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Weekly Review and Outlook − Could World Leaders Stabilize the Markets after a Historical Week?

Sun, Oct 12 2008, 09:26 GMT
by ActionForex.com Team

ActionForex.com

Action Insight Weekly Review and Outlook

Could World Leaders Stabilize the Markets after a Historical Week?

It's a historical week where we saw wild movements in all financial markets as well as coordinated rate cut from world central banks for this first time in history. The fear of credit crisis is intensifying with Dow having a historical slide of 18% to 8451 level. MSCI world index lost 20%, the largest decline since records began in 1970. Crude oil dropped 17% to $78 for the first time in a year and commodities are generally sold off. In the currency markets, it's obvious that the Japanese yen was the biggest winner on risk aversion while carry trade currencies like Aussie was the biggest loser. Aussie had the biggest weekly drop since it began trading freely in 1983 and fell 20% against dollar, 25% against yen. Canadian dollar had the biggest weekly decline against dollar since 1971 too. Yen, on the other hand, had the biggest weekly rally against dollar since 1998.

Worlds leaders are meeting over the weekend to tackle the credit crisis that's spreading over to all parts of the world. G7 leaders vowed that "urgent and exceptional" action will be taken to "unfreeze credit and money markets" but no detail is given so far. G20 also pledged to beat the crisis too. European leaders meet on Sunday in search for a "common tool box" to tackle the financial crisis that's spreading over to Europe. US Treasury Paulson indicated that pumping funds into banks is a priority and the government will note "waste time" on working out a solution. But after all, the effects on the markets are to be seen.

Technically speaking, we would like the emphasize that the current moves in the financial markets are something of a larger degree than some people think. For example, DOW is at least correcting the multi decade advance that started back in the 70s. Oil is probably at least correcting the rise from 14.21 that started in 1999. In the forex markets, dollar index's rally should at least be at the same degree as down trend that started at 121 in 2001. The same picture is seen in most forex pairs and key levels would continue to be taken out in the next few months as the credit crisis spread further to other parts of the global economy.

Currency Heat Map Weekly View

Federal Reserve, European Central Bank, Bank of England, Bank of Canada, Swiss National Bank and Sweden's Riksbank join forces today in a historical, emergency, coordinated global rate cuts by 50bps ease save the world's economies from the worst crisis since the Great Depression. Fed, ECB, BoE, BoC and Riksbank will cut by 50bps. SNB cut by 25bps. PBoC of China also joins to cut by 27bps. BoJ didn't participate but said it supports the move and left rates unchanged at 0.5%. RBA surprised the markets by cutting one full percent point earlier in the week, the biggest cut since 1992, to bring Overnight Cash Rate down to 6.00%, doubling expectation of 50bps cut. Fed also announced that they will buy "commercial paper" to support financing needs of corporations.

Economic data took a back seat last week and were large ignored. US Jobless claims dropped mildly but remains elevated at 478k. Wholesale inventory rose from than expected by 0.8% in Aug. Trade deficit came in narrower than expected at -59.1b in Aug. Import prices has largest fall in fives years of -3.00% mom in Sep. Eurozone Sentix Investor Confidence dropped further to -27.8 in Oct. Q2 GDP finalized at -0.2% qoq, 1.4% yoy. Germany factory order rose 3.6% mom, dropped -7.6% yoy in Aug. UK industrial production deteriorated further to -2.3% yoy in Aug with Manufacturing production dropped further to -1.9% yoy. Nationwide consumer confidence in UK dropped less than expected to 50 in Sep. Japanese leading indicators dropped -2.1% in Aug. Economic watch DI dropped slightly to 28 in Sep. Machine orders dropped more than expected by -14.5% mom, -13.0% yoy in Aug. Swiss unemployment rate was unchanged at 2.4% in Sep Canadian building permits plunged sharply by -13.5% in Aug, but Ivey PMI unexpectedly improved to 61 in Sep. Trade surplus widened to 5.8b in Aug. New housing price index was flat in Aug. Canadian job report was solid, adding 106.9k jobs in Sep, much stronger than expectation of 11k. Unemployment rate was unchanged at 6.1% versus expectation of 6.2%. Australian unemployment rated climbed to 4.3% in Sep.

The Week Ahead

The coming week features a number of important economic data from around the world. From US, there are CPI and PPI, retail sales, new residential construction, regional fed survey from NY and Philadelphia, TIC capital flow. The economic calendar also features Eurozone CPI final and German ZEW; UK CPI and PPI, employment report; Swiss combined PPI and ZEW; New Zealand retail sales. Nonetheless, markets will likely continue to ignore those economic data and focus on announcement from world leaders as well as development in the global financial markets.

Technically speaking, while we don't expect a change in medium dollar and yen bullish trend, focus will be on signal of a a short term top in both currencies for profit taking. In particular, attention will be paid on development in all yen crosses for early indications of a short term bottom. Near term levels include 140 in EUR/JPY, 177 in GBP/JPY and 72.5 in AUD/JPY. Focus in the dollar index is on whether it could sustain above 81 level. Meanwhile, 9200 in dow will be important to determine whether a short term bottom is finally formed. If the above levels are breached, traders could take profits on the current positions first and wait for the next opportunity to buy dollar and yen again.

More Forex Technical Analysis Reports Here.

AUD/USD Weekly Outlook

AUD/USD's decline from 0.9849 accelerated even further last week and dived to as low as 0.6330, taking out 0.6773 key medium term support without hesitation. From a short term angle, initial bias remains on the downside this week as long as 0.6759 minor resistance holds. Further decline is still expected to next downside target of 76.4% retracement of 0.4773 to 0.9849 at 0.6712 at 0.5971. On the upside, note that mild bullish convergence condition is being displayed in 4 hours MACD. Above 0.6759 will argue that a short term bottom is in place and bring rebound to 0.7135 and above before resuming the down trend.

In the bigger picture, the strength of the fall from 0.9849 strongly suggests that it's developing into an impulsive fall in at least the same degree as the up trend from 0.4773 to 0.9849. The current interpretation is that first wave of such fall has completed at 0.7802. Second wave correction has completed at 0.8519 and fall from there should represents the third wave decline. In other words, we're probably in the middle of such decline only. Any interim correction should be limited below 0.7802 support turned resistance and bring down trend resumption.

In the longer term picture, a long term top is in place at 0.9849 with bearish divergence condition in monthly MACD and RSI. Considering the corrective three wave structure of the multi year up trend from 0.4773 to 0.9849 and the impulsive nature of the fall from 0.9849, the long term down trend could be resuming. Having said that, while some interim medium term consolidation could be seen, the fall from 0.9849 is in favor to extend to retest 0.4773 low at least.

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Published on  Sun, Oct 12 2008, 09:28 GMT