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Weekly Review and Outlook − Intermarket Relationships Dominate And Will Continue So

Sun, Sep 7 2008, 11:51 GMT
by ActionForex.com Team

ActionForex.com

Action Insight Weekly Review and Outlook

Intermarket Relationships Dominate And Will Continue So

Intermarket relationships continued to dominate last week. Firstly, the yen staged a strong broad based rally on risk aversion, following the sharp over 500 pts fall in Dow and broad weakness in global equity markets. Most yen crosses were hit hard, in particular commodity yen crosses as massive carry trade unwinding took place. Note that the fall in Dow argues that the recovery started at 10827 in Jul has already completed at 11867 in Aug. In other words, the Dow could be in the start of another wave of decline which in turn, will provide boost to the yen.

Secondly, the greenback continued to be supported by carry trade unwinding as well as another fall in oil prices. Nymex crude oil dived through 110 level to as low as 105.13 during the week. Dollar index, on the other hand surged to as high as 79.08 and is now pressing an important medium term fibonacci retracement level at 79.07. There is no clear sign of a short term top in the dollar index yet and further sharp rally could be seen if dollar index can manage to take out this fibonacci resistance decisively.

There was news report during the weekend saying that US Treasury Paulson will announce a plan pre Asian to take control of Fannie Mae and Freddie Mac, to put them into a conservatorship. the government will take control of the two GSEs for at least a year to evaluate whether they should remain government run or restructured. Both CEOs will also be removed. Reactions from the financial markets at the start of the week will be closely watched.

Currency Heat Map Weekly View

On the data font, unemployment rate in US surged sharply from 5.7% to 6.1% in Aug, much worse than expectation of 5.7% and is the highest reading since Sep 2003. Job market showed -84k contraction versus expectation of -75k. Prior month's fall was also revised down from -51k to -60k. Jobless claims jumped to 444k. Q2 labor cost was revised down to -0.5% while productivity was up to 4.3%. ISM manufacturing index dropped slightly from 50.0 to 49.9 in Aug. Price paid component dropped sharply to 77.0, lowest level since Feb. Employment component also dropped back into contraction region at 49.7. ISM Services came in at 50.6, above expectation and back above 50. Though, employment component remains sub-50 at 45.4. Construction spending dropped -0.6% in Jul, worse than expectation of -0.4%. Fed's discount window minutes showed increased support for raising interest rates. Dallas and Kansas City Fed voted for discount rate hike on three separate occasions before FOMC Aug 8 meeting. Chicago Fed also shifted to prefer a hike in late Jul.

ECB left rates unchanged at 4.25% as widely expected. In press conference, Trichet once again tried to sound hawkish, noting that upside risks to price stability had been confirmed by recent data and stressing the need to avoid broad-based second-round effects. Regarding growth, Trichet said that down risks to growth prevail and Eurozone is undergoing an "episode of weak activity." In the the Q&A session, Trichet said that ECB has no bias at the moment. Staff projections for 2008 GDP growth was lowered from 1.5-2.1% to 1.1-1.7% and that of 2009 was changed from 1.0-2.0% to 1.6-1.8%. Inflation forecasts was revised from 3.2-3.6% to 3.4-3.6% in 2008 and 1.8-3.0% to 2.3-2.9% in 2009.

Eurozone manufacturing PMI revised mildly higher to 47.6 in Aug. Services PMI recovered mildly to 48.5 in Aug. Retail sales dropped -0.4% mom, -2.8% yoy in Jul. Q2 GDP showed -0.2% qoq contraction, dragging yoy rate down to 1.5%. PPI rose 1.1% mom, 9.0% yoy in Jul, below expectation of 1.3% mom, 9.1% yoy.

BoE left rates unchanged at 5.0% as widely expected. No statement was issued and focus will turn to minutes to be published on Sep 17.UK Prime Minister Gordon Brown proposed spending 1 billion pounds to help the housing market to reverse the worse recession in at least 18 years, including suspending tax on UK houses cost less that 175,000 pounds, and exempting stamp duty for a year. PMI manufacturing unexpectedly improved mildly from 44.3 to 45.9 in Aug. UK PMI construction unexpectedly rebounded to 40.5 in Aug but still remain deep in contraction region below 50. Services PMI unexpectedly improve to 49.2 in Aug but remains below 50. Nationwide consumer confidence improved mildly to 52 in Aug but remains near to 4 years low. Halifax house price dropped more by -10.9% yoy in Aug.

Swiss SVEME PMI was below expectation at 52.5. Aug CPI dropped -0.3% mom with yoy rate moderated to 2.9%. Q2 GDP growth slowed to 2.3% yoy.

Yasuo Fukuda resigned as Japan's prime minister after less than a year in office. Shinzo Abe resigned last year in July.

BoC left rates unchanged at 3.00% and issued a less dovish than expected statement. The statement noted that interest rates remain appropriately accommodative. The bank believes inflation will "converge" around the 2% target by H2 2009 and headline inflation will be lower than expected due to retreating energy prices. Domestic demand in Canada slowed by remains strong and remains supported by financial conditions that remain "significantly better than those in most other major economies." The Canadian Economy added 15.2k jobs in Aug, stronger than consensus of 8.0K. Unemployment rate was unchanged at 6.1%, better than expected of 6.2%.

RBA cut rates for the first time in seven years as widely expected. The overnight cash rate is lowered by 25bps to 7.00%. The statement was somewhat less dovish than expected and suggested that the next policy move will be data dependent. The statement said that the Board will continue to assess prospects for demand and inflation over the period ahead, and set monetary policy as needed to bring inflation back to the 2-3 per cent target over time." Q2 GDP decelerated more than expected from downwardly revised 3.3% yoy to 2.7% yoy. Current account deficit narrowed less than expected to -12.77b in Q2

The Week Ahead

As mentioned above, markets reaction to US Treasury Paulson to take control of Fannie Mae and Freddie Mac will be the main focus initially this week, in particular on whether yen will extend it's recent rally or correct on the news. Also, focus will be on whether dollar index will take out 79/80 level which overlaps with a medium term fibonacci retracement level or correct from the current level.

Focus in US will mainly be on Friday's retail sales which is expected to recover mildly by 0.1% in Aug. Other data from US include pending homes sales, wholesale inventories, trade balance, import prices, PPI, U of Michigan consumer sentiments and business inventories.

From Eurozone, main focus will be on Q2 employment report.

UK PPI inflation data will be paid closely attention and could prompt some speculation of rate cut from BoE if it moderates more than expected in Aug. Other data from UK include industrial production and manufacturing production, trade balance.

A number of economic data will be released from Japan but focus will mainly on Q2 GDP which i expected to show -1.0% Q/Q growth and -4.0% annualized growth.

Big week ahead for the Aussie, the weakest currency last week. Markets will listen to RBA governor's testimony on Monday for hints on the chance of further rate cut in near term, in particular in Oct. Jul retail sales and Aug job report will also be closely watched.

RBNZ will meet this week and is expected to cut rates by another 25bps to 7.75%. Retail sales will also be featured.

More Technical Analysis Reports Here

GBP/USD Weekly Outlook

Cable's down trend reaccelerated further to as low as 1.7537 last week. From a short term angle, initial bias remains on the downside this week as long as 1.7861 minor resistance holds this week. Further decline is expected to next target of 161.8% projection of 2.1161 to 1.9337 from 2.0158 at 1.7207. On the upside, above 1.7861 will indicate that an intraday low is in place and bring recovery to 4 hours 55 EMA (now at 1.8011) and above. But short term outlook will remain bearish as long as 1.8794 resistance holds.

In the bigger picture, medium term fall from 2.1161 (07 high) is still in progress and should be targeting next key support at 1.7047 first. On the upside, break of 1.8794 resistance will indicate that a short term bottom is finally formed and bring stronger rebound and longer consolidation. But upside should be limited well below 1.9337 support turned resistance and bring another fall.

In the longer term picture, last week's development further confirms that a long term reversal has happened at 2.1161 with monthly MACD turning negative and RSI diving into oversold region. The impulsive nature and the scale of the fall from 2.1161 also provides strong evidence to the case of the start of a long term down trend. Next downside target will be 61.8% retracement of 1.3680 to 2.1161 at 1.6538. Break of 2.0158 resistance is needed to invalidate this view.

Also, while it's still a bit early to draw a conclusion, one must be aware of the possibility that whole multi decade advance from 1.0463 (85 low) has already completed with three waves up to 2.1161. If this is the case, the current fall from 2.1161 is just the start of a long term down trend that should eventually bring cable through 1.3681 (01 low). The development for the rest of the year will be interesting.

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Published on  Sun, Sep 7 2008, 12:02 GMT