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Weekly Forex Market Commentary

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The French Consumer confidence index for July is due on Tuesday

Mon, Jul 28 2008, 06:24 GMT
by Cornelius Luca

GFT (Global Forex Trading)

Past Week's Data and Events

The US currency ended the week higher, as soft data had already been priced in, and some decent data and earnings (read not as bad as expected) triggered profit taking on short positions. And a declining oil, which barely failed to reach $150/gallon, provided unwarranted optimism. The US economy is in a recession and there is no remedy on the horizon. The dollar should struggle higher for a little longer before the next big decline.

United States
The dollar posted some rare gains last week, mostly on short covering. The proposed bailout of Fannie Mae and Freddie Mac was supportive, though we don’t know how much the taxpayers will be stung. Some OK economic data, and less horrible for (some of the) banks also helped. But quite a few banks seem to be on the edge of the abyss and one wonders what can FDIC actually do. The unforgiving deflation of the ridiculously burgeoned housing bubble will continue and the debt-fattened people lost their heads (again). Reality bites, doesn’t it? And some realize that not affording things, well means just that.

The dollar surged on Tuesday in part because Treasury Secretary Paulson paid lip service for the currency and the Federal Reserve Bank of Philadelphia president said interest rates should be raised.

Home prices fell 4.8 percent in May on a yearly basis, according to the Office of Federal Housing Enterprise Oversight.

New home sales only edged down 0.6 percent to an annual rate of 530,000 in June from the upwardly revised May rate of 533,000.

Existing home sales fell by a more than expected 2.6 percent to an annual rate of 4.86 million units in June from a 4.99-million unit rate in May. The report suggests the housing market is not close to bottoming out.

But foreclosure filings more than doubled in the second quarter on a year basis!

Bank of America’s earnings were better than expected, but Wachovia reported a record quarterly loss of $8.9 billion, and cut the dividend and 6,350 job.

The leading economic indicator contracted 0.1 percent in June and the report for May was revised downward to –0.2 percent from +0.1 percent. The dollar slipped briefly.

The Federal Reserve's Beige Book confirmed that economic activity has slowed in the past month, as consumer spending was sluggish or slowing in nearly all of the Fed districts.

The final University of Michigan Consumer Sentiment for July came in at 61.2 from a preliminary 56.6. That’s also up from June’s 56.4.

Durable goods orders unexpectedly increased 0.8 percent in June from an upwardly revised 0.1 percent increase in May. Ex-orders for transportation equipment, orders expanded 2 percent, the most this year, after contracting 0.5 percent a month earlier. Bookings for non-defense capital goods excluding aircraft, a measure of future business investment, climbed 1.4 percent after a 0.1 percent decrease in May.

Initial claims for state unemployment insurance benefits rose 34,000 to a seasonally adjusted 406,000 in the week ended July 19, from a revised 372,000 (initially 366,000) the prior week. The surge apparently reflected seasonal volatility typical at this time of year.

The Eurozone
The euro/dollar fell for the second consecutive week, but only surrendered 23.6% Fibonacci retracement level of the last leg of the uptrend since February. The regional economy is starting to crumble, while silly politicians still dream their “kingdom” will not be affected by the US economic slowdown. The euro should be much lower, but the time is not ripe yet.

The Ifo institute's German business confidence index collapsed 3.7 points to 97.5 in July, the most since the September 11, 2001, from June's revised reading of 101.2. The current situation sub-index slipped to 105 from 108.3 and the expectations index decreased to 90 from June's revised reading of 94.6.

Along the same lines, French business confidence fell to 98 in July, the weakest since May 2005, from 101 in June, amid record oil prices and a strong euro. Moreover, Italian business confidence fell to 83.5 in July, its lowest level in seven years, from a revised 86.7 in June. Elsewhere, Spanish unemployment rose 10.4 percent to the highest rate in 3 1/2 years in the second quarter and Belgian business confidence sank in July.

The Eurozone Purchasing Managers' Index for manufacturing declined to 47.5 in July from 49.2 in June, while services PMI fell to 48.3 from 49.1 in June.

Japan
Dollar/yen closed higher last week, but remained in a trading range. It would take a close above 108.45 to get things rolling higher.

The dollar/yen rally through Thursday was accelerated by news that Tokyo Marine, Japan's largest insurer, agreed to buy Philadelphia Consolidated Holding for $4.7 billion.

Japan's trade surplus shrank 89 percent to 138.6 billion yen in June from a year earlier. Imports surged 16.2 percent to a record because of the surging oil costs, while exports fell 1.7 percent for the first time since November 2003 because demand for cars and electronics slowed.

Annual CPI increased 2.0 percent in June, and the core CPI rose 1.9 percent. The Tokyo CPI rose 1.6 percent in July on year and the core rose just 0.1 percent.

The UK
While sterling/dollar closed the week lower, alternating days for nine days makes trading quite a challenge. Don’t see much reason for a clear direction yet. The pair should head lower, give the rapid weakening of its economy, but the rising channel remains in place.

UK house prices fell an annual 2 percent in July, the most since 2002, but prices increased in London by 0.3 percent from June.

Retail sales contracted 3.9 percent in June after expanding 3.6 percent in May. That's almost a perfect wash, and if you remember, I had cautioned at the time that the increase in June was a mistake.

The CBI Industrial Trends survey was poor. The book order balance swung from +1 in June to -8 in July. The export order book and domestic output expectations fell, though domestic price expectations rose sharply.

The GDP expanded only 0.2 percent in the second quarter, the slowest pace since 2001, amid shrinking manufacturing and construction and the financial woes. Gross domestic product expanded 1.6 percent from a year earlier, the least since 2005. This means the UK economy took another step to recession.

Canada
Dollar/Canada finally “broke” higher, but in fact remains in a trading range. Expect more of the same. And keep an eye on commodities.

Canadian retail sales rose by a less than expected 0.4 percent in May, as consumers paid more for gasoline and cut back on purchases of clothing from 0.6 percent in April.

The CPI came out on the high side of expectations, rising 0.7 percent in June and 3.1 percent on a yearly basis from 2.2 percent in May. But the core rate was flat at 1.5 percent.

Switzerland
Dollar/Swiss franc rallied to a one-month high and this should be exciting – but it’s not. The slowly declining channel remains in place.

Australia
The Australian dollar fell last week as the commodity prices took a breather, but the uptrend continues unabated. Only a close below 0.9450 would sound mildly bearish.

Consumer price index rose 1.5 percent from the first quarter, when it gained 1.3 percent. This lifted the year-over-year rate to 4.5 percent from 4.2 percent.

This Week's Data and Events

United States

D Date GMT Event Period UBS Previous Market

The US economic agenda will begin on Tuesday with the release of the Conference Board’s Consumer Confidence report for July.

The revision of the GDP and the Price Index reports for the first quarter are due on Thursday, along with the Chicago PMI index for July.

It’s the first Friday of the month, so be on the lookout for the release of the nonfarm payrolls and unemployment rate for July.

The ISM manufacturing PMI report for July and the construction spending report for June are due on Friday as well.

The Eurozone
The Eurozone economic calendar will start with the release of the German GfK Consumer Confidence index for August.

The French Consumer confidence index for July is due on Tuesday.

Wednesday will see the release of the German retail sales report for June.

The Eurozone Retail PMI, Business Climate Indicator, Consumer Confidence, Economic Sentiment Indicator and Industrial Confidence Indices for July are due on Wednesday as well.

The German unemployment rate report for July and the Eurozone unemployment rate report for June are due on Thursday, along with the regional HICP flash estimate report for July.

Japan
The Japanese economic agenda will open on Tuesday with the release of the unemployment rate, household spending and retail trade reports for June.

The industrial production report for June is due on Wednesday.

The housing starts report for June will be released on Thursday.

The UK
The UK calendar will start on Tuesday with the release of the CBI distributive trades survey July.

The Nationwide House Prices report for July is due on Wednesday.

The PMI Manufacturing index for July is due on Thursday.

Canada
The Canadian economic calendar only features the monthly GDP report for May.

Overview

Euro/dollar
Last week's range: 1.5629 – 1.5943 (Down)
Previous range: 1.5784 – 1.6036 (Down)

Euro/dollar headed lower last week and broke out of a medium-term bullish channel. It gave back half of the gains made between June 13 and July 15. The short-term outlook will remain bearish only a close below 1.5670.

Below 1.5670, support comes at 1.5585. The next good level is at 1.5460. Below 1.5395, distant support is now seen at 1.5305.

Immediate resistance is seen at 1.5755. The next level is 1.5863. Pivot highs follow at 1.5943 and 1.6036. Above 1.6055, euro/dollar has distant resistance at 1.6135.

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

Dollar/yen

Last week's range: 106.06 – 108.01 (Up)
Previous range: 103.78 – 107.10 (Up)

Dollar/yen reversed early losses and rallied hard to a one-month high of 108.01, roughly near the 107.95 Gann pivot. My model remains long, but the upside bias needs reinforcement.

So, immediate resistance is at 107.95 from a 50-point pivot, which targets 107.45 and 108.45. Distant resistance is at 109.15 from another 50-point pivot, which targets 109.65 and 108.65.

Strong support now comes at 107.35. Strong support follows at 106.75 from a 50-point pivot, which targets 106.25 and 107.25. The next level is 105.60 from a 50-point pivot, which 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.

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

Sterling/dollar
Last week's range: 1.9818 – 2.0076 (Down)
Previous range: 1.9815 –2.0155 (Up)

Sterling/dollar has been alternating up and down days for nine consecutive days! That ended in a down week but within an inside range. The pair must quit the alternating pattern before a new direction can emerge.  Monday should see some weakness. Be careful, the rising trendline support was tested twice late last week.

Immediate support is at 1.9870. Below 1.9818, support is seen at 1.9770, 1.9710 and 1.9650. These levels are followed by 1.9605. Distant support remains at 1.9560.

Initial resistance now comes at 1.9968. Above 2.0040, further resistance comes at 2.0155. Distant resistance remains at 2.0395.

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

Dollar/Swiss franc
Last week's range: 1.0138 – 1.0406 (Up)
Previous range: 1.0013 – 1.0259 (Up)

Dollar/Swiss closed higher for the second consecutive week. Once again, the medium-term outlook remains negative, but another burst higher is possible early in the week. Only a close above 1.0400 would signal an aggressive upmove.

Above 1.0400, resistance comes at 1.0450. This is followed by 1.0540. Distant resistance remains at 1.0622.

Initial support is at 1.0315. Below 1.0275, support is still seen at 1.0200 and 1.0140. Distant support now comes at 1.0013.

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

Dollar/Canada
Last week's range: .9992 – 1.0206 (Up)
Previous range: 0.9974 – 1.0141 (Mixed)

Dollar/Canada remains in a trading range despite rallying for four consecutive days and breaking above the tip of a triangle. Only a close above 1.0245 would signal significant strength.

So, immediate resistance is now seen at 1.0245. The next levels are 1.0300, 1.0325 and 1.0380. Distant resistance remains between 1.0470 and 1.0485.

Initial support comes at 1.0150. Below 1.0000, support is seen at 0.9974. Distant support remains pegged at 0.9910.

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

Euro/yen
Last week's range: 167.53 – 169.97 (Mixed)
Previous range: 165.33 – 169.66 (Mixed)

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

Initial resistance is still lodged at 170.00. The next level is at 170.55. Above 171.44, distant resistance is seen at 173.90.

Immediate support is now seen at 168.95. The next levels are 168.25, 167.70 and 166.80. Distant support remains at 165.55.

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

Euro/sterling
Last week's range: 0.7841 - 0.7975 (Down)
Previous range: 0.7908 – 0.8022 (Down)

Euro/sterling fell last week after forming a bearish reversal a week earlier and broke the bottom of a triangle. My model remains short now, but sideways trading is likely.

Initial support comes at 0.7841. The next support comes at 0.7817 and 0.7766. Distant support is at 0.7670.

Immediate resistance is now seen at 0.7935. The next levels are 0.7975 and 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 28 2008, 06:31 GMT