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Forex Weekly Review and Outlook − Dollar Recovers after Bernanke, Focus Turns to ECB and NFP

Sun, Sep 2 2007, 09:44 GMT
by ActionForex.com Team

ActionForex.com

Forex Weekly Review and Outlook

Dollar Recovers after Bernanke, Focus Turns to ECB and NFP

Though being pressured for most of the week, dollar recovers mildly after speeches from Fed Chairman Bernanke and President Bush on Friday. Yen continues to consolidation as markets calmed down from prior panic carry trade unwinding. Though this week will start with US market holiday, much volatility is anticipated as the week goes, with four central bank rate decisions featured (ECB, BoE, BoC, RBA), non-farm payroll, as well as a number of important economic indicators.

Bernanke's speech on housing and monetary policy in the annual Jackson Hole conference was highly anticipated last week. Bernanke emphasized that Fed is closely monitoring the housing and mortgage market, and will take necessary actions to limit fallout on the real economy. Credit is tighter for all but conforming mortgages and that implied tighter credit for the economy, including including higher-yield spreads, reduced credit issuance, greater risk aversion and increased volatility in financial markets. Focus will be on the most updated economic data to determine the need to act. But, Fed will not act to protect investors from their bad decisions.

Later on Friday, President Bush made a Rose Garden speech to discuss administration initiatives to reduce foreclosures. Bush proposed the Federal Housing Administration (FHA), which provides mortgage insurance to lower-income borrowers, to allow some homeowners who have missed payments to refinance into new loans. He also called for greater education efforts to help homeowners avoid foreclosure. Also, Bushed proposed to lower down-payments and higher loan limits for FHA-insured loans and called for a change in the tax code to benefit homeowners who sell their homes at a loss.

Markets showed little reaction to the FOMC minutes released during the week as it did little to alter the speculations of a near term rate cut. The minutes noted that even though moderate economic expansion is still expected in the coming quarters, downside risks to growth had increased. "Housing would remain a drag on growth for some time and represented a significant downside risk to the economic outlook." And even though "members expected a return to more normal market conditions, but recognized that the process likely would take some time, particularly in markets related to subprime mortgages." The committee also noted that "a further deterioration in financial conditions could not be ruled out and, to the extent such a development could have an adverse effect on growth prospects, might require a policy response".

Data from US were pretty solid. Factory orders surged 3.7% in Jul, much better than expectation of 0.7%. Chicago PMI improved to 53.4 to 53.8 in Aug. US Personal income rose 0.5% in July, above June’s 0.4% growth and beats expectation. Spending was up from 0.2% and rose 0.4%. However, core PCE deflator, the Fed's preferred gauge of inflation rose a modest 0.1% for the 4th in the last 5, keeping the yoy rate at 1.9%, staying in Fed's support zone of 1-2%. Q2 GDP growth, though revised less than expected, is still at at the fastest rate in amore than year at 4.0%. Personal consumption was also revised higher to 1.4% in Q2, though it missed expectation of 1.5%. Existing home sales in US dropped merely 0.2% in Jul from an upwardly revised 5.76m annualized rate to 5.75m. Though it marked a fifth consecutive decline in the existing home sales and is the lowest reading since Nov 02, it's slightly better than expectation of 5.70m.

The highly anticipated speech from Trichet has just focused on productivity. He said that eurozone productivity growth is "disappointing" comparing with more resilient growth in the US. And it is also "not particularly high" compared with previous business cycles. Productivity growth has been stronger in the manufacturing sector. But in services sector, it has not improved much. Nothing regarding ECB's expected rate hike in Sep was mentioned.

Data from Eurozone saw Germany's Ifo business confidence index continued to weaken in August, though did not do so to the degree that markets had expected. The headline index fell for the third month in a row to 105.8 vs expectation of 105.4. Meanwhile, Eurozone M3 money supply grew 11.7% yoy in July, up from 10.9% and beat expectation of 11.0% and getting farther away from the 4.5% benchmark level which the ECB considers as non-inflationary. Germany Gfk consumer confidence dropped for the first time in six months to 7.6 in Aug, which is far lower than expectation of 8.5. Eurozone HICP confirmed to be at 1.8% yoy, unemployment rate staying at all time low of 6.9% while economic sentiment just dropped slightly from 111 to 110.

The headline CPI in Japan showed no change in July, however, core CPI, which excludes food prices, remained in negative territory, declining by 0.1% yoy. Industrial production dropped more than expected by -0.4%, in Jul. Though, unemployment rate continued to improve by dropping to 3.6%, hitting a fresh 9 year low. Jul housing starts data which tumbled -23.4% to 0.947m annualized rate, the first time in records since 1978 that the series has dropped below one million. Retail sales unexpectedly dropped -2.2% yoy in Jul. The ultra but lone hawk, BoJ Atsushi Mizuno called for BoJ to raise interest rates to prevent excessive borrowing that triggered the US subprime mortgage problems.

Sterling was pressured briefly after news that BoE loaned 1.6 Billion Pounds at 6.75% penalty rate, which is its highest rate. This is taken as an indication that commercial banks are reluctant to provide credit after the collapse of the U.S. subprime-mortgage market. Nationwide house price index cooled further from 9.9% yoy to 9.6% in Aug.. Gfk consumer confidence which improved from -6 to -4 instead of expectation of deteriorating to 0-7.

Swiss CPI unexpectedly dropped -0.1% mom in Aug, following a -0.6% drop in Jul. Yoy rate was dragged down to 0.4% comparing to expectation of 0.7%. Swiss KOF dropped more than expected to 2.06 in Aug. Canadian GDP data came in above expectation, rising 0.2% mom in Jun versus consensus of 0.0%. Annualized qoq growth weakened from revised 3.9% to 3.4% but remains solid. From Australia, retail sales rose 0.9%mom in July after surging 1.4% in the previous mont suggesting that consumer demand remains robust.

The Week Ahead

Four central bank swill announce rate decisions this week. BoE, BoC and RBA are expected to keep rates unchanged. Opinion on whether ECB will hike is divided. Trichet has signaled a rate hike by using the coded word "strong vigilance" in Aug's press conference but markets speculate that ECB will postpone that rate hike due to recent turmoil in the financial markets. Trichet has so far provided no guidance as he only said emphasized that ECB won't pre-commit to any policy move.

On the other hand, Bernanke's speech was taken as another indication that Fed has opened the door for a rate cut in the Sep meeting and the outcome will very much depends on the upcoming batch of economic data, in particular the NFP. This will also be consistent with the last FOMC statement on Aug 7 that Fed expects economy to continue to expand at a moderate pace, supported by "solid growth in employment and incomes and a robust global economy." That is, The result of the NFP this week will swings the odd of a Fed cut sharply.

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

EUR/USD

EUR/USD's rebound from 1.3360 extended further to as high as 1.3719 last week. However, short term upside momentum is seen diminishing with bearish divergence condition in 4 hours MACD and RSI. A short term top is possibly in place at 1.3719 already. Initial outlook will be consolidative with mild downside bias this week for 1.3593 support first and lower. However, downside should be contained by 1.3543 cluster support (50% retracement of 1.3360 to 1.3719 at 1.3540) and bring another rise. Above 1.3719 will indicate rebound from 1.3360 has resumed for a retest of key resistance zone of 100% projection of 1.1639 to 1.2978 from 1.2483 at 1.3822 and 1.3851 high.

In the bigger picture, EUR/USD is still kept above mentioned long term cluster support at 1.3328/29 (38.2% of 1.2483 to 1.3851 at 1.3328 and 23.6% retracement of 1.1639 to 1.3851 at 1.3329), as well as 55 weeks EMA (now at 1.3247). There is no confirmation of completion of up trend from 1.1639 yet. Also, the corrective nature of the fall from 1.3851 to 1.3360 suggest that it's merely a correction, or part of a consolidation to the medium term rally. However, since 1.3822/51 is an important medium term resistance zone, sustained break of this zone is needed to confirm long term up trend from 1.1639 has resumed. Otherwise, medium term outlook will remain neutral and another fall could be seen to 1.3360 low or below before completion.

On the downside, 1.3262 low will be the support level to pay attention too. Medium term outlook will still be neutral as long as this support holds. However, decisive break of this level will add favor to the case that whole up trend from 1.1639 has completed and bring further fall to 1.2978 (medium term resistance turned support) first.

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Published on  Sun, Sep 2 2007, 09:44 GMT