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Weekly Forex Market Commentary

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Thursday will see the release of the CPI report for July

Mon, Aug 11 2008, 12:42 GMT
by Cornelius Luca

GFT (Global Forex Trading)

Past Week's Data and Events

The US currency exploded higher last week and this confirms it put in a significant bottom. The US economy is in recession and the housing sector is in disarray, but the rest of the world is only starting to get the contagion and it will be ugly. Commodities have started to be liquidated and I believe there are more positions to be closed. The dollar has much more to go and I suspect any weakness would provide opportunities to buy it on the cheap.

United States
The dollar surged primarily versus the commodity and European currencies, but then managed to spread its might against the yen as well. ECB President Trichet inadvertently accelerated the move by flip-flopping through his statement before finally suggesting concern about weakening Eurozone growth. That was enough to trigger a disproportionate response, which reflected long-held imbalances in the prices of commodities and the dollar. The dollar has been oversold and the commodities overbought for months, but the trigger to reinstall common sense was pulled only recently.

Europe and the rest of the world has lagged the US financial problems but cannot skirt them; de-coupling in the economy and financial sectors cannot exist in the small world of today, so look for all the other currencies to drop further against the dollar.

The US data was mixed, but frankly irrelevant, as we are in a recession.

The Federal Reserve kept its benchmark interest rate at 2 percent as widely expected, as it has little room to maneuver while as inflation accelerates and the economy slows down.

Personal income rose by 0.1 percent in June, the lowest rate since April 2007, after rising 1.8 percent in May. But consumer spending rose 0.6 percent in June after gaining 0.8 percent in May.

The core PCE price index rose 0.3 percent in June, above economists' consensus forecast for a 0.2 percent rise.

Factory goods orders unexpectedly rose by a greater-than-expected 1.7 percent in June and the May report was revised upwards to +0.9 percent from +0.6 percent advance. June's increase was the largest since December.

The services ISM rose a tad more than expected to 49.5 in July from 48.2 in June; but a reading below 50 still indicates contraction.

The number of Americans filing first- time claims for unemployment benefits rose by 7,000 to 455,000 in the week ended August 2 to the highest level since March 2002 from 448,000 the prior week. No kidding!

The National Association of Realtors said its Pending Home Sales Index rose 5.3 percent to 89.0 in June from a downwardly revised 84.5 in May. This was the highest reading for the index since October, when it was at 89.8.

Worker productivity rose at a 2.2 percent annual rate in the second quarter because employers cut jobs from a 2.6 percent gain in the prior quarter. Labor costs rose 1.3 percent.

The Eurozone
The euro/dollar made a massive decline last week and clearly peaked. The European Central Bank kept interest rates at a seven-year high of 4.25 percent, as widely expected, to fight inflation despite mounting evidence of an economic slump mounts. But ECB President Trichet killed the euro with statements highlighting economic weakness.

News that the Eurozone producer prices declined to 0.9 percent in June from 1.2 percent increase in the prior month didn’t help the euro early last week. On a yearly basis, inflation rose to 8 percent, the most since the series began in 1990, from +7.1 percent in May.

The Eurozone service PMI fell to 48.3 in July from 49.1 in June and held below the 50 line in the sand. On an individual basis, Germany’s fell to 53.1 from 53.3 (not so bad), but France’s edged up to 47.5 from 47.0 (but still bad).

The Eurozone retail sales contracted 0.6 percent in June and the May figures were revised downward to +0.5 percent from 1.2 percent. On a yearly basis, sales contracted 3.1 percent.

The euro fell further on Wednesday on news that German manufacturing orders fell 2.9 percent in June and the May decline was revised to 1.4 percent from -0.9 percent. On a yearly basis, orders contracted 6.1 percent.

The euro recovered only briefly on Thursday following good German data.

German industrial production increased 0.2 percent n June, the first gain in four months, after contracting a whopping 1.8 percent in May (but better than the initial –2.4 percent originally reported). On a yearly basis, industrial production rose 1.7 percent.

German trade surplus increased to 19.7 billion euros in June as exports rose at the fastest pace in nearly two years from a downwardly revised 14.3 billion euros recorded in May (from 14.4 billion euros).

France's trade deficit expanded to a record 5.6 billion euros in June because of the oil prices from a revised 4.7 billion euros in May.

Elsewhere, Italian industrial production recovered 0.1 percent in June from 1.4 percent decline the previous month. On a yearly basis, it contracted 1.8 percent on top of another decrease of 2 percent in May.

Italy’s preliminary GDP unexpectedly contracted 0.3 percent in the second quarter on a quarterly basis, while the annual pace was flat. This is the first of the European countries to publish the GDP data, and is the harbinger of things to come.

Japan
Dollar/yen took its time, about five months, to break above 108.60, but was finally successful last week. It reached its highest levels since January 2 and should gain further, but a reduced pace.

The initial demand for the yen ignored the assessment of the Japanese economy. It strengthened because local investors exited carry trades and foreign equities to bring the money home.

The coincident index fell to 101.7 in June from 103.3 a month earlier and the leading index fell to 101.7 from 103.3. These weak reports suggest the possibility the economy has entered a recession.

The yen edged higher early Thursday on news that orders for machinery fell by a less than expected 2.6 percent from May, when they climbed 10.4 percent.

The UK
Sterling/dollar came under intense selling pressure last week, as it melted for six consecutive days. It now fell to the lowest levels since November 2006. The historical aberration of 2 bucks for a pound is finally over.

The Chartered Institute of Purchasing and Supply's construction PMI fell to 36.7 in July to the weakest reading since the survey began in 1997 from 38.8 in June. Of course, a report below 50 signals contraction.

The pound sank further on Tuesday on news the services PMI contracted 47.4 in July, according to the Chartered Institute of Purchasing and Supply, while factory production unexpectedly fell 0.5 percent in June for a fourth consecutive contraction. Industrial production fell 0.2 percent after –0.9 percent!

Consumer confidence fell 11 points to 51 in July, the largest drop since the survey began in May 2004, according to Nationwide Building Society.

The British economy expanded only 0.1 percent in the quarter through July, the slowest pace in three years, the National Institute of Economic and Social Research said.

Adding to the pile of evidence about the weakness of the housing sector, house prices declined fell 1.7 percent in July and 8.8 percent on a yearly basis, the steepest decline since the survey began in 1983.

The Bank of England kept the main interest rate unchanged at 5 percent as expected amid accelerating inflation.

Canada
Dollar/Canada surged to a one-year high last week amid long liquidation of commodity positions. More strength is in the store.

And the economic weakness is not helping.

The Ivey purchasing managers' index showed Canadian business and government spending fell to 65.5 in July from 69.6 the month before.

Building permits fell by a steeper-than-expected 5.3 percent in June after an unexpected rise in May.

Canadian employers unexpectedly cut 55,200 jobs in July after a drop of 5,000 the month before. The jobless rate fell to 6.1 percent from 6.2 percent as 74,100 people left the labor force.

But the consumer confidence increased to 81 in July from 79.6 in June.

Switzerland
Dollar/Swiss franc surged to a 5 ½-month high last week and should gain further in the medium term.

The local data carried little weight.

The Swiss PMI slipped to 54.1 in July from54.9 in June (and from 63.2 last July).

Unemployment remained unchanged at 2.3 percent in July as expected.

Australia
The Australian dollar collapsed during the third week of decline to coin a 6 ½-month low amid aggressive liquidation of carry trades and commodity positions. The weakness should persist, but at a reduced pace.

The RBA left rates unchanged on Tuesday but clearly signaled intent to cut them at their next meeting on September 2. Japanese retail accounts and others have been aggressively exiting their large long positions in the commodity currencies.

Home-loan approvals fell 3.7 percent in June to a four-year low from May, when they dropped a revised 6.9 percent.

The number of Australian people employed rose 10,900 in July after climbing a revised 22,200 in June. The jobless rate held at 4.3 percent.

This Week's Data and Events

United States
D Date GMT Event Period UBS Previous Market

The US economic agenda will open on Tuesday with the release of the trade balance report for June. What’s there to say? Worse on oil for two more reports and then a little better for the same reason. Old news, no one cares.

The retail sales report for July is due on Wednesday – this report is important as spending of the tax rebate is over.

Thursday will see the release of the CPI report for July. This report is key as well.

Industrial production and capacity utilization report for July, and the Empire State manufacturing and University of Michigan surveys for August are due on Friday.

The Eurozone
The Eurozone calendar will start on Monday with the release of the French industrial production report for June.

The French CPI report for July is due on Tuesday.

Wednesday will see the release of the Eurozone industrial production report for June.

The French business sentiment for July and Germany CPI report for August are due on Thursday.

The final Eurozone HICP report for July is due on Thursday as well.

The Eurozone, German and French GDP reports for the second quarter are due on Friday.

Japan
The Japanese economic agenda will start on Tuesday with the release of the industrial production and consumer confidence reports for July.

The current account balance for June and the GDP for the second quarter are due on Wednesday.

Thursday will see the release of the Tertiary industrial activity report for June.

The UK
The UK economic calendar will begin on Monday wit the release of the trade balance report for June and the PPI report for July.

Tuesday will see the release of the DCLG house prices report for June and of the CPI report for July.

The ILO unemployment report for June is due on Wednesday.

Canada
The Canadian economic agenda will start on Monday with the release of the new housing price report for June.

The trade report for June is due on Tuesday.

Canada survey manufacturing shipments report for June is due on Friday

Overview

Euro/dollar
Last week's range: 1.4999 – 1.5630 (Down)
Previous range: 1.5517 – 1.5768 (Down)

Euro/dollar fell for the fourth consecutive week but that was a collapsing decline, reaching a 5 ½-month low. The close below 1.5316 confirmed a double top targeting the 1.4600 area. My model remains short since July 22.

Initial support is at 1.4910. Below 1.4860, support now comes at 1.4735. Distant support is now pegged to the 1.4600 area.

Immediate resistance is seen at 1.5000. The next levels are 1.5065 and 1.5110. Above 1.5200, resistance comes at 1.5255, 1.5305 and 1.5395. Distant resistance is at 1.5550.

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

Dollar/yen
Last week's range: 107.46 – 110.37 (Up)
Previous range: 107.29 – 108.38 (Mixed)

Dollar/yen surged to an eight-month high and my model remains long. The Gann pivot at 110.35 ruled and this will give you direction this week as well.

Strong support is now pegged at 109.15 from a 50-point pivot, which targets 109.65 and 108.65. Strong support follows at 107.95 from a 50-point pivot, which targets 107.45 and 108.45. Distant support is at 106.75 from a 50-point pivot, which targets 106.25 and 107.25.

So, immediate resistance is now at 110.35 from my 50-point pivot, which targets 109.85 and 110.85. The next key level is 111.60 from another 50-point pivot, which targets 112.10 and 111.10. Distant resistance is at 112.90 from yet another 50-point pivot, which targets 113.40 and 112.40.

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

Sterling/dollar
Last week's range: 1.9147 – 1.9762 (Down)
Previous range: 1.9728 – 1.9968 (Down)

Sterling/dollar fell for the third consecutive week and the intense pressure burst the bottom of a triangle and took it to the lowest levels since November 2006.It is targeting the bottom of its channel declining since November 2007, which is at 1.8940. Perhaps we can also say that GBP/USD formed a long-term head-and-shoulders pattern that targets the 1.7550 area.

Below the strong support at 1.9095, further supports are seen at 1.8940, 1.8900 and 1.8865. Distant support is now pegged at 1.8620.

Initial resistance now comes at 1.9210. Above1.9270, further resistance comes at 1.9325 and 1.9420. Distant resistance is now seen at 1.9590.

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

Dollar/Swiss franc
Last week's range: 1.0435 – 1.0838 (Up)
Previous range: 1.0319 – 1.0522 (Up)

Dollar/Swiss rallied for the fourth consecutive week, but that was extremely aggressive and reached a 5 ½-month high. My model remains long. All eyes are on the channel line at 1.0935.

Immediate resistance is at 1.0875. Above 1.0905, key resistance comes at 1.0935. This is followed by 1.1055. Distant resistance now comes at 1.1185.

Initial support is pegged at 1.0745. Below 1.0620, support is now seen at 1.0505. Distant support now comes at 1.0425.

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

Dollar/Canada
Last week's range: 1.0262 – 1.0696 (Up)
Previous range: 1.0174 – 1.0300 (Up)

Dollar/Canada rallied for the third consecutive week but it was explosive and reached a one-year high. It closed up in 13 of the past 14 days and last week’s daily ranges were significant. My model remains long.

Immediate resistance is now seen at 1.0710. The next levels are 1.0805 and 1.0885. Distant resistance is 1.1040.

Initial support comes at 1.0600. Below 1.0545, support is seen at 1.0470. Distant support is now pegged at 1.0380.

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

Euro/yen
Last week's range: 165.33 – 169.47 (Down)
Previous range: 167.01 – 169.72 (Down)

Euro/yen fell to a two-month low and my model remains short. The cross alleviated its overbought condition. The close below 165.90 signals a double top formation that targets 161.45. Again, hold on to short positions until a bullish reversal is confirmed.

Immediate support is now seen at 163.50. The next levels are 163.00 and 162.75. These are followed by 161.45. Distant support is now seen at 158.63.

Initial resistance is at 164.85. The next levels are 165.95 and 166.80. Above 167.70, distant resistance is seen at 169.47.

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

Euro/sterling
Last week's range: 0.7811 – 0.7945 (Down)
Previous range: 0.7846 – 0.7942 (Mixed)

Euro/sterling reversed early gains and slumped to a 3 ½-month low. My model remains short.

Initial support is at 0.7795. The next support comes at 0.7766. Distant support is at 0.7670.

Immediate resistance is now seen at 0.7835. The next levels are 0.7870 and 0.7890. Above the pivot high at 0.7945, distant resistance is at 0.8022.

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

Published on  Tue, Aug 12 2008, 08:28 GMT