 2.4 percent rise in April.

The German trade surplus narrowed to 14.4 billion euros in May from 18.8 billion euros in April. Meanwhile, the surplus in the current account narrowed to 7.5 billion euros from 15.5 billion euros in April.

France's trade deficit widened in May to a record 4.74 billion euros from a revised 3.74 billion euros in April.

The Eurozone GDP for the first quarter was revised down to 2.1 percent on a yearly basis from 2.2 percent. On a quarterly basis it was revised downward to 0.7 percent, but the previous quarter was revised upward to 0.7 percent.

Japan
Dollar/yen continued to be all over the place, but nowhere specific. The lack of direction should persist.

The Economy Watchers index fell to 29.5 in June from 32.1 in May. An index of conditions in two to three months slid to 32.1, the worst since September 2001, from 35.1.

Orders for Japanese machinery surged 10.4 percent in May from April when they climbed 5.5 percent.

Producer prices climbed 5.6 percent from a year earlier, after a revised 4.8 percent gain in May, while the current account surplus narrowed 5.9 percent in May from a year earlier.

Consumer sentiment index dropped to 32.6 in June, the worst in at least 26 years, from 33.9 in May.

The UK
Sterling/dollar made little progress last week, as cable remains the weakest of the European lot. It should now edge lower.

The pound fell sharply on Monday and Tuesday, and soft US data was in part to blame.

Manufacturing unexpectedly contracted 0.5 percent in May to the weakest in eight months, from flat in April (initially reported at +0.1 percent). The index of manufacturing production fell to 102.7, the lowest level since September.

Sales of services and manufactured goods fell to –2 in the second quarter, the lowest since 1992, from +17, according to the British Chambers of Commerce. Moreover, an index tracking factories fell to -3 from +12, the least since the end of 2001.

The DCLG House Price Index rose 3.7 percent in May on a yearly basis, but slipped from April’s +4.9 percent.

Still, house prices fell 2 percent in June, according to HBOS.

But the pound bounced on Wednesday and Friday despite soft data.

Mortgage rates on a home loan fixed for two years rose to 6.63 percent in June, the highest since February 2000.

Also, consumer confidence declined 6 points to 63, the lowest since the survey began in May 2004, according to the Nationwide Building Society.

The goods trade gap remained unchanged at 7.5 billion pounds in May.

The Bank of England kept the benchmark interest rate unchanged at 5 percent, as widely expected.

Canada
Dollar/Canada continued to consolidate last week.

The Canadian dollar rallied on Monday following news that a record number of company executives polled by the Bank of Canada believed Canada's inflation rate will exceed the top end of the central bank's 1 percent-to-3 percent target band over the next two years.

Building permits rose 1.1 percent in May led by construction projects for utility companies, hospitals and schools. The market showed little reaction.

Canada’s unemployment rate increased to 6.2 percent in June from 6.1 percent in May, while the net change in employment has declined by 5,000. On a yearly basis, employment increased 1.7 percent and created 290,000 jobs.

Switzerland
Dollar/Swiss franc resumed its pattern of alternating up and down weeks. It closed on a weekly basis at the lowest level in three months, but held above the previous week’s lows. If the Iran crisis expands, the pair should dig deeper. If not, there is some room on the upside.

Australia
The Australian dollar surged to a new all time-high amid stubbornly strong commodity prices, high yields and overall strong, if not perfect, economy.

Australian business confidence fell to - 9 points in June, the weakest result since the September 11, 2001, from - 4 in May, according to National Australia Bank.

Also, consumer confidence fell 6.7 percent to a 16-year low of 79 points in July, the sixth straight reading of less than 100.

Meanwhile, home-loan approvals dropped 7.9 percent in May, the most in eight years.

But employment added 29,800 jobs in June and the jobless rate fell to 4.2 percent from 4.3 percent.

This Week's Data and Events

United States
D Date GMT Event Period UBS Previous Market

The US economic calendar will start on Tuesday with the release offset of significant set of data. This includes the Empire State Manufacturing index for July, the PPI report for June, the retail sales report for June, and the business inventories report for May.

The CPI and the industrial production reports for June are due on Wednesday, along with the NAHB Housing Market Index for July and the Treasury International Capital Flows.

Also on Wednesday, Fed Chairman Bernanke will give the semi-annual Monetary Policy Testimony at the House of Representatives.

The housing starts and the building permits report for June and the Philly Fed survey for July are due on Thursday.

The Eurozone
The Eurozone economic agenda will open on Monday with the release of the regional industrial production report for May.

Tuesday will see the release of the ZEW Survey of German Economic Sentiment for July and of the French Business Sentiment index for June.

The final German and French CPI reports for July are due on Wednesday.

On Thursday, the ECB Governing council meeting will leave interest rates unchanged.

The Italian trade balance for May is due on Thursday as well.

The Eurozone trade balance for May, the German PPI report for June and the Italian industrial orders for May are due on Friday.

CAD Date GMT Event Period UBS Previous Market

Japan
The Japanese economic calendar is light this week.

On Tuesday, the Bank of Japan will leave its target rate unchanged at 0.50 percent.

The tertiary industry activity index for May is due on Tuesday as well.

Wednesday will see the release of the final Machine Tool Orders report for June.

The final Leading and Coincident Indices for May are due on Thursday.

The UK
The UK calendar will start on Monday with the release of the PPI report for June, the BRC Retail Sales report for June, and the RICS House Price report for June.

The CPI and retail price index reports for June are due on Tuesday.

Wednesday will see the release of the unemployment rate report for May.

Canada
On Tuesday, the Bank of Canada should leave its rates unchanged at 3.0 percent.

Wednesday will see the release of the Manufacturing Shipments report for May.

The Bank of Canada Monetary Policy Report is due on Thursday.

Friday will see the release of the leading indicators report for June.

Overview

Euro/dollar
Last week's range: 1.5612 – 1.5946 (Up)
Previous range: 1.5656 – 1.5908 (Down)

Euro/dollar rallied to a 2 ½-month high last week and my model went long. But early Sunday it turned south, and the short-term outlook is cautiously bearish.

Below 1.5860, support is now at 1.5740. The next good level is at 1.5685. Below 1.5630, distant support is 1.5575.

Immediate resistance is seen at 1.5970. A pivot high follows at 1.6020. Above 1.6055, euro/dollar faces resistance at 1.6135. Distant resistance remains at 1.6250.

NEAR-TERM:Slightly bearish
MEDIUM-TERM:Slightly bullish
LONG-TERM: Bullish

Dollar/yen
Last week's range: 105.66 – 107.75 (Mixed)
Previous range: 105.00 – 106.92 (Mixed)

Dollar/yen traded between two Gann pivots at 105.60 and 107.95 last week. My model remains short, as it approaches the tip of a triangle. The outlook is mixed.

Strong support remains at 105.60 from a 50-point pivot that targets 105.10 and 106.10. Distant support is at 104.50 from another 50-point pivot, which targets 104.00 and 105.00.

Immediate resistance is 106.75 from a 50-point pivot, which targets 106.25 and 107.25. Distant resistance still comes at 107.95 from a 50-point pivot, which targets 107.45 and 108.45.

NEAR-TERM: Mixed
MEDIUM-TERM: Mixed
LONG-TERM: Mixed

Sterling/dollar
Last week's range: 1.9650 – 1.9957 (Mixed)
Previous range: 1.9798 – 2.0005 (Down)

Two rallies on Wednesday and Friday helped sterling/dollar recoup losses and my model went long.  It probed the resistance from the trendline declining since November, but this held. The medium-term outlook remains mixed for this weak European currency, but in the short term it should decline.

Immediate support is at 1.9800. Below 1.9785, support is now seen at 1.9745 and 1.9710. These are followed by 1.9605. Distant support remains at 1.9560.

Initial resistance now comes at 1.9885. This is followed by 1.9917 and 1.9957. The next level is 2.0005. Above 2.0040, further resistance comes at 2.0145. Distant resistance still comes at 2.0395.

NEAR-TERM:Slightly bearish
MEDIUM-TERM: Slightly bullish
LONG-TERM:Mixed

Dollar/Swiss franc
Last week's range: 1.0138 – 1.0353 (Down)
Previous range: 1.0113 – 1.0283 (Up)

Dollar/Swiss tumbled on Friday primarily because the belligerent Iran. My model went short, but the support from the trendline rising since March 17 held, so the upside should now be probed. Only a close below 1.0113 would signal a more sustainable decline.

Immediate resistance is at 1.0215. Above 1.0325, resistance remains at 1.0415 and 1.0450. This is followed by 1.0540. Distant resistance remains at 1.0622.

In initial support is at 1.0135. Below 1.0113, support is seen at 1.0065 and .9996. The next big level is .9825. Distant support remains at .9642.

NEAR-TERM: Slightly bullish
MEDIUM-TERM:Slightly bearish
LONG-TERM: Bearish

Dollar/Canada
Last week's range: 1.0070 – 1.0233 (Down)
Previous range: 1.0064 - 1.0239 (Up)

Dollar/Canada continues to lack direction as it approaches the tip of a triangle, but volatility is rising. Wait until it breaks out.

Initial support comes at 1.0050. Below 1.0015, support is seen at 0.9980. Distant support remains pegged at 0.9910.

Immediate resistance is now seen at 1.0130. The next levels are 1.0180, 1.0200 and 1.0285. Above 1.0300, there is resistance at 1.0380. Distant resistance remains between 1.0470 and 1.0485.

NEAR-TERM: Mixed
MEDIUM-TERM: Mixed
LONG-TERM: Bearish

Euro/yen
Last week's range: 167.14 – 169.62 (Up)
Previous range: 166.10 – 169.13 (Mixed)

Euro/yen climbed to a near 26 1/2-year high last week. The cross remains heavily overbought, but hold on to existing long positions until a bearish reversal is confirmed

Initial resistance comes at 170.55. Above 171.44, distant resistance is seen at 173.90.

Immediate support is at 168.15. The next levels are 167.70 and 166.80. Distant support follows at 165.55.

NEAR-TERM: Bullish
MEDIUM-TERM: Bullish
LONG-TERM: Bullish

Euro/sterling
Last week's range: 0.7903 – 0.8019 (Up)
Previous range: 0.7871 – 0.8001 (Mixed)

Euro/sterling broke the top of a triangle and reached a one-month high. My model is long, but further upmove should not be aggressive. In fact, the next immediate move should be down.

Initial support comes at 0.7985. Below the 0.7935 level, support comes at 0.7910, 0.7870 and 0.7817. Distant support is at 0.7766.

Immediate resistance is now seen at 0.8026. Above the pivot highs at 0.8033 and 0.8100, distant resistance remains at 0.8155.

NEAR-TERM: Slightly bearish
MEDIUM-TERM: Mixed
LONG-TERM: Bullish

Published on  Mon, Jul 14 2008, 07:36 GMT