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Weekly Review and Outlook − Dollar Weakened on Recession Fear

Sat, Feb 16 2008, 23:01 GMT
by ActionForex.com Team

ActionForex.com

Action Insight Weekly Review and Outlook

Dollar Weakened on Recession Fear

Dollar weakened generally last week on intensified worry of recession in the US economy after dovish Bernanke Testimony as well as a string of poor economy data. That was a sharp contrast to the situation down under in Australia with Aussie boosted by strong economic data and a hawkish monetary policy statement from RBA. Euro recovered most of prior week's losses while the Japanese yen weakened in general after global stock markets stabilized. FOMC minutes will be the main feature next week but the another bunch of US economic data will likely be the trigger of further volatilities in the markets.

Dollar was lifted earlier last week after surprisingly solid retail sale report that suggested that consumers were just down but not out. Headline sales rose 0.3%, up from Dec’s 0.4% fall and beat expectation of -0.3% fall. A 0.6% gain in autos boosted overall sales in January. Ex auto-sales also rose 0.3%, beating expectation of 0.2%. However, the strength in dollar was brief and dollar turned around after dovish testimony of Bernanke.

Dollar weakened generally across the board after Bernanke's Testimony before Senate. While the testimony was brief, the message was clear. "The outlook for the economy has worsened in recent months, and the downside risks to growth have increased." Risks to growth in the US outweigh inflation and further rates are likely from Fed as the Fed needs to provide "adequate insurance against downside risks." Baseline forecast suggest growth in first half will be sluggish even though the change in monetary policy and fiscal stimulus package will support a stronger economy in the second half. Credit conditions could also tighten further.

Former Fed chairman Alan Greenspan said that US economy is "clearly on the edge" of recesssion.He reiterated earlier comments that odds of an economic contraction are "50 percent or better."

Dollar was further hammed after surprisingly weak NY State Manufacturing index spurred further worries on risks of deeper slowdown and recession in the US economy. The index unexpectedly sank from 9.0 to -11.7, marking the first contraction reading in nearly three years. University of Michigan consumer sentiment also fell to a 16 year low of 69.3.

As the week closed, interest rates futures show a 68% chance Fed will lower its target for overnight lending between banks by 0.5 bps to 2.5% at its next scheduled meeting on Mar 18. The remaining bets are for a 0.75 bps reduction.

Other data from US saw business inventories rose 0.6% in Dec. Trade deficit in US narrowed more than expected by 6.9% from -63.1b -58.8b, better than expectation of -61.0b, thanks to rising exports and falling imports. The goods deficit with China also narrowed 0.6% to 18.8b. Jobless claims dropped 9k from 357k to 348k near to the 4 week average of 347k. TIC capital flow dropped more than expected to 56.5b in Dec. Industrial production rose 0.1% in Jan, inline with consensus while capacity utilization was unchanged at 81.5%. Import prices rose more than expected by 1.7% mom, 13.7% yoy in Jan.

Germany ZEW investor confidence unexpected improved from 15 year low of -41.6 to -39.5 in Feb. Q4 GDP in Eurozone rose 0.4% qoq, 2.3% yoy, slightly better than expectation of 0.3% qoq, 2.2% yoy. Industrial production dropped -0.1% in Dec, dragging yoy rate down to 1.3%. Eurozone trade balance posted first deficit in 16 months, at -4.2n.

BoJ left rates unchanged at 0.50% as widely expected, by unanimous vote. In the monthly report , BoJ left economic assessments unchanged, saying that the Japanese economy is still expanding moderately even though the space is slowing due to drop in housing investment. Fukui later mentioned that risks to the Japanese economy have heightened and inflation risks are smaller than those of the US and Europe.

Japanese Q4 GDP rose 0.9% qoq with annualized rate at 3.7%. Both were much stronger than expectation of 0.4% and 1.5%. The report suggests growth in Japan is still robust but two issues undermined the strength of the result. Firstly, the stronger Q4 result was somewhat inflated by lower base effect in Q3, in particular considering the second downward revision. Secondly, the GDP deflator dived further negative to -1.3% which suggests that real GDP was inflated. Other data from Japan saw industrial production rising 1.4% mom, 0.8% yoy.

Japanese wholesale inflation hits 27-year high. Domestic CGPI climbed from 2.6% yoy to 3.0% yoy, beating expectation of 2.8% on rising oil and material costs. Trade surplus rose to 1013b, slightly below consensus of 1027b. While exports to US continued to drop by 4.5% Dec, exports to Asia offset that and rose 8.2%. Exports to EU rose 2.4%. Consumer confidence in Jan dropped from 38.2 to 37.9 in Jan. Capacity utilization rose from 018.4 to 110.2 in Dec. Jan machine tools orders was flat.

Though, the Japanese yen paid little attention in these events and focused on the stock markets and carry trades instead. The yen was pressured with stock markets stabilized after Warren Buffett offered to help out troubled bond insurers.

The BOE Quarterly Inflation Report was the main feature in UK last week. While further easing is still expected from BOE, the Quarterly Inflation Report suggested that it wont 'be aggressive. The report noted that higher energy, food and import prices will push inflation up sharply in the near term, and could reach around 2.1% which Governor will be required to write a letter to Chancellor of Exchequer Darling. However, “tighter credit conditions and weaker real income growth (will) bear down on domestic demand” and will slow inflation back to the 2% target. The bank based its forecasts on investors' bets for the benchmark interest rate to fall to 4.5% by the end of the year.

Inflation data from UK were mixed. PI input rose sharply from revised 12.2% to record high of 19.1% in Jan, much stronger than expectation of 14.3%. Out PPI also climbed from 5.0% yoy to a 16 year high of 5.7%, beating consensus of 5.1%. Core PPI rose from 2.5% yoy to 3.1% vs expectation of 2.6%. Though, headline CPI dropped more than expected by -0.7% mom in Jan, while yoy rate climbed less than expected to 2.2% only. Core CPI indeed slowed from 1.4% yoy to 1.3% yoy. Both RPI and RPI-X beat expectation and climbed to 4.1$ yoy and 3.4% yoy respectively.

There was also additional support to sterling from improvements in the job markets. ILO unemployment rate unexpected fell from 5.3% to 5.2% for the three months smoothed to Dec. Claimant count held unchanged at 2.5% in Jan, dropping -10.8k, double the consensus expectation amount and reached the lowest level since June 1975.

Canadian dollar traded with an undertone last week and weakened sharply on Friday. Canadian dollar was pressured by disappointing trade surplus which shrank to 9 year low of 23.5b in Dec. Further selloff was seen after Dec manufacturing shipment dropped sharply by -3.4%.

Some volatility was seen in the Aussie during last week but after all, it did managed to strengthen solid expectation for further rate hike from RBA. In the Quarterly Monetary Policy Statement, RBA revised inflation forecast for the year to Jun 2008 up from 3.25% to 3.75%, well above its 2-3% target band. The bank said the inflation risk was "uncomfortably high". More importantly "monetary policy is likely to need to be tighter in the period ahead." in absence of a "shift in economic risks to the downside". Markets generally took the statement as a signal that RBA will continue the current tightening cycle, even after the bank raised rates to 11 year high of 7.00% las week. Unemployment rate unexpectedly dropped to a record low of 4.1% in Jan, much better than expectation of 4.3%. Job growth rose to 26.8k, also much stronger than expectation of 15k.

The Week Ahead

Fear of recession will probably continue to pressure the greenback. Main feature from US this week is on the FOMC minutes. While the generally tone is not expected to be different from Bernanke's testimony, focus will be on the revision on forecasts from Fed. Another round of housing data will be released this week, together with Jan CPI as well ass Philly Fed index, which would likely trigger further volatility in the markets.

BoE will also release their meeting minutes this week. The vote outcome will be the main focus while other messages will likely echo those in the Quarterly Inflation Report.

While Euro recovered most of the prior week's loss last week, the speculations on rate cut from ECB in H2 didn't die. Markets will in particular look into Friday's PMI manufacturing and services on the state of the economy in the Eurozone and adjust their expectation on ECB rate path afterwards.

Another major focus of the week will be on Canadian CPI as well as retail sales. USD/CAD is still struggling around parity and will need these two pieces of important economic data to provide the momentum to decisively break away from parity.

More Technical Analysis Reports Here

USD/CHF Weekly Outlook

USD/CHF's rebound from 1.0729 was limited at 1.1105 last week, just below mentioned key near term 1.1120 cluster resistance (38.2% retracement of 1.1596 to 1.0836 at 1.1126 and 138.2% projection of 1.0836 to 1.1120 from 1.0729 at 1.1121). Subsequent fall indicates that such rebound has completed and having said that, initial bias is on the downside this week for retest of 1.0729 low. On the upside, above 1.0985 will turn intraday outlook consolidative first.

In the bigger picture, as discussed before, corrective nature of the fall from 1.1120 suggests that it's just part of a consolidation pattern. In other words, decline from 1.1596 has made a low at 1.0836 and subsequent price actions are consolidation to this decline only and should have completed with three waves to 1.1105 (first at 1.1120, second at 1.0729. Firm break of 1.0729 will confirm that fall from 1.1596 has resumed for next downside target of 61.8% projection of 1.1596 to 1.0836 from 1.1105 at 1.0635 first. However, strong rebound from 1.0729 will indicate that such consolidation is still in force. Also, break of mentioned 1.1120 resistance will argue that fall from 1.1596 has indeed completed at 1.0729 and much stronger rebound should be seen with prospect of retesting 1.1596 resistance.

In the longer term picture, whole down trend from 1.3283 (05 high) is still in force. The preferred interpretation is that fall from 1.3282 was initially contained at 1.1919 and turned into sideway triangle consolidation that completed at 1.2467, where the medium term down trend from 1.3283 resumed . Having said that, next medium term downside target will be 161.8% projection of 1.3283 to 1.1919 from 1.2467 at 1.0260. Also, such medium term decline is tentatively treated as resumption of the long term down trend from 1.8305 (00 high) which could extend further to parity. This will still hold as long as 1.1596 resistance remains intact.

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Published on  Sat, Feb 16 2008, 23:15 GMT