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Weekly Forex Market Commentary

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The FOMC on Wednesday should produce a rate cut of 25 basis points and no more

Mon, Apr 28 2008, 06:13 GMT
by Cornelius Luca

GFT

The dollar made some spectacular gains last week primarily on relief/hope that the worst of the subprime disaster is over. Maybe. But recession is looking us in the eye and while the dollar doesn’t do all that bad during these periods, it is premature to call the end of its long-term downtrend. This week could prove crucial for new-found strength of the dollar and weakness is likely early in the week.

United States
The equity markets look good here, and the dollar mounted a dramatic recovery against most of the European currencies and rallied versus the yen. But the rally was mostly against the overbought euro and stemmed from hopes the US financial system is on its way to recovery. These expectations were fueled by a Wall Street article saying that the Federal Reserve will make a final cut of 25 basis points before pausing. Watch for this week’s developments - this rate cut, the euro crosses, the oil price and the unemployment rate on Friday – for further cues.

Durable goods orders slipped 0.3 percent in March, but ex-transportation rose 1.5 percent. Non-defense capital goods orders excluding aircraft was revised up to -2.0 percent from -2.4 percent.

New home sales fell 8.5 percent to an annual rate of 526,000 units in March from the downwardly revised February rate of 575,000 units. Not quite a surprise, really.

Existing home sales contracted 2 percent to a 4.93 million-unit annual rate in March, according to the National Association of Realtors. Still surprised?

The University of Michigan final index of consumer sentiment was revised down to 62.6 from 63.2 in April, the weakest level since 1982, from 69.5 the prior month. Hmmm!

Initial claims for jobless benefits fell by 33,000 to a seasonally adjusted 342,000 in the week ended April 19 from an upwardly revised 375,000 (from 372,000) in the prior week.

The Eurozone
The euro/dollar suffered aggressive losses that surprised even though they had been expected for quite some time. There is some more room on the downside – but probably not much more. The pair should see some weakness early in the week.

The euro stabbed lower initially early Tuesday on adverse news out of the German banking sector. Duesseldorfer Hypothekenbank needed to be bailed out by a group of banks in the wake of the collapse of the US subprime market.

It then surged briefly to above 1.6000 before melting away.

The Eurozone services PMI rose to 51.8 in April from 51.6 in March. However, the manufacturing PMI fell to 50.8 from 52 in March. The composite index of services and manufacturing rose to 51.9 from 51.8.

Meanwhile, the Eurozone industrial orders rose 0.6 percent in February and 9.9 percent on a yearly basis.

The euro collapsed on Thursday following news the Ifo business climate index fell to 102.4 in April, the lowest since January 2006, from 104.8 in March. The current business situation sub-index declined to 108.4 in April from 111.5 in March, and the expectations for future business measure sank to 96.8 from 98.4.

The French manufacturers sentiment fell to a 16-month low of 106 in April from 108.

Only Italian consumer confidence rose to 99.8 in April from a 99.0 last month.

The Eurozone current account showed a surplus of 4.3 billion euros in February, down from 7.9 billion euros in January.

Japan
Dollar/yen only struggled higher last week in a technically bound move.

But most of the economic data passed without much reaction – as it should.

The only data was interest was released on Friday, when a high inflation report stirred hopes for a rate hike. A tad premature.

Consumer prices rose 1.2 percent in March, the fastest pace in a decade. Core prices rose 0.3 percent on a yearly basis. Tokyo's core prices rose 0.7 percent in April from a year earlier from 0.6 percent in March.

Before that, the Japanese Leading Index number was revised up to 54.5 percent in February from an initial reading of 50 percent and from 45.5 percent for January. The coincident index reading was revised up to 70 percent from 44.4 percent and from January's 20 percent, while the lagging index was revised down to 40 percent from 50 percent.

All-industries index fell 1.4 percent in February.

The trade surplus shrink 30.2 percent to 1.12 trillion yen from a year earlier, as imports rose 11.1 percent due to record oil prices and exports rose 2.3 percent.

The UK
The sterling/dollar ended the week lower, but it was the toughest kid on the (European) block. Initial strength is likely.

The pound fell sharply on Monday on news that the Bank of England offered to swap government bonds for mortgage securities to improve bank lending - the move had been discounted by the market.

The pound then surged on Friday despite news that GDP slowed to 0.4 percent the first quarter, the least since the first quarter of 2005, from 0.6 percent in the previous quarter. The BoE has cut its benchmark interest rate three times since December to 5 percent from a six-year high of 5.75 percent in July to avert a recession.

The housing contraction continued unabated. Mortgage approvals fell 18 percent to the lowest in more than a decade in March and 46 percent on a yearly basis.

UK retail sales declined 0.4 percent in March from February’s upwardly revised to 1.1 percent from 1 percent. The March decline was the largest since January 2007. On a yearly basis, retail sales rose 4.6 percent in March and February's growth was revised upward to 6.3 percent from 5.5 percent.

Canada
Dollar/Canada closed higher, but lacked much direction and oomph. It should now head lower as it approaches the tip of a triangle

The Bank of Canada met the market expectations and cut its benchmark rate by 50 basis points to 3 percent to stimulate its economy, now expanding at its slowest pace in 16 years. It also signaled more easing may be needed. The rate cut narrows Canada's biggest rate premium over the Federal Reserve's benchmark in four years. Traders expect another 25 bps from 2.25 percent on April 30.

Retail sales unexpectedly fell 0.7 percent in February, the first decline in five months, after gaining a downwardly revised 1.4 percent the month before. But on a yearly basis, retail sales expanded 5.7 percent.

Switzerland
Dollar/Swiss franc rallied last week, but future gains are not as clear.

Australia
The Australian dollar gave sharp gains to close the week flat.

It surged initially on Monday after the local PPI producers rose a record 1.9 percent in the first quarter from 0.6 percent in the fourth quarter.

In addition, the CPI increased 1.3 percent in the first quarter from 0.9 percent in the previous quarter. On a yearly basis, CPI rose 4.2 percent. The RBA will probably lift rates again in May to combat further inflationary expectations.

This Week's Data and Events

United States
The US economic agenda will start on Tuesday with the release of the Conference Board Consumer Confidence report for April.

The FOMC on Wednesday should produce a rate cut of 25 basis points and no more.

The preliminary GDP and the Employment Cost Index reports for the first quarter are due on Wednesday as well, along with the Chicago PMI report for April.

The Personal Income report for March, the ISM Manufacturing PMI report for April and the Construction Spending report for March are due on Thursday.

It’s the first Friday of the month, so don’t forget to fasten your seat belts ahead of the release of the Nonfarm Payrolls and unemployment Rate reports for April! You’ll need it.

The Factory Goods Orders report for March is also due on Friday.

The Eurozone
The Eurozone economic calendar will begin on Monday with the release of the Germany’s GfK Consumer Confidence report for May and of Italy’s Business Confidence report for April. We had two bad previous ones in Germany, so expect another disappointment.

Tuesday will see the release of the Eurozone Retail PMI report for April and of the French Consumer confidence report for April.

On Wednesday, all eyes will be on Germany’s Retail sales report for March and Unemployment report for April. Both reports are very important.

The Eurozone Industrial and Consumer Confidence report for April and Unemployment Rate report for March are due on Wednesday as well.

The regional manufacturing PMI for April is due on Friday.

Japan
The BoJ Rate Announcement for April is due on Wednesday – expect no change.

Wednesday will see the release of the Unemployment Rate, Household Living Expenditure, Industrial Production and Housing Starts reports for March.

The UK
The UK agenda will start on Tuesday with the CBI Distributive Trades report for April.

The Nationwide House Prices and GfK consumer confidence reports for April are due on Wednesday.

The PMI Manufacturing for April will be released on Thursday.

Canada
There will be no relevant economic reports due this week.

Overview

Euro/dollar
Last week's range: 1.5556 - 1.6020 (Down)
Previous range: 1.5672 – 1.5985 (Up)

The overbought euro/dollar made a collapsing decline last week after climbing briefly above 1.6000 to annihilate some knockout options. It gave back about a quarter of the gains made since January by the end of the week. But, have we seen the real peak? The weekly chart clearly displays a bearish engulfing pattern following a record high, but several weeks earlier we had been “treated” to an equally appetizing dark cloud cover and euro/dollar then surged to new record highs. My model remains short. Don’t leave your guard down, this pair may still bounce. My model is short, but its initial bias is up.

Initial resistance is at 1.5680. The next level is 1.5760. Above 1.5820, resistance remains at 1.5985. Distant resistance is seen at 1.6040.

Immediate support is now seen at 1.5600. The next level is 1.5556. Below the important level at 1.5480, euro/dollar has support at 1.5415. This is followed by 1.5340. Distant support comes at 1.5150.

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

Dollar/yen
Last week's range: 102.89 – 104.81 (Up)
Previous range: 100.31 – 104.64 (Up)

Dollar/yen marched higher to a two-month high but its rally decelerated late in the week. The risk on the upside looks limited. The two pivots at 103.40 and 104.50 really helped last week.

Immediate resistance is at 105.00. The next levels remain at 105.20 and 105.60 from a 50-point pivot that targets 105.10 and 106.10. Distant resistance is at 107.45.

Initial support is at 104.50 from a 50-point pivot, which targets 104.00 and 105.00.Strong support is at 103.40 from a 50-point pivot, which targets 102.90 and 103.90. The next level is at 102.30 from another 50-point pivot, which targets 101.80 and 102.80.

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

Sterling/dollar
Last week's range: 1.9677 - 2.0025 (Down)
Previous range: 1.9597 – 1.9998 (Up)

Cable closed the week lower, but Friday’s rally alleviated its losses – bottom line, the status quo continues, as the pair is approaching the tip of a medium term triangle. My model went long again and the initial move should be up.

Initial resistance now comes at 1.9915. Above 2.0000, there is a pivot high at 2.0046. This is followed by 2.0190. Distant resistance looms at 2.0275.

Immediate support is seen at 1.9815. This is followed by 1.9760. Below 1.9677, distant support is 1.9597.

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

Dollar/Swiss franc
Last week's range: 0.9998 – 1.0430 (Up)
Previous range: 0.9927 – 1.0283 (Up)

Dollar/Swiss rallied to a seven-week high of 1.0430 last week and my model remains long. However, choppy trading with only some upside bias is expected now.

Initial resistance now comes at 1.0430. This is followed by 1.0550. The next level is 1.0625. Distant resistance now comes at 1.0795.

Immediate support is now seen at 1.0260. This is followed by 1.0185. Support is then pegged at 1.0135. Below 1.0020, distant support is at 0.9642.

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

Dollar/Canada
Last week's range: 1.0000 – 1.0214 (Up)
Previous range: 0.9989 – 1.0275 (Down)

Dollar/Canada closed higher last week, but fell is Asia. It still remains in a trading range, as it approached the tip of a triangle.

Initial support now comes at 1.0050. The next levels are 1.0000 and 0.9945. Below 0.9865, distant support is pegged at 0.9745.

Immediate resistance is now seen at 1.0150. Above 1.0250, strong resistance is at 1.0325. Distant resistance is perched at 1.0415.

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

Euro/yen
Last week's range: 162.69 – 164.96 (Down)
Previous range: 158.26 – 164.66 (Up)

Euro/yen fell the last three days of the week from the highest levels of the year, but not all that much. Nevertheless, my system went short. Stay cautiously short.

Immediate support is at 162.68. This is followed by 161.85. The next level is at 161.10. Distant support is at 158.25.

Initial resistance is at 163.80. The next resistance is at 164.96. Above 166.66, resistance is at 167.72. The euro/yen retains distant resistance at 168.95.

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

Euro/sterling
Last week's range: 0.7852 – 0.8050 (Down)
Previous range: 0.7876 – 0.8099 (Down)

Euro/sterling reversed early gains to close the week at a three-week low and my model remains short. That’s good, as the cross is overbought and formed bearish reversals for two weeks. Again, only a close below 0.7875 gives scope to a sustained pullback.

The next level remains at 0.7823. Below 0.7785, distant support remains at 0.7605.

Immediate resistance is now seen at 0.7935. This is followed by 0.8015. Above 0.8100, the next level is 0.8155. Distant resistance is then seen at 0.8270.

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

Published on  Mon, Apr 28 2008, 06:19 GMT