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Weekly Forex Market Commentary

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Tuesday will see the more important data on the housing starts and the PPI reports for July

Mon, Aug 18 2008, 08:03 GMT
by Cornelius Luca

GFT (Global Forex Trading)

Past Week's Data and Events

The US currency marched higher during the past week in a stampede and even the yen fell prey, despite benefiting intermittently from liquidation of carry trades. The Eurozone, UK and Japanese economies having lagging the US economy is starting their decline and this places the dollar in a position of relative strength. Unless the commodities slow down their descent, the dollar seems primed for more gains.

United States
The dollar recovered more of its unwarranted losses since last year amid confirmation that economic decoupling is not really possible at this cyclical point. The Eurozone and Japanese GDPs contracted in the second quarter, while our fell only back in the fourth quarter of 2007. Commodity prices are still coming down as historically excessive spec is being reversed. Massive long positions are surely still in play, but many wanna-be’s are out. The US data showed interesting pockets of strength, albeit not enough to tell us that the economy is doing well. But this shows the resilience of the economy in the face of the unprecedented financial and credit hits. The worst is yet to come, but that doesn’t mean the dollar has to remain weak. It will see weakness again, but that will be slowed by those who missed the last sharp upmove.

The trade deficit unexpectedly narrowed 4.1 percent to $56.8 billion in June as strong exports overcame record imports of petroleum from a downwardly revised $59.2 billion in May. Exports increased 4 percent, the biggest percentage jump since February 2004, while imports rose 1.8 percent. What was impressive was that the deficit improved while oil prices were still surging. It should improve further because of the subsequent oil price decline.

Retail sales edged down 0.1 percent in July after an upwardly revised 0.3 percent increase in June. On a yearly basis, sales expanded 2.6 percent, down from +3.4 percent a month earlier. Ex-autos, retail sales increased by a respectable 0.4 percent in July.

The consumer price index climbed 0.8 percent, twice as much as anticipated, while the core CPI increased 0.3 percent for a second month.

The import price index slowed to 1.7 percent in July from rising a revised 2.9 percent in June. On a yearly basis, the index rose 21.6 percent, the biggest jump since the report was started in 1982. Ex- petroleum, prices rose 0.9 percent last month from June and 8 percent from last year. Meanwhile, export prices accelerated to 1.4 percent in July from 1.0 percent in June.

Business inventories expanded by a larger-than-expected 0.7 percent in June after a 0.4 percent increase in May. Sales climbed 1.7 percent following a 1.1 percent rise.

The housing sector is far, probably at least one year away, from bottoming.

Existing home sales fell to a 10-year low in the second quarter and the median price for a single-family house dropped 7.6 percent.

Along the same lines, home prices fell 15.8 percent in May, the most since at least 2001, according to S&P/Case-Shiller.

The Federal Reserve Bank of New York's general economic index rose to 2.8 in August, the highest level since January, from minus 4.9 in July. A reading of zero is the dividing mark between growth and contraction. The measure of employment improved to -4.5 from -6.3, signaling fewer firings. Nice, but not that meaningful.

Industrial production slipped to 0.2 percent in July from a downwardly revised 0.4 percent increase in June (from a previously reported +0.5 percent). Capacity utilization edged up to 79.9 percent in July from 79.8 percent.

The University of Michigan preliminary index of consumer sentiment increased to 61.7 in August from 61.2 in July. The index of consumer expectations for six months from now improved to 56.8, the highest since March, from 53.5. That’s nice – but not convincing.

The number of first-time applications decreased by 10,000 to 450,000 in the week ended August 9, from an upwardly revised 460,000 the prior week (from a previously reported 455,000).

The Eurozone
The euro/dollar suffered the fifth week of losses and a wave of weak economic data was not helpful at all. The pair should see more losses in the medium term, but in the short term it should consolidate.

French industrial production unexpectedly declined 0.4 percent in June from May, when it dropped a mammoth 2.9 percent (worse than initially reported –2.6 percent). On a yearly basis, output contracted 1.6 percent, enhancing expectations for an economic contraction. Insee expects the French economy to grow 0.2 percent in the second quarter before stagnating in the next three months.

The Eurozone industrial production was unchanged in June after falling a revised 1.8 percent in May. On a yearly basis, production contracted 0.5 percent on top of a 0.4 percent decline in May.

The Eurozone CPI rose to 4.1 percent in July, the highest since April 1992. This is more than double the European Central Bank's ceiling of 2 percent. But French consumer prices fell 0.3 percent in July and this helped them hold at an annual 4.0 percent.

The Eurozone GDP fell 0.2 percent in the second quarter from the first, when it increased 0.7 percent. On a yearly basis, GDP slowed for a third straight quarter to 1.5 percent. Germany’s GDP came in at -0.5 percent and France’s at -0.3 percent.

Meanwhile, the Eurozone CPI fell 0.2 percent in July and held at 4 percent on the year.

Japan
Dollar/yen was the wild card last week, rising, falling and then rising again, all in an aggressive fashion. The problem was, all three moves made sense… The rallied were in line with general dollar strength, while the slide was triggered by massive sales of yen crosses, carry trades or not. This means we must expect the choppy pattern to continue. And the stagflation problems affecting the US seem to seep into the Japanese shores as well.

PPI climbed 7.1 percent in July on a yearly basis after a revised 5.7 percent increase in June.

Japan industrial output was revised to -2.2 percent in June from –2.0 percent. This follows a 2.8 percent expansion in May.

Household's consumer confidence fell for the fourth consecutive month in July and reached 31.4 (from 32.6 in June). The current reading is the lowest since the Cabinet Office started measuring consumer confidence in June 1982.

Gross domestic product contracted 0.6 percent in the second quarter from the first quarter, when it grew 0.8 percent. An annual basis, it fell 2.4 percent after expanding a revised 3.2 percent in the first quarter.

The current-account surplus shrank 67.4 percent to 493.9 billion yen in June as exports fell and record oil prices pushed up the import bill. Exports fell 1.5 percent in June from a year earlier after a 4.2 percent gain in May, while imports climbed 17.8 percent, compared with 4 percent in May.

The tertiary index showed demand for services decreased 0.8 percent in June.

The UK
Sterling/dollar continued to get battered, and that makes the exchange rate of 2.0000 look like a distant nightmare, even though it happened only about one-month ago. Cable remains the weakest of the European currencies, so it will lead any additional weakness. The economic data is not helping and there is little on the horizon to offer help.

UK producer prices increased 0.4 percent in July on the month but expanded 10.2 percent from a year earlier, at the fastest pace since records began in 1986, from +10 percent in June. Raw material costs slowed to 30.1 percent from a year earlier from 30.8 percent in June. Imported materials rose a record 21.2 percent in the year, the statistics office said today. Input prices fell 0.6 percent from June.

Meanwhile, CPI remained unchanged in July but accelerated to 4.4 percent on a yearly basis, more than double the central bank's 2 percent target, from 3.8 percent in June.

The trade gap still widened to 7.7 billion pounds in June as the deficit with countries outside the European Union expanded to a record. Exports rose 4.2 percent and imports by 4.1 percent.

The Bank of England cut its forecast for UK economic growth to about 0.1 percent on a year-on-year basis in the first quarter of 2009 from the previous forecast of 1 percent. It also said the inflation rate will fall below the 2 percent target in two years if policy makers keep the benchmark interest rate at 5 percent.

Claims for jobless benefits climbed 20,100 to 864,700 in July, the biggest increase since December 1992, and the unemployment rate rose to 2.7 percent from 2.6 percent in June.

Canada
Dollar/Canada is in a tough spot. It reached a new high for the uptrend early last week and then made a choppy decline despite sizeable losses in the commodity prices and good local economic reports. Watch this one carefully.

The price of new homes in Canada climbed 0.1 percent in June after two months of unchanged prices and 3.5 percent on a yearly basis, the slowest pace in six years.

The trade surplus widened to C$5.76 billion in June from a downwardly revised C$5.22 billion in May. Exports and imports rose to records in June, gaining 3.1 percent and 2 percent respectively.

Factory sales rose 2.1 percent in June from May, more than double the expectations.

Switzerland
The dollar rallied versus the Swiss franc as well during the past week, but less than against the euro. This is probably because of the risk from Russia’s bloody attack on Georgia and of the Soviet-style threats against Poland.

Australia
The Australian dollar remains under pressure amide long liquidation of spec carry trades and commodities. The economy is showing increasing signs of weakness, but remains stronger than the one in New Zealand. This didn’t stop AUD/NZD from collapsing.

Australian consumer confidence jumped 9.1 percent from July to 86.2 points in August from a 16-year low, according to a Westpac Banking Corp. and Melbourne Institute survey. This is the sixth consecutive reading of less than 100, showing pessimists still outnumber optimists.

The currency fell early Thursday after a central bank official said the RBA is in a position to consider cutting interest rates.

This Week's Data and Events

United States
D Date GMT Event Period UBS Previous Market

The US economic calendar will begin on Monday with the release of the Homebuilders' survey NAHB August – that’s not a market mover.

Tuesday will see the more important data on the housing starts and the PPI reports for July.

The leading indicators report for July and the Philly Fed survey for August are due on Thursday.

The Eurozone
The Eurozone economic calendar will start on Monday with the release of the French Business Sentiment report for July.

More important will be Germany’s ZEW Current Situation report for August and Producer Prices report for July. They are both due on Tuesday.

The Eurozone PMI Manufacturing and Services reports for August are due on Thursday.

Japan
The two-day BoJ meeting on Monday and Tuesday will leave rates unchanged – and very likely for the rest of the year.

All Industry Activity report for June is due on Wednesday.

Thursday will see the release of the trade balance report for July.

The UK
The UK economic agenda will begin on Wednesday with the release of the Bank of England’s MPC minutes for August and with the CBI Industrial trends report for August. They are both important at a time the pound is getting annihilated.

Thursday will see the release of the retail sales report for July and of the business investment report for the first quarter. The sales are crucial, given the funny previous two months reports (the former as a huge gain and the latter as an equally large decline).

The index of services report for June and of the GDP report for the second quarter are due on Friday.

Canada
The Canadian economic agenda will open on Wednesday with the release of the leading indicators report for July and retail sales report for June. They are both significant reports.

Thursday will see the release of the CPI July.

Overview

Euro/dollar
Last week's range: 1.4660 – 1.5083 (Down)
Previous range: 1.4999 – 1.5630 (Down)

Euro/dollar fell for the fifth straight week and closed below its rising trendline. The pair remains on track of a double top targeting the 1.4600 area. My model remains short since July 22. After a brief bounce, the decline should resume.

Immediate resistance is seen at 1.4755. This is followed by 1.4832 and 1.4950. The next levels remain at 1.5015, 1.5065 and 1.5110. Distant resistance is at 1.5320.

Initial support is now seen at 1.4640. Below the target at 1.4600, support now comes at 1.4505 and 1.4440. Distant support moved down to 1.4265.

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

Dollar/yen
Last week's range: 108.38 – 110.30 (Up)
Previous range: 107.46 – 110.37 (Up)

Despite aggressive choppy trading, dollar/yen still climbed to a new high for the year and my model is long. The Gann pivot at 110.35 still ruled and will continue to do the same at least early this week.

Immediate resistance is now at 110.35 from my 50-point pivot, which targets 109.85 and 110.85.. The next key level remains 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.

Strong support is now pegged at 109.85. Further strong support is at 109.15 from a 50-point pivot, which targets 109.65 and 108.65. Distant support follows at 107.95 from a 50-point pivot, which targets 107.45 and 108.45.

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

Sterling/dollar
Last week's range: 1.8514 – 1.9256 (Down)
Previous range: 1.9147 – 1.9762 (Down)

Sterling/dollar fell for the fourth straight week and reached the lowest levels since July 2006.It is now confirmed that GBP/USD formed a long-term head-and-shoulders pattern that targets the 1.7550 area. While the medium term outlook remains negative, the failure to hold below the declining channel line suggests a pause for the time being.

Below the immediate support at 1.8624, there is a pivot low at 1.8514. Further supports are seen at 1.8480 and 1.8405. Distant support is now pegged at 1.8190.

Initial resistance now comes at 1.8700. Above 1.8786, further resistance comes at 1.8867. Distant resistance is now seen in the 1.9100 area.

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

Dollar/Swiss franc
Last week's range: 1.0743 – 1.1008 (Up)
Previous range: 1.0435 – 1.0838 (Up)

Dollar/Swiss rallied for the fifth consecutive week, but the bulk of the upmove occurred on Thursday. My model remains long. After a brief pullback, the upmove should resume.

Initial support is pegged at 1.0890. Below 1.0855, support is now seen at 1.0725. Distant support is at 1.0620.

Immediate resistance is at 1.1008. Above 1.1055, key resistance comes at 1.1185. Distant resistance moved up to 1.1360.

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

Dollar/Canada
Last week's range: 1.0564 – 1.0730 (Down)
Previous range: 1.0262 – 1.0696 (Up)

Dollar/Canada fell from a new one-year high. The choppy decline turned my model short on Friday. But be careful, as the commodity prices are falling.

Initial support comes at 1.0560. Below 1.0545, support is still seen at 1.0470. Distant support is now pegged at 1.0380.

Immediate resistance is now seen at 1.0635. Above 1.0710, the next levels remain 1.0805 and 1.0885. Distant resistance is 1.1040.

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

Euro/yen
Last week's range: 161.41 – 165.68 (Down)
Previous range: 165.33 – 169.47 (Down)

Euro/yen fell further to a three-month low last week and my model remains short. The cross reached the target of a double top formation at 161.45. Again, hold on to short positions until a bullish reversal is confirmed.

Immediate support is now seen at 161.40. The next levels are 160.85 and 160.05. Distant support is now seen at 158.63.

Strong resistance is at 163.00. The next level is 164.30. Above 165.05, distant resistance is seen at 167.30.

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

Euro/sterling
Last week's range: 0.7794 – 0.7993 (Up)
Previous range: 0.7811 – 0.7945 (Down)

Again, euro/sterling gave back most of its early gains and remained in a slightly declining channel. My model remains short.

Initial support is at 0.7845. The next supports come at 0.7795 and 0.7766. Distant support is at 0.7670.

Immediate resistance is now seen at 0.7900. Above the pivot high at 0.7945, distant resistance is at 0.8022.

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

Published on  Mon, Aug 18 2008, 08:11 GMT