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Forex Weekly Review and Outlook − Dollar Made Multiple Lows ahead of a Huge Week

Sat, Oct 27 2007, 14:36 GMT
by ActionForex.com Team

ActionForex.com

Forex Weekly Review and Outlook

Dollar Made Multiple Lows ahead of a Huge Week

Dollar weakened to new record low against Euro last week as market's focus gradually turned back from risk aversion to interest rates. With help of record oil and gold prices, the buck also dropped to new 33 year low against the Canadian dollar as well new 23 year low against Aussie. In addition to FOMC rate decision, Q3 GDP, Non-Farm Payroll will also be featured this week. After all, it will be a huge week for the greenback.

Dollar initially benefited from carry trade unwinding activities and rebounded against most majors. However, the strength in the greenback was not sustained as markets gradually turned focus back to interest rates. Dollar was sold off towards the end of the week after a serious of disappointing economic data and on firm expectation of further rate cut from Fed on Oct 31.

Housing data continued to show further deterioration in the housing markets. Existing home sales dropped -8.0% in Sep to 5.04m annualized rate, much weaker than consensus of 5.28m, and is the largest decline since 1999. Even though new home sales recovered to 0.77M in Sep That was mainly due to a large downward revision in Aug and the data was still below expectation of 0.78m.

The usually volatile durable goods orders fell for a second month by -1.7% in Sep, much worse than expectation of 1.5% rise. Prior month's contraction was also revised from -4.9% to -5.3%. Jobless claims dipped mildly but came in much worse than expected at 331k, the second consecutive week of above 330k reading. University of Michigan consumer sentiment was revised lower to 80.9 versus last month's 83.4.

After initial pull back Euro surged to new record high against the greenback towards the end of the week. Data from Eurozone were mixed. The closely watched German Ifo business climate index dropped further to 20 month low of 103.9 in Oct. However, that was slightly better than expectation of 103.7. Current situation index dipped slightly from 109.9 to 109.6 while business expectation index dipped slightly from 98.7 to 98.6. However, German Gfk consumer confidence unexpectedly tumbled to 7 month low of 4.9.

M3 money supply growth slowed more than expected to 11.3% yoy in Sep. 3 Months average rose slightly to 11.5%. Manufacturing PMI dropped more than expected from 53.2 to 51.5 in Oct. Meanwhile, Services PMI rose more than expected from 54.2 to 55.6. Eurozone current account surplus narrowed from 3.3b to 0.7b in Aug.

Japanese yen spiked higher on Monday as aftermath of G7 meeting but failed to sustained momentum. The yen gave back some gains in crosses as the week went on. Japan National CPI remain in negative territory at -0.2% yoy in Sep. Core inflation, excluding food prices, came in at -0.1% yoy, negative for the eighth consecutive month. Inflation pressures remain subdued and will continue to delay BoJ's normalization of rates. Industrial production dropped -1.4% mom, +0.8% yoy in Sep, missing expectation.

Despite edging mildly against dollar last week, momentum in Sterling was unconvincing as the pound continued to be pressured in crosses throughout the week, first by yen cross, then by EUR/GBP cross. There was additional pressure after BoE noted that the credit, equity, and commercial property markets remain "vulnerable to further adjustments." Swiss combined PPI dropped -0.3% mom in Sep, largest monthly contraction in 19 months, dragging yoy rate to 2.9%.

Commodity currencies generally surged against dollar last week. Canadian dollar rode on record oil price of over $92 a barrel, as well as stronger than expected retail sales in Aug, which rose 0.7% mom versus consensus of 0.5%, and made new 33 year against the greenback. The Australian headline CPI came in lower than expected, rising 0.7% qoq, 1.9% yoy comparing to consensus of 0.9% qoq, 2.1% yoy. However, the markets are indeed focusing on the core inflation measure which saw RBA trimmed mean CPI rose 2.9% yoy, and the weighted median CPI that rose 3.1% yoy. Both are above expectation of 2.8% yoy. Interest rates futures quickly priced in over 80% chance of a 25bps hike from RBA in Nov, up from 60% before the data. Aussie was also supported by rally in gold prices. RBNZ left rates unchanged at 8.25% as widely expected.

The Week Ahead

It is a huge week for the greenback. Markets are aggressively increasing the odds of a rate 25bps on Oct 31 after terribly bad housing data in the past two weeks, with interest rates implying over 90% chance now. It's believed that Fed won't surprise the markets like what it did in Sep and will opt for 25bps cut instead of 50bps. Focus will indeed be on how much more will Fed need to cut and the accompanying statement will provide some clues. Also, it's believed that effect of the subprime problem and housing market downturn on the overall economy is limited. The Q3 GDP data to be released before FOMC will need to meet market's expectation of 3.1% growth to validate this view. Then, focus will turn to Friday's job report which is expected to show 88k growth in non-farm payrolls and unchanged unemployment rate at 4.7%. Market's expectation for further rate cut could drastically change after these events.

Other than that, ADP employment will be eyed as a preview to NFP. Details of the ISM manufacturing report will be looked into, in particular on price and employment. Sep core PCE deflator is expected to remain tame at 1.8% yoy. Other important data from US include Conference Board Consumer Confidence, Chicago PMI, construction spending, , pending home sales and factory orders.

Based on current inflation outlook BoJ is widely expected to keep rates unchanged at 0.5% next week. The yen will continue to be driven by risk aversion and another sharp fall could be seen should the yen complete recent short term consolidation. Also, yen's carry trade unwinding will continue to be a main risk of other currencies' rally against dollar. Other data from Japan include retail sales, unemployment rate, household spending, Manufacturing PMI, construction orders and housing starts.

From Eurozone, retail sales and unemployment rate in Germany, Eurozone unemployment rate, economic sentiment and PMI manufacturing will be released. UK nationwide house price, Gfk consumer confidence as well as manufacturing and construction PMI will be featured. From Switzerland, focus will be on KOF leading indicator and CPI.

Commodity currencies will continue to be driven by strength in oil and gold prices. Canadian dollar will also be sensitive to the release of Aug GDP. Australia retail sales and trade balance as well as New Zealand trade balance will be eyed too.

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

EUR/USD

Despite initial pullback, EUR/USD's rally resumed towards the end of the week by taking out 1.4348 resistance and made new record high of 1.4393. From a short term angle, initial bias will remain on the upside this week as long as 1.4316 minor support holds. NExt upside target is 1.4535 cluster resistance (95 high and 200% projection of 1.3262 to 1.3851 from 1.3360 at 1.4538). However, note that 1.4535 represents an important resistance zone and the current rally from 1.3360 could be limited there initially on loss of upside momentum and medium term overbought condition.

On the downside, below 1.4316 will turn intraday outlook neutral first. Further break of 1.4124 support will indicate that a short term top is possibly in place already and bring deeper correction to 1.4014 support and below.

In the bigger picture, with medium term rising channel (support at 1.3604) remains intact, up trend from 1.1639 remains in force. Also, regardless of internal structure, such rise is treated as resumption of the long term up trend from 0.8223 (00 low) to 1.3668 (04 high) and is expected to extend to 61.8% projection of 0.8223 to 1.3668 from 1.1639 at 1.5004 which will overlap with 1.5 psychological resistance.

On the downside, below 1.4124 will warn that a short term top is in place and bring deeper correction. But a break below the mentioned medium term trend line is needed to be the first alert to indicate that such rally from 1.1639 has completed. Otherwise, medium term outlook remains bullish.

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Published on  Sat, Oct 27 2007, 14:37 GMT