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Daily Forex Technical Report

Weekly Review and Outlook − Dollar and Yen Gained on Risk Aversion, More Strength Ahead

Sat, Jan 17 2009, 22:33 GMT
by ActionForex.com Team

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Weekly Review and Outlook

Dollar and Yen Gained on Risk Aversion, More Strength Ahead

Dollar and yen gained modestly last week on risk aversion on the back of renewed concern on the banking sectors. World stock markets were still down to close the week despite some recovery towards the end on news of another round of bailouts and US Congress approval of TARP II. Euro was mixed after ECB's rate cut, closing the week down against dollar, yen and Swissy but up against Sterling, Loonie and Aussie. We're maintaining the view that risk appetite/aversion is still the main driving force in the markets and thus the close correlation with stocks should remain.

Taking a look at stocks, DOW was still down -3.7% to close at 8281 despite late recovery. More importantly, last week's break of key near term support of 8367 was taken as a confirmation that the corrective rebound from Nov's low of 7450 has finally completed and another wave of selling has just started. The late recovery is viewed as a pull back to retest the 8367 level before further decline. Elsewhere FTSE was down 6.8% to 4147, DAX down 9.4% to 4336, Nikkei was down 6.9% to 8230. We're expecting the global stock markets to retest last Oct/Nov's lows. Having said that, more strength in the dollar and yen are generally expected.

Economic data from US were generally bad, in particular with retail sales dropped sharply by -2.7% in Dec, (ex autos-3.1%), much worse than markets expectation of -1.2% (ex-auto -1.3%). Dec CPI stayed positive at 0.1% yoy but deflation is inevitable in the near future. Core prices also moderated more than expected to 1.8% yoy. PPI showed first annual drop in sevens by -0.9% yoy with core PPI moderated to 4.3% yoy. Regional Fed surveys from New York and Philadelphia remained negative despite better than expected readings.

Dollar Index surged further to 85.13 before treating mildly. While a short term top might be in place and some more consolidation could be seen, downside is expected to be contained above 81.19 support and bring rally resumption. As discussed before, corrective fall from 88.46 should have completed after three waves down to 77.69. While rise from there represents resumption of larger up trend remains to be seen. But short term strength is nevertheless expected to retest this 88.46 high.

Euro was pressured until ECB finally cut rates by 50bps to 2.00% last week. Indeed, the common currency stabilized and staged a mild recovery as Trichet signaled that the bank will be on hold in Feb and wait for more data before deciding on rates again in March. But after all, markets are still expecting another 50bps cut in Q1 to bring the key ECB interest rate down to 1.50%. The Common currency will like remains pressured. In particular, the 0.9799 top in EUR/GBP looks more like an important top as time past. The common currency will likely be double pressured by selling in EUR/GBP as well as risk aversion in EUR/JPY. Though, some support could be seen against commodity currencies as they would likely be much harder hit by risk aversion.

Commodity currencies, including Canadian dollar, Australian dollar and New Zealand Dollar are generally weak for various reasons. Risk aversion, though, is a common theme. Canadian dollar is pressured by persistent fall in crude oil prices. Aussie was down after data showed rising unemployment rate from 4.4% to 4.5%. Meanwhile, Kiwi was sold off after Standard & Poor's revised the nation's AA+ foreign-currency credit rating outlook to negative from stable.

The Week Ahead

Markets may start off slowly with holiday in US but volatility will continue to build up as the week goes. Development in global stocks remain the main focus. In addition, markets will also pay much attention to BoC which is expected to cut rates by 50bps to 1.00% on Tuesday. BoJ is expected to be on hold at 0.1% on Thursday.

On the data front, UK will dominate the week with CPI, employment, retail sales and Q4 GDP as well as BoE minutes. US calendar will start of lightly but focus will turn to new residential construction data. From Eurozone, focus will be on German ZEW as well as Eurozone manufacturing and services PMIs. Other data include Canadian retail sales, CPI as well as New Zealand CPI, retail sales.

More Forex Technical Analysis Reports Here.

AUD/USD Weekly Outlook

AUD/USD dived further to 0.6537 before recovering mildly. With a short term bottom in place, as indicated by 4 hours MACD's stay above signal line, some more consolidation could be seen initially this week, with risk of recovery further to 0.6810 resistance and above. But upside should be limited by 0.6956 resistance and bring decline resumption. As discussed before, consolidation from 0.6008 should have completed with three waves to 0.7267. Below 0.6537 will indicate that fall from there has resumed for retesting 0.6008 low.

In the bigger picture, price actions from 0.6008 is treated as consolidation to the impulsive decline from 0.9849 only and has possibly completed at 0.7267 already. Sustained break of 0.6008 will indicate that the down trend from 0.9849 has resumed for another five wave medium term decline, targeting 0.4773 (01 low) next. Above 0.7267 will suggest that such consolidation is still in progress for another rise to 38.2% retracement of 0.9849 to 0.6008 at 0.7475 before completion.

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, Jan 17 2009, 22:36 GMT

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