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Forex Weekly Review and Outlook − Markets to Focus on US−China Protectionism Tension Development

Sat, Mar 31 2007, 10:01 GMT
by ActionForex.com Team

ActionForex.com

Forex Weekly Review and Outlook

Markets to Focus on US-China Protectionism Tension Development

Dollar was set to end an eventful week on a high note but all prior developments were overshadowed by late Friday's announcement from Commerce Department on new import duties on China. Dollar reversed earlier gains from strong data, falling sharply and ended the week lower across the board. The coming week will feature rate decisions from RBA and BOE, plus a number of important economic data including ISM indices and employment report from US. However, focus will likely remain on the development in the US-China protectionism tension.

The US Commerce Department announced on Friday that it will reverse more than 23 years of practice and apply trade tariffs to glossy paper imports from China. The decision is preliminary and initial duties will range from 10.9% to 20.3%, averaging at 18.16%. The Commerce Department said Chinese paper producers benefit from government grants, tax incentives, debt forgiveness and other unfair subsidies. China's exports of coated paper more than doubled in 2006 to $224 million. Dollar was sold offer after this news as traders speculate that the policy will extend to other produces including raw materials, machinery and furniture imports that could eventually start a trade war between US and China. Such would hurt demand for US exports by making them raising the costs and could also prompt China to diversify some of its foreign reserves away from the greenback.

China's Commerce Ministry expressed on Sat that China is "very dissatisfied" with the tariffs and will "closely monitor and reserve the right to take any necessary action". It also criticized U.S. insistence on treating China as a non-market economy while, designation as a market economy would make it easier for Chinese companies to fight anti-dumping actions.

In the highly anticipated testimony to Joint Economic Committee, Bernanke noted that the current level of core inflation remains "uncomfortably high" but should gradually moderate if energy prices remain near current levels and labor market does not tighten any further. However, risk is still to the upside. Regarding housing markets, he said that risks to economic growth have increased because of downturns in housing and company investment, but the problems are likely to be contained. The noted that risks to Fed's baseline forecast have grown in recent weeks and such uncertainty has prompted the FOMC to change its post-meeting statement to leave some flexibility to future policy decisions. But he emphasized that the Fed have "not shifted away from an inflation bias". After all, it's believed that the Fed is still the bias is still towards tightening, even though it's a little bit softer. Friday's release of core PCE deflator, which rose by 0.3% mom in Feb, pushing yoy rate to 2.4%, matching last Sep's peak is consistent with this view and indicates inflation risk remains substantially on the upside.

Other data from US were mixed, with personal income and spending both rose more than expected by 0.6% comparing to expectation of 0.3%. Chicago PMI staged an impressively strong rebound to 61.7 in Mar, much stronger than expectation of 49.2, and being the strongest reading since Apr 05. Construction spending rose 0.3% in Feb, which is also above expectation of -0.6%. Q4 GDP growth was also revised higher from 2.2% to 2.5%. However, new home sales fell sharply by -3.9% to 0.85m in Feb. COnsumer confidence missed expectation nand dropped to 107.2 in Mar while durable goods orders also rebound less than expected by 2.5% in Feb.

Data from Eurozone saw German Ifo business sentiment index rebounded to 107.7 in Mar, breaking two months losing streak. HICP in Germany accelerated to 2.1% in March, back above 2% while Eurozone HICP also accelerated slightly to 1.9%. German unemployment rate dropped to 9.2%, lowest in 5 years while Eurozone unemployment rate also dropped slightly to 7.3%. Eurozone M3 money supply growth defied economists again and accelerated further to 10% in Feb.

Minutes for the Feb BoJ meeting that hiked rates by 25bps revealed that many members believed that core CPI is still in a up trend even though there may be interim dip in the near term. Consumer inflation in Japan dipped back to negative zone as CPI fell by -0.2% while core CPI fell by -0.1%. Comments from officials were mixed with Finance Minister Omi said he doubts the economy is still experiencing deflation. Meanwhile, Economic Fiscal Policy Minister Ota said the end to falling prices in "in sight". Other Feb data include housing spending which rose 1.3%, industrial production which dropped -0.2%, unemployment rate which stayed at 4.0%.

Sterling was pressured after BoE Governor King's testimony. King said that it was "not surprising" policy makers held different views on inflation because the outlook was uncertain and that the housing market was slowing. While another hike is still expected from BoE in Q2, King's comments, together with the dovish MPC minutes released previous week, has dampened hope for an April hike. Current account deficit came in larger than expected at -12.7b in Q4 while GDP growth was revised slightly lower to 0.7% qoq.

Swiss KOF indicator rebounded further to 1.90 in Mar, beating expectation of 1.83 and is consistent with the view that recovery should be seen in the Swiss economy in second half of the year. Canadian dollar's extended rally against dollar, supported by BoC Governor Dodge's comment that domestic demand appeared to be strengthening but was limited after mixed data which seen GDP growing 0.1% only in Jan while PPI rose 0.9% in Feb.

The Week Ahead

While rate decisions of two central banks and some important economic indicators will be featured in the week ahead, the focus will likely remain on the development on the US-China trade issue. In particular on further comments from Chinese officials and announcement of any reverse acts. While dollar may be boosted by solid data during the week, the effect could be brief as markets will likely remains cautious until the situation clears. Meanwhile, sentiments on dollar will likely remain fragile. We have some reservation on the direct effect on yen as it gained relatively less against dollar after the news was initially announced. Believe the key to yen will be on how Asian stock markets react to the news and further developments and yen will be benefited from risk aversion carry trade unwinding in case some selloffs are seen in the Asian stock market this week.

From US a string of important data will be released in the first week of the month as usual, including ISM manufacturing and non-manufacturing indices, factory orders. Non-farm payroll report will also be released on Friday that will catch a lot of attention as usual.

From Eurozone, Manufacturing PMI and Services PMI will be featured with Eurozone PPI, retail sales as well ass Germany factory orders. Swiss PMI and CPI will also be released. Focus on Japan will main be on Q1 Tankan survey.

BoE rate decision will be one of the main feature this week. Markets has scaled back speculation on an April hike after King's testimony. While expectation has now turned to a May hike, BoE may yet give us a surprise by pulling ahead the raise, just like what they did in Jan. So this event will be closely watched. Industrial production and manufacturing production will also be released on the same day.

RBA rate decision will be another main feature of the week. Aussie remains supported by expectation of further rate hike in Q2 after hawkish comments from RBA officials in the last few weeks. However, opinion is divided on whether RBA will hike in April. Australia retail sales and trade balance will be released prior to the announcement.

Read full report (EUR/USD, GBP/USD, USD/CHF, USD/JPY, EUR/JPY) here.

USD/CHF

Despite rebounding further last week, USD/CHF's upside was limited by 1.2239 and failed to break firmly above mentioned 1.2228/30 cluster resistance (61.8% retracement of 1.2354 to 1.2029 at 1.2230, 38.2% retracement of 1.2550 to 1.2029 at 1.2228) as expected. Friday's sharp fall suggests that recovery from 1.2029 has completed at 1.2239 already. Hence, initial bias will be on the downside this week. Break of 1.2082 support will add much credence to this view and bring retest of 1.2029 cluster support (78.6% retracement of 1.1879 to 1.2571 at 1.2027). Firm break of 1.2029 will confirm recent decline has resumed for next downside target of 1.1879 support (06 low).

However risk of further consolidation remains and as long as USD/CHF stays above 1.2029, it could still continue to gyrate inside established range of 1.2029/2239. Sustained break of 1.2228/30 will put key near term resistance of 1.2354 (61.8% retracement of 1.2550 to 1.2029 at 1.2351) in focus.

In the bigger picture, medium term outlook remains bearish with USD/CHF staying below both 55 days EMA and 55 weeks EMA. Weekly MACD is still staying negative, supporting this view too. The preferred interpretation at this point is that the whole down trend from 1.3283 is still in progress with the first move from 1.3283 finished with three waves down to 1.1919. Subsequent rebound to 1.2768 was the interim correction nand price actions from there represent resumption of such down trend. Sustained break of 1.1878 will add more credence to this view and bring further medium term weakness towards 100% projection of 1.3283 to 1.1919 from 1.2768 at 1.1404.

However, note that USD/CHF is still bounded in wide range of 1.1878 to 1.2768. A rebound to above 1.2354 resistance will dampen this view and indicate that the fall from 1.2571 has completed after meeting 1.2027 fibo support. Another rise could then be seen to retest this high and then the upper end of the range at 1.2768.

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Published on  Sat, Mar 31 2007, 10:03 GMT