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Forex Weekly Review and Outlook − Dollar Mixed after Dovish Bernanke, Sterling and Loonie Even Weaker

Sat, Jan 12 2008, 21:20 GMT
by ActionForex.com Team

ActionForex.com

Action Insight Forex Weekly Review and Outlook

Dollar Mixed after Dovish Bernanke, Sterling and Loonie Even Weaker

As it should be, views on monetary policy paths remained the dominate force in the currency markets last week. Both ECB and BoE left interest rates unchanged. While Euro was supported by hawkish comments from Trichet, Sterling continued to be under pressure on expectation of further rate cuts from BoE in Q1. Bernanke's dovish speech last week signaled that Fed could cut rates more aggressively in the coming FOMC meeting on Jan 30. Canadian dollar tumbled across the board after weak employment report reaffirmed the view more rate cuts should be seen from BoC in the near term. Meanwhile, Aussie was boosted by strong data that suggest RBA is still firmly on hold.

Looking at the weekly currency Heat Map, we can see that Canadian dollar was clearly the weakest currency last week. Sterling also extended its fall against most major currencies except the Canadian. On the other hand, the Aussie was generally strong, strengthened against all majors along with the Swissy. This can also be reflected AUD/CAD and GBP/AUD were the top 2 movers last week, gaining 3.66% and losing -3.03% respectively. Dollar was indeed just mixed against the majors.

Bernanke's speech caught most attention in a string of Fedspeaks last week. To the market's surprise, Bernanke sounded extremely dovish. In his prepared speech Financial Markets, the Economic Outlook, and Monetary Policy, Bernanke said that risks to the economy have now become "more pronounced" and "baseline outlook for real activity in 2008 has worsened". The Fed is ready to take "substantive additional action" to safeguard the economy against such risks. Financial markets remain "fragile" even though Fed's implementation of Term Auction Facility eased some pressure on interbank lending rates. After Bernanke's speech, interest rate futures are now price over 90% of 50bps cut from Fed in Jan. The chance of a 75bps cut even surged further to 44%!

Economic calendar in the US was very light last week. Pending home sales deteriorated further from 89.9 to 87.6 in Nov. he nominal U.S. trade deficit in goods and services widened much more than expected by 9.3% in Nov, reaching a 14 month high of -$63.1b. Both exports and imports increased but import surged by $5.9b largely due to increase in oil prices. Though, jobless claimed improved more than expected to 322k while wholesale inventory rose to 0.6%.

As widely expected, ECB left rates unchanged at 4.00%. In the post meeting press conference, Trichet maintained a hawkish tone and emphasized that ECB stands ready to act "preemptively" to ensure second round effects and risks to price stability do not materialize. Also, He said that ECB will not tolerate an inflation spiral of rising prices and wages. On inflation, Trichet noted recent data confirmed that risk to price stability is on the upside and HICP will remain far above 2% in near term.

Data from Eurozone saw unemployment rate unchanged at 7.2% in Nov, with PPI accelerated to 4.1% yoy. Economic sentiment and business climate both dropped to 104.3 and 0.92 in Dec respectively. Q3 GDP confirmed to grow 2.7% yoy, 0.8% qoq in Q3. Though, retail sales was very weak, dropping -0.5% mom in Nov, dragging yoy rate to the negative side at -1.4%.

BoE left rates unchanged at 5.50% today. As usual, BoE did not issue a statement today for keeping rates unchanged and markets will look forward to the minutes to be released on Jan 23 for details of the discussions and vote splits. Markets continues to expect further rate cut from BoE in the near term, in particular after Marks & Spencer, the countries largest clothing retailer, reported a 2.2% falling like-for-like sales.

Data from UK were generally soft. BRC retail sales dropped to 0.3% in Dec. UK trade deficit widened more than expected to -7.38b in Nov. Industrial production and manufacturing reports showed -0.1% mom drop in IP, dragging yoy rate to 0.4%, -0.1% drop in MP, dragging yoy rate down to 0.1%. Halifax house price index, though, unexpectedly rebounded by 1.3% in Dec.

Swiss unemployment rate edged higher to 2.8% in Dec.

Canadian dollar was under extreme pressure on a string of weak data that prompted further speculations that BoC will have another rate cut in near term, following the 25bps cut in Dec. Housing started dropped more than expected to 187.5k in Dec. Building permits dropped drastically by -9.9% in Nov even though house price index rose more than expected by 0.5%. More importantly, even though unemployment rate remained unchanged at 5.9% in Dec, total employment unexpectedly dropped by -18.7k, first drop in eight months. Better than expected trade surplus of 3.7b offered little support to the Loonie.

The Aussie, on the other hand, was supported by narrower than expected trade deficit at -2254m after strong rise in exports in Nov. Retail sales also beat market expectation by rising 0.8% mom in Nov.

The Week Ahead

A lot of important economic data are scheduled to be released this week. In particular, markets will focus on both data from US and UK to reaffirm current views on monetary policies. From US, retail sales growth in Dec in expected to slow sharply to 0.1% with ex-autos sales at 0.1% too. Building permits and housing starts are both expected to deteriorate further in Dec, showing no sign of bottoming yet. Dec PPI & CPI inflation report will also be featured. PPI is expected to accelerate to 7.9% yoy in with core PPI unchanged at 2.0% yoy. On the other hand, CPI is expected to slow mildly to 4.1% yoy with core CPI up slightly to 2.4% yoy. Nevertheless, the inflation reports are not expected to provide much support to the greenback, especially if the retail sales report surprises the markets on the downside, since Fed's mind is clear on growth and recession rather than inflation.

Other data from US include regional Fed survey from NY State and Philadelphia, business inventories, industrial production, TIC capital flow U of Michigan consumer sentiment as well as Fed's Beige book.

From UK, PPI & CPI report as well as retail sales will be closely watched. Stronger PPI inflation data are expected in general. However, headline CPI is expected to slow slightly from 2.1% yoy to 2.0% yoy in Dec with RPI and RPI-X slowing too. Retail sales is expected to show merely 0.2% mom growth in Dec, dragging yoy rate down from 4.4% to 3.5%.

From Eurozone, industrial production, ZEW, final reading of Dec HICP, Nov trade balance will be released. A lot of data will also be released from Japan including machine orders, domestic CGPI, current account and trade balance, industrial production and consumer confidence.

Aussie will try to draw further strength from Dec employment report which is expected to show unemployment rate dropping further from 4.5% to 4.4%.

More Technical Analysis Reporst Here

AUD/USD Weekly Outlook

AUD/USD's rebound form 0.8551 resumed last week and surged to as high as 0.8975. However, upside was initially limited by key near term cluster resistance 0.8975/77 (50% retracement of 0.9398 to 0.8551 at 0.8975 and 100% projection of 0.8551 to 0.8846 from 0.8682 at 0.8977). Though, from a short term angle, initial bias will still remain on the upside as long as 0.8858 resistance turned support holds. Sustained break of 0.8975/77 cluster resistance will confirm that correction from 0.9398 has completed at 0.8551 after drawing support from 50% retracement of 0.7675 to 0.9398 at 0.8537. In such case, further rally should ten be seen to retest this 0.9398 high.

On the downside, below 0.8858 will suggest an intraday top is in place and turn intraday outlook neutral first. However, further break of 0.8682 support will firstly confirm that rise from 0.8551 has completed. Secondly, it will suggest that such rise from 0.8551 is of corrective nature and, in turn, indicates that correction from 0.9398 is still in progress. In such case, another fall should be seen to below 0.8551 low before completing the fall from 0.9398.

In the bigger picture, rally from 0.7015 has made a medium term top at 0.9398 after failing 200% projection of 0.6773 to 0.7992 from 0.7015 at 0.9453. As long as 0.9398 high remains intact, fall from there is tentatively treated as part of the correction pattern to whole rally from 0.7015 only and further decline could still be seen to support zone between 0.8008 (04 high) and 50% retracement of 0.7015 to 0.9398 at 0.8207 before completion. Though, downside should be contained there and bring rally resumption.

In the longer term picture, the whole up trend from 0.4773 (01 low) should still be in force as long as the current correction is contained above 0.8008 high. Sustained break of 0.9398 will confirm that such up trend has resumed for next target of 100% projection of 0.4773 to 0.8008 from 0.6773 at 1.0008 which overlaps with parity.

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Published on  Sat, Jan 12 2008, 21:22 GMT