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Daily Forex Technical Report

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Weekly Review and Outlook − Dollar and Yen Pulled Back as Another Round of Rate Cuts Began

Sat, Nov 1 2008, 21:26 GMT
by ActionForex.com Team

ActionForex.com

Weekly Review and Outlook

Dollar and Yen Pulled Back as Another Round of Rate Cuts Began

Dollar and yen gave pulled back sharply last week on the back of strong rebound in the stock markets. MSCI World index jumped as much as 9.8%. Both DOW and S&P 500 had the largest rally since 1974 by more than 10% during the week. Europe's Stoxx 600 rose 12%, the biggest rally since 2001. MSCI Asia Pacific Index rose 6.9% with Nikkei. Commodity currencies were the biggest winner with AUD/JPY jumping more than 10% while CAD/JPY and NZD/JPY rose over 8% during the week. Dollar index was down to as low as 83.11 before rebound.

The rate cut delivered by Fed and BoJ calmed the markets for the moment. Technical develop in the stock markets as well as the currency markets suggest that selling climax might have peaked in near term but after all there is no change in the larger trend. DOW is still kept below key near term resistance at 9,794 while dollar index is held above key support zone of 80-83. The markets will likely continue to consolidate inside the current established range for a while.

Three central banks will meet this week, including RBA, ECB and BOE and all are expected to cut rates by another 50bps to continue the coordinated global easing cycle. Economic data will likely continue to affirm the expectations of a global recession. Though, special attention will still be paid to the result of US presidential election as well as the Non-farm payroll report.

Currency Heat Map Weekly View

FOMC cut the federal funds rate by 50bps to 1.00% as widely expected. Discount rate was also cut by 50bps to 1.25%. The vote was unanimous. The wordings in the statement showed additional concern on downside risks to growth. Fed acknowledged that "the pace of economic activity appears to have slowed markedly" owing to weakened consumer spending, business spending, industrial production and foreign economies, with extra restraints from "intensifications of financial market turmoil." Fed continue to adopt an easing bias as it pledged to "act as needed to promote sustainable economic growth and price stability". Inflation is not much of a concern for the moment since recent decline in energy and commodity prices and weaker economy will moderate inflation in the coming quarters. In addition, Fed set $120b swap lines in emerging markets including the creation of temporary swap with central banks of of Brazil, Mexico, Korea and Singapore. RBNZ and Fed also entered into a $15b swap line.

US Q3 GDP shrank -0.3%, the largest contraction since 2001 but was better than expectation of -0.5. Personal consumption had the first decline since 91 and dropped -3.1%, much worse than expectation of -1.9%. . Consumer spending dropped more than expected by -0.3% in Sep while income grew more than expected by 0.2%. The drop in consumer spending was indeed the biggest in four years. Inflation continued to moderated with headline PCE dropping to 4.2% yoy in Sep while core CPI dropped to 2.4% yoy. Chicago PMI deteriorated more than expected to 37.8 in Oct, worst reading since 2001. U of Michigan consumer sentiment was finalized at 57.6, lowest since the 56.4 recorded in Jun. Conference Board consumer confidence deteriorated sharply to 38 in Oct. New home sales unexpectedly rose 2.7% to 0.464m from downwardly revised 0.45m in Sep. S&P/Case-Shiller Composite-20 house price which dropped -16.6% yoy in Aug. Durable goods orders came in much better than expected, rising 0.8% in Sep versus expectation of -1.2% fall. Ex-transport orders dropped -1.1% versus consensus of -1.5%. Employment cost index rose 0.7% in Q3. Jobless claims was unchanged at 479k.

Germany Ifo Business Climate extended the down trend started in May and dropped further to new five year low of 90.2 in Oct. The figure missed expectation of 91.8. According to the survey, confidence is deteriorating quickly in all sectors of the economy. Germany Gfk consumer sentiment unexpectedly improved to 1.9 in Nov. Unemployment rate unexpectedly dropped to 7.5% in Oct. Retail sales dropped more than expected by -2.3% mom in Sep. Eurozone HICP flash moderated to 3.2% yoy as expected while unemployment was unchanged at 7.5% Business climate deteriorated to -1.3 in Oct while Economic sentiment dropped sharply to -24. M3 money supply growth slowed less than expected to 8.5% yoy.

In the financial stability report, BoE said that global financial system is facing the "most severe" instability in living memory and remains under strain as global economic downturn is underway. UK CBI realized sales balance was unchanged at -27% in Oct. Nationwide house price fell faster by -14.6% yoy in Oct. UK Gfk consumer confidence dropped more than expected to -36 in Oct, hitting the lowest level since at least 1974.

Swiss KOF leading indicator continued to the downtrend in Oct and fell from 0.52 to 0.35, the 15th consecutive month of decline and hit a five year low. .

BoJ cut benchmark interest rate for the first time in seven years by 20bps to 0.3% in a split decision. The monetary policy statement said the decision was split at 4-4 with governor Shirakawa cast the deciding vote. Though, Shirakawa later clarified that three members of the board voted for a stronger cut of 25bps while one called for no change. In the semi annual economic outlook report, BoJ expect economic growth to average between 0.1-0.2% this fiscal year before picking up to 0.3-0.7% in 2009. Medium term inflations are stable but would remain "relatively high" in short term. Though, the bank saw no emergence of second-round effects. Japanese Government announced a new 5T yen stimulus package which includes 2T yen in financial assistance to consumers along with tax cuts and loan guarantee for small businesses.

Japanese retail sales dropped more than expected by -0.5% mom, 09.4% yoy in Sep. Industrial production unexpectedly rose 1.2% mom, 0.4% yoy in Sep. Sep national CPI moderated to 2.3% yoy as expected and economists are expecting inflation to moderate in a steeper path in the near future. Unemployment rate unexpectedly dropped to 4.0% in Sep but economists generally expect it to bounce up again as Japan enters into recession.

Canada GDP dropped -0.3% in Aug. Canadian PPI dropped -1.2% mom, rose 8.0% yoy in Sep. New Zealand trade deficit came in wider than expected at -1183m.

The Week Ahead

The week will feature three central banks' meeting, US presidential election as well as a number of important economic data around the world. RBA, ECB and BOE are expected to cut rates by another 50bps to continue the coordinated global easing cycle. From US, ISM manufacturing and services, factory orders Q3 labor cost and productivity, pending home sales will be featured with the highly anticipated on-farm payroll. Eurozone PPI, manufacturing and services PMI, retail sales will be released. Swiss Oct CPI, SVME PMI, unemployment will be released too. Focus from UK will be on manufacturing and services PMI, nationwide consumer confidence, industrial and manufacturing production. Canadian building permits, Ivey PMI and job report, Australia retail sales, house price index, job report, New Zealand employment report will also be watched.

Technically speaking, as mentioned in various report, dollar and yen should have made a short term top. In most cases, it's uncertain on whether these are medium term tops. Nevertheless, good range trading opportunities should be presented in most pairs in near term. In short, we'd expect some more choppy consolidation in last week's range.

More Forex Technical Analysis Reports Here.

AUD/USD Weekly Outlook

Despite edging lower to 0.6008 early last week, AUD/USD was supported above 0.6 psychological support and 76.4% retracement of 0.4773 to 0.9849 at 0.5971 and rebounded strongly. Subsequent rebound was limited at 0.6891 and retreated mildly, turning intraday outlook neutral for the moment. On the downside, break of 0.6529 will suggest that the rebound from 0.6008 has finished and will flip intraday bias back to the downside for retesting this low. On the upside, above 0.6891 will indicate that rise from 0.6008 has resumed for 38.2% retracement of 0.9849 to 0.6008 at 0.7475.

In the bigger picture, the strong rebound from 0.6008 indicates that whole fall from 0.9849 has likely completed the five wave sequence already, with the fifth wave ended at 0.6008. Stronger rebound could be seen to 38.2% retracement of 0.9849 to 0.6008 at 0.7475 or above. Nevertheless, note that the impulsive nature of the fall from 0.9849 to 0.6008 indicate that price actions from 0.6008 is developing into correction/consolidation in a larger down trend only. The long term down trend is still expected to resume after completing the consolidation. On the downside, sustained break of 0.6008 will indicate that the down trend from 0.9849 has resumed for at least another five wave medium term decline.

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  Sat, Nov 1 2008, 21:32 GMT