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Weekly Forex Market Commentary

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The US economic calendar will start only on Thursday with the release of the Trade Balance report for August

Mon, Oct 8 2007, 07:16 GMT
by Cornelius Luca

GFT (Global Forex Trading)

Past Week's Data and Events

We had another week of interesting trading, which was dominated by strong appetite for risk and concern that the Fed may cut rates again as early as this month. When the dust settled, carry trades surged, while the European currencies rallied despite a strong US unemployment report. But the European currencies formed bearish reversal signals, so the buying on Friday must prove itself, while the carry trades still look good.

United States
The dollar was battered by the commodity currencies, but did well against the yen. But it’s more and more a non-dollar story, as the market focuses on carry trades, euro/sterling and overall buying any commodity currency that comes your way.

The US numero uno piece of data came in strong and bright but its light shined only for a short time. This tells you the market is not buying into any single factor when the Fed may be forced to cut rates again this year. I doubt that, but that’s what the market is pricing in.

The dollar surged briefly versus the European currencies and the yen after the release of the strong US jobless data. Non-farm payrolls increased by a more than expected 110,000 in September and hiring in each of the two previous months was revised up significantly. August’s report was revised upward to 89,000 from -4,000 and July’s report to +93,000 jobs from +68,000 for a total of 118,000. However, the unemployment rate edged up to 4.7 percent from 4.6 percent in August.

Manufacturing PMI grew at a slower rate of 52 percent in September from August's reading of 52.9 percent.

Meanwhile, the Institute for Supply Management's services index, which represents about 80 percent of economic activity, fell to 54.8 last month from 55.8 in August.

The dollar recovered on Tuesday despite weak secondary data. Pending home sales fell 6.5 percent in August but July's contraction was revised upward to 10.7 percent from 12.2 percent. On a yearly basis, sales fell 21.5 percent.

Initial claims for state unemployment insurance benefits rose by 16,000 to 317,000 in the week ended September 29 from an upwardly revised 301,000 (from 298,000) the prior week

Factory goods orders contracted a more-than-expected 3.3 percent in August from a revised +3.4 in July.

The Eurozone
The euro/dollar made a nice recovery on Friday after the soft US data but that didn’t help it avoid a bearish reversal formation on the weekly chart. This week trading will be ginger, as this signal will lock horns with the perceived weakness of the dollar.

The regional data was not impressive but this left things on hold for now.

The Eurozone manufacturing PMI fell to 53.2 in September and this was its lowest level since in nearly two years. On an individual basis, theGerman PMI slammed down to 54.9 from 56.0 and the French PMI slipped to 50.5.

Meanwhile, services PMI fell to 54.2 years in September, the lowest since August 2005, from 58 in August. Germany’s PMI fell to 53.1 from 59.8, the largest one month drop since the survey began.

The Eurozone retail sales rose a less than expected 0.1 percent in September.

The Eurozone PPI slipped to 1.7 percent in August on a yearly basis, the lowest reading since April 2004, from a 1.8 percent in July. On a monthly basis, the PPI rose 0.1 percent.

The Eurozone unemployment rate remained at a record low of 6.9 percent in August.

The European Central Bank left interest rates unchanged at 4 percent, of course, but then ECB President spoke from both sides of his mouth, which made him sound simultaneously hawkish and dovish. Excellent central banker performance!

Japan
Dollar/yen further last week and this is further proof of the demand for carry trades. The worldwide appetite for risk remains strong and the yen remains a funding currency.

The Japanese data was insignificant.

Tankan index of large manufacturers came in better than expected at 23 for the third consecutive quarter in the third quarter. Also on a positive note, large companies planned to increase spending to 8.7 percent on a yearly basis from 7.7 percent at the end of the second quarter.

The UK
The pound was mixed last week, as its own problems crashed against those of the dollar.

The UK PMI manufacturing fell to 55.1 in September from 56.3. Moreover, services PMI fell to 56.7 from 57.6 in August, according to the Chartered Institute of Purchasing and Supply and Royal Bank of Scotland.

Home prices were flat in September with mortgage lending down to 8.5 billion pounds in August.

Consumer confidence increased five points to 99 in September, the highest since May.

HBOS Plc's Halifax house price index fell 0.6 percent in September from a downwardly revised +0.3 percent in August.

Canada
Dollar/Canada collapsed to a new 31-year low on Friday following strong data and on demand for commodities.

Canada's unemployment added 51,100 jobs and this lowered the jobless rate to 5.9 percent in September for the first time since November 1974.

Ivey Purchasing Managers Index fell to 56.0 in September from 58.5 in August.

Building permits rose 1.4 percent in August.

Switzerland
Dollar/Swiss rallied sharply last week and its weakness on Friday should not last long.

The Swiss manufacturing PMI fell to 57.6 in September.

Australia
The Aussie/dollar exploded higher to a new 23-year high amid demand for carry trades.

Australia's retail sales rose 0.7 percent in August, twice the expectations.

Meanwhile, the trade deficit expanded to A$1.61 billion in August from a revised A$883 million in July, with exports up 2 percent and imports up 5 percent.

This Week's Data and Events

United States
The US economic calendar will start only on Thursday with the release of the Trade Balance report for August. Can’t be that good, can it?

Friday will see the release of a whole batch of important data that covers inflation and consumer confidence: the PPI report for September, the Retail sales report for September (back to school, let’s not forget this), and the University of Michigan survey for October.

The Eurozone
The Eurozone economic calendar will begin on Monday with the release of the German Factory Orders report for August.

The German and French Trade Balance reports for August and the German Industrial Production report for August are due on Tuesday.

Wednesday will see the French and the Italian Industrial Production reports for August.

The revision of Eurozone GDP for the second quarter is due on Thursday.

Friday will see the French CPI report for September and the Eurozone Industrial Production report for August.

Japan
Japan doesn’t have much data to release this week.

Monday is closed for a holiday.

The Machinery Orders report for August is due on Thursday.

The UK
The UK economic calendar starts on Monday with the release of the Industrial Production report for August and of the PPI input/output reports for September.

The Trade balance report for August is due on Tuesday.

The RICS House Price Balance for September will be released on Thursday.

Canada
Canada is closed on Monday for a holiday.

The Housing Mortgage report for September is due on Tuesday.

Thursday will see the release of New Housing Price report for August and the Trade report for August.

Overview

Euro/dollar
Last week's range: 1.4031 -1.4281 (Down)
Previous range: 1.4062 – 1.4277 (Up)

Despite its aggressive recovery on Friday, the euro/dollar closed the week lower and probably formed a bearish reversal on a weekly basis. At least in the short term the pair, which remains overbought in the medium term, should head lower. The uptrend is in trouble here.

Below 1.4035, euro/dollar has support at 1.3995. Only a break below 1.3965 would confirm that a peak is in place. The euro/dollar would make a more sustained decline toward the distant support at 1.3840.

A move above 1.4185 would negate the pullback. Above 1.4281, strong resistance is seen only at 1.4400. Distant resistance is at 1.4580.

NEAR-TERM:Slightly bearish
MEDIUM-TERM:Bullish
LONG-TERM: Bullish

Dollar/yen
Last week's range: 114.69 – 117.27 (Up)
Previous range: 114.04 – 115.88 (Down)

Dollar/yen broke out of an inside range and from a triangle on its way to a seven-week high. With the world liking carry trades once again, the pair should trade sideways to higher.

Immediate resistance is seen at117.35. Above 117.85 there is distant resistance at 118.25 from a 50-point pivot that targets 117.75 and 118.75.

Strong support is at 116.85 from another 50-point pivot that targets 116.35 and 117.35. Distant support follows at

115.50 from another 50-point pivot, which targets 115.00 and 116.00.

NEAR-TERM: Slightly bullish
MEDIUM-TERM: Mixed
LONG-TERM: Bearish

Sterling/dollar
Last week's range: 2.0278 – 2.0493 (Mixed)
Previous range: 2.0085 – 2.0475 (Up)

Sterling/dollar made little progress last week, even though it coined a 2 ½-month high. With three days down and two up, and the uptrend in trouble, more information is needed here.

Initial resistance is at 2.0470. Strong resistance comes at 2.0530. If this level gives way, look for a test of the pivotal high at 2.0654. Next level is 2.0735. Distant resistance is now perched at 2.0845.

Immediate support is seen at 2.0315. Next level is at 2.0275. Below 2.0155 there is distant support at 2.0000.

NEAR-TERM: Mixed
MEDIUM-TERM:Bullish
LONG-TERM:Bullish

Dollar/Swiss franc
Last week's range: 1.1619-1.1854 (Up)
Previous range: 1.1625 – 1.1757 (Down)

Dollar/Swiss made a spectacular recovery from a new (and marginal) 2 ½-year low of 1.1619 late last week and recovered nearly a quarter of the downtrend since June. Hold long positions now and sell only a stop loss basis.

Initial resistance is at 1.1854. Above 1.1935, distant resistance is at 1.2005.

Immediate support is at 1.1740. Next level is at 1.1695. Below 1.1585, there is support at 1.1495. Distant support follows at 1.1410.

NEAR-TERM: Mixed with upside bias
MEDIUM-TERM:Bearish
LONG-TERM: Bearish

Dollar/Canada
Last week's range: 0.9788 – 1.0017 (Down)
Previous range: 0.9914 – 1.0095 (Down)

Dollar/Canada plunged further last week to reach a 31-year low of 0.9788. The weakness should decelerate because of the severely oversold conditions.

Below 0.9788, there is support at 0.9750. Distant support lies at 0.9620.

Initial resistance is at 0.9910 and this is followed by 0.9980. The next level is at 1.0095. A break above 1.0165 would confirm a more aggressive recovery to 1.0265. Distant resistance is at 1.0345.

NEAR-TERM: Slightly bearish
MEDIUM-TERM: Bearish
LONG-TERM: Bearish

Euro/yen

Last week's range: 163.59 -165.38 (Up)
Previous range: 161.02 – 163.97 (Up)

Euro/yen rallied for fourth consecutive weeks to a 2 ½-month high and the the upside remains favored.

Above 166.10 the euro/yen now faces resistance nearby at 166.50. The cross then has strong resistance at 167.40. Above 168.40, distant resistance is perched now at 169.20.

Immediate support is seen at 164.90. This is followed by 164.25. The next level is now seen at 162.70. The support at 161.60 is very important. Distant support is at 159.40.

NEAR-TERM: Slightly bullish
MEDIUM-TERM: Slightly bullish
LONG-TERM: Bullish

Euro/sterling
Last week's range: 0.6910 – 0.6980 (Down)
Previous range: 0.6953 – 0.7028 (Mixed; peaking?)

Euro/sterling followed the bearish reversal on the weekly charts and gave back more of its gains from a 22-month high it coined a week before. It also reached the target of a double top. The immediate bias for the oversold cross is still down.

Strong support is now seen at 0.6910. A break below it would signal an aggressive downmove to 0.6867. Below 0.6810, distant support comes at 0.6775.

Initial resistance is at 0.6955. This is followed by 0.6995. Above the strong pivot at 0.7028, resistance is still seen at 0.7075. If the cross manages to close above this level, then expect a test of the distant resistance at 0.7118.

NEAR-TERM: Bearish
MEDIUM-TERM: Bullish
LONG-TERM: Bullish

Published on  Mon, Oct 8 2007, 09:27 GMT