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Weekly Review and Outlook − Bailout Plan Approved but Investors Unconvinced, Risk Aversion Dominates

Sat, Oct 4 2008, 18:59 GMT
by ActionForex.com Team

ActionForex.com

Action Insight Weekly Review and Outlook

Bailout Plan Approved but Investors Unconvinced, Risk Aversion Dominates

After a week of drama, the $700b bailout plan was finally approved by House on Friday. With Senate already approve the modified plan on Wednesday, US President Bush signed off the plan to ease the credit crunch that's now "threatening" the US economy. However, the markets are rather not convinced that this is the solution. Dow ended up 7.3%% lower to close the week. The news was clearly not enough to boost investors confidence. Dow indeed closed lower than Monday's low, where the historical 777 points fall occurred after House initially rejected the plan. S&P 500 also had it's worst weekly decline since Sep 01 and fell 9.4%.

The impact on the forex markets can seen clearly on massive yen buying on risk aversion. Dollar also benefited with most major currencies dragged down in yen crosses. Note that Aussie remains the weakest currency on falling commodity prices and dovish rate outlook. Euro caught up on the weakness after four major financial institutions in Europe were bailed out. Comments from Trichet after ECB meeting suggest the bank is close to cutting rates added further pressure to the common currency. Crude oil followed stocks and tumbled to as low as 91.3 and dragged Canadian dollar down sharply.

Looking ahead, development of the credit market crisis remains key to all financial markets. An important point to pay attention is whether DOW will be supported by the psychologically important level of 10,000 which will trigger volatile movements in yen crosses. In addition, BoE and RBA are both scheduled to meet this week. Both central banks are expected to cut rates this time. In particular, Sterling is the relatively better performing major currency last week but it could catch up again should BoE cuts more than expected or sounds they're more policy easing to come.

Currency Heat Map Weekly View

On the date front, Non-farm payroll report showed -159k contraction in the job market in US in the month of Sep, far worse than expectation of -100k, and was the biggest fall since Mar 03. Also, note that this was the ninth consecutive month of contraction. The total job loss in Q3 after revisions added up to -299k, much higher than Q2's 214k. Unemployment rate remains elevated at 6.1%. Average hourly earnings rose 0.2% mom but average weekly hours dropped -0.3% mom.

ISM manufacturing index plunged sharply to 43.5 in Sep, worst reading since Oct 2001, suggesting that deterioration in the economy is accelerating. Employment component also dropped sharply from 49.7 to 41.8 while Price paid component dropped from 77.0 to 53.5. ISM Services was slightly better than expected at 50.2 in Sep. Chicago PMI dropped less than expected to 56.7 in Sep. Factory orders dropped -4.0% in Aug.

PCE core accelerated to 2.6% yoy in Aug. Headline PCE moderated slightly to 4.5% instead. Personal spending was flat versus consensus of 0.2% growth while income beak expectation by growing 0.5%. S&P Case-Shiller dropped more than expected by -16.3% yoy in Jul. Conference Board Consumer Confidence improved more than expected to 59.8 in Sep. Jobless claims remains elevated at 497k.

ECB left rates unchanged at 4.25% as expected. Trichet delivered a much softer message in the following press conference. A few points to note. Firstly, the governing council did discussed two options, on hold and cut rates, even though the rate to hold rates was unanimous. Secondly, Trichet noted weakening of Eurozone economic activity has been "very visible" and recent data suggests there are "increased downside risks" to growth. Thirdly, Trichet acknowledged that upside inflation risks have diminished even though they didn't disappear yet. All in all, Trichet stressed that ECB is aware of the high level of uncertainty that has developed due to intensification of the financial market turmoil. After all, the markets generally believe that Trichet is paving the way for a rate cut, probably by year end and another cut early next year.

Eurozone HICP flash moderated to 3.6% yoy as expected. PPI dropped -0.5% mom in Aug, with yoy rated moderated to 8.5% as expected. Eurozone sentiments were steadily bad in Sep. Economic sentiment dropped less than expected to 87.7 while consumer confidence was unchanged at -19. Unemployment rate in Eurozone climbed from 7.3% to 7.5% in Aug. Retail sales rose 0.3% mom, dropped -1.8% yoy in Aug. Services PMI was revised higher to 48.4 in Sep.

Japan quarterly Tankan survey showed confidence among Japanese businesses continued to deteriorate in Q3. Large manufacturing index dropped sharply from 5 to -3, hitting the first negative result in more than five years. Large manufacturing index dropped from 10 to 1. Capex growth slowed from 2.4% to 1.7%, much worse than expectation of 2.5%. Retail sales rose more than expected by 0.7% yoy in Aug. Manufacturing PMI dropped further to 44.3 in Sep. Household spending dropped much fore than expected by -4% yoy in Aug. Unemployment rate rose more than expected to 4.2% in Aug. Industrial production fell -3.5% mom, -6.9% yoy in Aug. Housing started rose 53.6% in Aug.

UK manufacturing PMI plummeted to record low of 41 in Sep. Services PMI fell to record low of 46 in Sep. Gfk consumer sentiment improved from -36 to -32 in Sep. Q2 GDP final was revised higher from 1.4% yoy to 1.5% yoy. Nationwide house price dropped -1.7% mom, -12.4% yoy in Sep.

Swiss SVME PMI dropped to 47.8 in Sep. CPI rose 0.1% mom 2.9% yoy in Sep, above expectation of -0.1% mom, 2.7% yoy.

Canadian GDP was surprisingly strong, rising 0.7% mom in Jul. Australia retail sales posted stronger than expected gain of 0.3% mom in Aug. Trade surplus came in wider than expected at 1364m in Aug. New Zealand Trade deficit came in narrower than expected at -750m in Aug.

The Week Ahead

Dollar and yen regained their medium term strength last week. Dollar index finally took out 80.38 high and confirmed that medium term rally from 71.31 has resumed. This is also reflected with EUR/USD and AUD/USD breaking prior lows and USD/CAD bring key 1.08 medium term resistance. Similar situation was seen in the Japanese yen with EUR/JPY and AUD/JPY resuming medium term down trend. Hence, on of the focuses this week is on how these trends are continuing to development.

In addition, RBA is widely expected to cut rates again this week and the questions are firstly how much and what's next. Most economists expect a 50bps cut in the OCR to 6.50%. Further Aussie selling could be seen if RBA hints there will be more policy easing down the road.

GBP/USD and GBP/JPY are still holding above prior low but remain vulnerable. Another main focus will be BoE rate decision this week. BoE is expected to cut by 25bps to 4.75%. And should the bank deviate from markets' expectation, the Pound will most likely be rocked.

Another major focus is FOMC minutes and Bernanke's speech on Tuesday. Markets are pricing in over 80% chance of a "50bps" cut from Fed on Oct 29. The rest of the odds are for a 75bps cut!. Bernanke's words will be heavily scrutinized for confirming such expectation.

Other events include the release of US pending home sales, wholesale inventories trade balance; Eurozone Q2 GDP; BoJ rate decision and minutes; UK industrial and manufacturing production, nationwide consumer confidence, trade balance; Canadian Ivey PMI , building permits, housing starts, trade balance and job report; Australian job report.

More Forex Technical Analysis Reports Here.

For Crude Oil and Gold analysis, click here

EUR/JPY Weekly Outlook

EUR/JPY's sharp fall last week and break of 147.03 low confirms that medium term fall from 169.96 has resumed. Initial bias remains on the downside this week as long as 146.89 minor resistance holds. Further fall is expected to next short term target of 61.8% projection of 169.96 to 147.03 from 156.84 at 142.67 first. On the upside, above 146.89 will indicate that an intraday low is formed and bring recovery. But upside should be limited below 151.34 resistance and bring fall resumption.

In the bigger picture, the sharp fall from 169.96 is still in progress and should be targeting long term fibonacci level of 38.2% retracement of 88.97 to 169.96 at 139.02. Though some support could be seen there on oversold condition, with weekly RSI deep below 30 level, and bring consolidation. On the upside, above 151.34 will be the first signal that a medium term bottom is form. Touching of 156.84 resistance will confirm and bring consolidation before staging another decline.

In the long term picture, whole up trend from 88.97 (00 low) has completed, with bearish divergence conditions in weekly MACD and RSI and with monthly MACD remains below signal line. Sustained trading below 55 months EMA added further credence to this case. While it's still early to conclude, note that whole rise from 88.97 to 169.96 could be part of a large scale consolidation to multi decade down trend from 285.56. The strength of the fall from 169.96 argues that it could be impulsive move at the same degree as the rise from 88.97 to 169.96. If that's the case, EUR/JPY should at least head to 61.8% retracement of 88.97 to 169.96 at 119.90 in the long run.

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Published on  Sat, Oct 4 2008, 19:07 GMT