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Weekly Forex Market Commentary

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The euro reversed early losses to close the week higher in aggressive trading

Tue, Sep 23 2008, 12:23 GMT
by Cornelius Luca

GFT

Past Week's Data and Events

The dollar encountered unprecedented lack of liquidity last week (as only cable was affected in 1992/1993 and dollar/yen in 1998) as FX took a secondary position behind classic assets. The government didn’t save the day, but the year and probably the decade with an unprecedented operation to remove toxic assets from banks’ books and allow them to live and fight another day. There were other complex measures, but the bottom line is that we can re-start living our lives and FX will return to normality in early October. The dollar is facing divergent trading, probably strong against the yen and slightly weak versus the European currencies. The worst may probably truly be behind us. Hat tip to Mr. Paulson and Mr. Bernanke!

United States
Twenty years from now you will remember where you were on the week of September 15, 2008. The data were mostly bad last week, but the market was looking at the Lehman bankruptcy, the BoA’s swift scoop of Merrill Lynch, and the AIG’s woes. AIG was saved in the eleventh hour by a special government loan and this smart move stave off a colossal financial disaster.

The European Central Bank and the Bank of England joined the Fed in providing liquidity, with the ECB pumping $100 billion and the BoE $36 billion. Then on Thursday, the Federal Reserve added liquidity to central banks around the world. But, commercial banks still don’t lend money to each other on fear that the other one will go under.

The Federal Reserve left interest rates unchanged at 2.0 percent before bailing out AIG and its accompanying statement showed it was in no hurry to cut rates in the near-term despite the recent turmoil in financial markets.

But starting late on Thursday there was talk of unprecedented government intervention and the stocks flew higher into the end of the week. What the government intends to do and the Congress should quickly approve, is move quickly to shore up toxic assets from banks’ books and reassure big (and normal) investors that they can still keep capital in money markets accounts. This is the biggest expansion of federal power over the financial system since the Great Depression. Is it a perfect plan? Probably not and it will us cost nearly a trillion dollars; but it’s the best damn plan this country has come up in a really long time (maybe ever?) to stop the US financial world melt down. The banks should soon have room to breathe and the government will probably make a pretty buck on the current toxic positions in the long run.

Industrial production fell by a worse than expected 1.1percent in August after (somehow) rising a downwardly revised 0.1 percent in July. Capacity utilization fell 78.7 from 79.7.

Moreover, the New York Empire State manufacturing index fell -7.41 in September from +2.77 in August.The recovery didn’t last long, did it?

The CPI inflation remained high, despite edging lower on the month. Consumer prices slipped 0.1 percent in August thanks toa 4.2 percent decline in gasoline prices, but a 0.5 percent increase in clothing prices pushed core prices up 0.2 percent, still below July’s +0.3 percent. On a yearly basis, the CPI came in at 5.4 percent, down from the 17-year high of 5.6 percent in July; the core CPI was unchanged at 2.5 percent. Given the burst of the commodity bubble and lower consumption, inflation will decline significantly this year and beyond.

Housing starts fell 6.2 percent to an annual rate of 895,000 in August from the downwardly revised July estimate of 954,000 (from the originally reported 965,000). Interestingly, in the Northeast and the Midwest, housing starts fell by 14.5 percent and 13.6 percent, respectively while starts in the West increased by 10.8 percent. Building permits dropped 8.9 percent to an 854,000 pace.

The TIC net overall capital outflow came in at $74.8 billion July; net long-term inflow came in $6.1 billion from $53.4 billion in June and the net outflow was $8.2 billion from $36.6 billion inflow.

The Philly Fed survey was not bad at all, bouncing to +3.8 in September from –12.7 in August (and expectations for a reading of –10). This was the first positive report since November 2007! But the market was focusing on other bigger things on Thursday.

The weekly claims for unemployment benefits rose 10,000 to 455,000 last week. That’s nothing; it will get gruesome by early next year.

The Eurozone
The euro reversed early losses to close the week higher in aggressive trading. The regional data were not bad, but that’s not the reason why the currency gained.

The key German ZEW index came in a better than expected at -41.1 in September from -55.5 in August. It’s still bad.

Eurozone labor costs declined to +2.7 percent in the second quarter from an upwardly revised +3.5 percent in the previous quarter.

The Eurozone CPI fell by 0.1 percent in August, while core CPI rose to 1.9 percent from 1.7 percent, while Germany’s CPI came in at -0.3 percent on the month and 3.1 on the year, the same as in July.

The Eurozone trade balance worsened to -2.3 billion euros in July from -0.1 billion euros the previous month.

The Eurozone construction output rose 0.1 percent in July from -0.6 percent in June.

Elsewhere, Italy’s CPI came in flat August and +4.2 percent on a yearly basis, the same as the previous month.

The French current account deficit improved to -3.8 billion euros in July from -4.3 billion euros.

Japan
The dollar/Japanese yen recovered from a four-month low to close this crazy week higher. This may continue this week.

Japanese consumer confidence fell to a new record low of 30.1in August from 31.4 in July.

Machine tools orders sank 13.9 percent in August on the year on top of –14.2 percent in July.

The UK
The pound reversed early losses to close higher last week. This recovery may continue this week.

UK CPI edged up to 4.7 percent in August from 4.4 percent the previous month.

Meanwhile, the DCLG house prices fell 0.3 percent in July on a yearly basis, after expanding 0.6 percent the previous month.

The claimant count rate rose to 2.8 percent in August from 2.7 percent previously, with the ILO unemployment rate up 5.5 percent in July from 5.4 percent previously.

Retail sales expanded 1.2 percent in August and 3.3 percent on the year. That’s nice, but who cares? It should be reversed next month.

Canada
The Canadian dollar reversed early losses to close the week on a strong note. Additional strength is likely this week.

Looking to avoid contagion from the US, Canadian Prime Minister Harper said that his economy remains solid despite global troubles because of a strong household sector, government sector, and financial institutions.

However, foreign investors reduced their holdings in Canadian securities in July for the first time since November 2007 for a net divestment of C$5.59 billion.

Manufacturing sales rose 2.7 percent in July, a fourth consecutive monthly increase, from 2.1 percent in June.

Switzerland
The dollar/Swiss franc failed on the upside and turned sharply lower. But it ended the week off its lows. We need more direction.

Australia
The Australian dollar reversed from a 13-month low to close the week higher. More strength is likely.

This Week's Data and Events

United States
D Date GMT Event Period UBS Previous Market

The US economy will start on Wednesday with the release of the existing home sales for August. Well, it’s too early for a bottom.

Thursday will see the release of the new home sales report for August and of the durable goods orders report for August.

The revision of the second quarter GDP is due on Friday.

The University of Michigan report for September is due as well.

The Eurozone
The Eurozone economic agenda will start on Tuesday with the release of the Eurozone PMI services and manufacturing, the French consumer spending report for July and of the Italian consumer confidence index for September.

On Wednesday, be on the lookout for the crucial IFO survey of German Business Climate for September.

The French business survey for August is due on Wednesday as well.

The German GfK consumer confidence report for October follows on Thursday.

Friday will see the release of the French consumer confidence report for August and of the revision of the second quarter GDP.

Japan
The Japanese economic agenda will begin on Monday with the release of the all industry activity report for July.

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

Inflation reports are due on Friday.

The UK
The UK economic calendar will start on Monday with the release of the Rightmove house price survey for September.

Thursday will see the release of the Nationwide House Prices report for September.

Canada
The Canadian economic agenda will start on Monday with the retail sales report for July.

Tuesday will see the release of the inflation report for August.

Overview

Euro/dollar
Last week's range: 1.4075 – 1.4539 (Up)
Previous range: 1.3882 – 1.4428 (Down)

Euro/dollar reversed aggressive losses to close higher last week after coining a near 2 ½-year low the week before. My model is long on profit taking and more sustained recovery should be under way, as I mentioned in the previous report.

Initial resistance is seen at 1.4545. Above 1.4625, resistance is still seen at 1.4810. This is followed by 1.4910. Distant resistance is at 1.5015.

Immediate support is at 1.4375. The next level is 1.4290. Below 1.4180, support is at 1.4075. Further support still comes at 1.4010. Distant support is at 1.3883.

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

Dollar/yen
Last week's range: 103.56 – 108.01 (Up)
Previous range: 106.07 – 109.07 (Down)

Dollar/yen surged from a near four-month low to close higher, as the yen remains an ingredient for crosses. My model went long. The medium-term outlook is mixed, but the short-term outlook is bullish.

Immediate resistance is at 107.95 from a 50-point pivot, which targets 107.45 and 108.45. Above 108.80, look for a test of the 50-point pivot at 109.15, which targets 109.65 and 108.65. Distant resistance is at 110.35 from a 50-point pivot, which targets 109.85 and 110.85.

Initial support is at 106.75 from another 50-point pivot, which targets 106.25 and 107.25. The next level is 105.60 from a 50-point pivot that targets 105.10 and 106.10. This is followed at 104.50 by a 50-point pivot, which targets 104.00 and 105.00. The next level is 103.40 from another 50-point pivot, which targets 102.90 and 103.90.

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

Sterling/dollar
Last week's range: 1.7733 – 1.8386 (Up)
Previous range: 1.7448 – 1.7975 (Up)

Sterling/dollar recovered aggressively late last week from sharp losses. My model remains long and the upside is again favored in the short term.

Good resistance is at 1.8386. Above the strong level at 1.8470, further resistance is at 1.8505. Distant resistance is now seen at 1.8750.

Below 1.8235, strong support now comes at 1.8110. This is followed by 1.7917. Distant support comes at 1.7776.

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

Dollar/Swiss franc
Last week's range: 1.0901 – 1.1305 (Down)
Previous range: 1.1129 – 1.1417 (Up

Dollar/Swiss fell sharply, more than I expected, after reaching a near nine-month high the week before. The late recovery took the edge off the decline, but the initial bias is lower once again.

Immediate support is at 1.0980. Below 1.0885, support is still pegged at 1.0844. This is followed by 1.0715. Distant support moved down to 1.0555.

Initial resistance now comes at 1.1100. The next level is 1.1200. This is followed by 1.1360. Above 1.1417 there is a pivot high at 1.1605.

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

Dollar/Canada
Last week's range: 1.0570 – 1.0782 (Down)
Previous range: 1.0551 – 1.0821 (Mixed)

Dollar/Canada reversed early gains to fall sharply late last week. That’s one week after nailing a 13-month high. My model remains short, and the outlook remains slightly negative.

Support now comes first at 1.0412. This is followed by 1.0350 and 1.0230 (crucial trendline support). Below 1.0180, distant support is now at 0.9974.

Initial resistance is at 1.0550. Above 1.0645, resistance is at 1.0821 from a new pivot high. Distant resistance remains at 1.0867 from another pivot high.

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

Euro/yen
Last week's range: 147.07 – 155.54 (Up)
Previous range: 147.55 – 156.99 (Down)

Euro/yen surged from an over two-year low to close the week significantly higher. The medium-term outlook is positive, and my model remains long.

Initial resistance level is at 156.80. The next level is 158.50. This is followed by 159.90. Distant resistance is still seen at 161.15.

Immediate support is now seen at 154.45. The next level is 153.70. Below 152.30, distant support is now at 147.07.

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

Euro/sterling
Last week's range: 0.7848 – 0.8009 (Down)
Previous range: 0.7921 – 0.8077 (Down)

Euro/sterling fell further last week after forming a bearish reversal two weeks earlier. The initial bias is slightly negative.

Initial support is at 0.7848. Below 0.7814, support is seen at 0.7794. Below 0.7766, distant level is now at 0.7640.

Above 0.7960, resistance is at 0.8010. Strong resistance is still seen at 0.8038. The cross then sees resistance at 0.8093 and at 0.8077 from a pivot high. Distant resistance remains is at 0.8262.

NEAR-TERM: Mixed with downside bias
MEDIUM-TERM: Bullish
LONG-TERM: Bullish

Published on  Tue, Sep 23 2008, 14:34 GMT