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Weekly Forex Market Commentary

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The Productivity report for the first quarter is due on Wednesday

Mon, May 5 2008, 06:34 GMT
by Cornelius Luca

GFT

The dollar put on a good performance last week in line with the stock indices on liquidation of long-term short positions, and on relief that the worst of the credit crunch and of the financial crisis is over. That’s nice, only that the recession is in its budding stages. That on its own doesn’t mean the US currency has to decline, but expect more shocks, as consumer confidence/spending will only worsen. Watch out for some more short term strength for the dollar.

United States
We had some decent economic reports last week and the battered market embraced them in an over optimistic manner. The recession is only starting, so don’t get confused by the too-nice-to-be true GDP data. Consumers will guard their spending closer and closer and more famous stores will have to close down.

The Federal Reserve met the market expectations and cut its benchmark rate by 25-basis points to 2 percent and indicated it will pause after seven cuts since September. Maybe, it’s all data dependant. Only that lower short term borrowing costs will not really help.

The Conference Board's confidence index fell to 62.3 in April, a smaller decline than forecast, but the lowest since March 2003, from an upwardly revised 65.9 in March.

Manufacturing ISM better came in at a better than expected at 48.6 in April, and while the number still shows contraction, the dollar rallied further on Thursday.

Construction spending fell a more-than-expected 1.1 percent in March after an upwardly revised 0.4 percent increase in February.

Home prices contracted 12.7 percent in the year through February, according to Case-Shiller. The index has fallen every month since January 2007.

The economy expanded at a 0.6 percent annual pace in the first quarter, the same as in the previous quarter. An increase in inventories balanced a decline in consumer spending and business investment. The improvement in the trade deficit added 0.2 percent to growth, after a 1 percent boost the prior quarter.

The Chicago PMI rose to 48.3 in April from 48.2 in March.

Personal income rose 0.3 percent in March after +0.5 percent in February, spending expanded 0.4 percent after a 0.1 percent increase the prior month, and nominal disposable personal income slipped to 0.3 percent from 0.5 percent. Nominal personal consumption expenditures increased 0.4 percent.

The dollar surged further after the better than expected unemployment data. Nonfarm payrolls shrank by only 20,000 workers, following a revised 81,000 decline in March. The jobless rate fell to 5 percent from 5.1 percent in March.

Initial claims for jobless benefits increased 35,000 to a seasonally adjusted 380,000 in the week ended April 26 from a revised 345,000 (up from 342,000) the previous week.

Factory goods orders surged 1.4 percent in March. Hmmm! But that was only enough to balance February’s losses.

The Eurozone
The euro/dollar sank further, but it’s only relief selling, and if it goes to 1.5000, it’s still not that far. The ECB has no intention to cut rates yet, and this should put the brakes on the slide of the pair.

The economic data was all over, but nothing screams yey or ney.

Consumer prices in six German states unexpectedly declined in April, with prices in Bavaria down 0.2 percent. Prices also declined in Hesse, North Rhine-Westphalia, Baden-Wuerttemberg, Brandenburg and Saxony. Policy makers at the European Central Bank have suggested the refi rate of 4 percent may not be sufficient to limit European inflation, which reached a 16-year high of 3.6 percent in March, but these reports may alleviate the hawkish talk.

Italian business confidence indicator fell to 86.9 in April from March's revised reading of 88.8.

Unlike the Ifo and Zew reports, German consumer confidence improved to 5.9 in May significantly in April, raising the forecast for May from a revised 4.8 points in April (from 4.6), according to GfK.

French consumer confidence fell to minus 37 in from minus 36 in the prior month, the statistical office INSEE said.

Germany's number of jobless fell 94,000 in April to total 3.414 million. This helped the unadjusted jobless rate decline to 8.1 percent in April from 8.4 percent in March. The seasonally adjusted jobless rate remained unchanged at 7.9 percent in April.

The Eurozone CPI came in at 3.3 percent April, while the local business climate indicators fell to 0.4 in April from 0.8.

France's housing starts decreased 9.9 percent and housing permits fell 15.5 percent on the year in three months to March.

Italian consumer prices edged up 0.1 percent in April and 3.3 percent on an annual basis.

Retail sales in Germany unexpectedly declined an additional 0.1 percent n March from February, when they contracted 0.7 percent.

European manufacturing PMI slowed to 50.7 in April from 52 in March.

Japan
Dollar/yen marched higher last night and hit all kinds of technical levels. The upside looks limited.

Only a week after the world was looking for a possible rate hike in Japan, a cold shower was served. The Bank of Japan left rates unchanged at 0.5 percent, as universally expected. But it also cut its economic growth forecast to 1.5 percent in the year ending March 31 from an October estimate of 2.1 percent, and forecast inflation would accelerate in a report that omitted a reference to raising interest rates for the first time in two years.

Retail sales rose 0.5 percent in March and 1.1 percent from a year earlier.

The volatile industrial production fell sharply by 3.1 percent in March, nearly double the gains registered the previous month.

Seasonally adjusted unemployment slipped to 3.8 percent in March from 3.9 percent in February.

Meanwhile, household spending fell 1.6 percent in March from a year earlier.

The UK
The sterling/dollar encountered selling pressure, but remained within recent trading ranges.

The economic reports re-affirmed the status quo.

UK data continued to deteriorate with the April CBI distributive trades data falling 26 after last week’s weak industrial trends survey. Net lending also fell more than expected in March (to 6.9 bln vs. an expected 7.2 bln)

The housing sector’s woes continued, as expected. The average cost of a home in England and Wales contracted 0.6 percent in April the most since December 2004. Prices declined 0.9 percent on a yearly basis, according to Hometrack.

Along the same lines, house prices fell 1 percent in April from a year earlier, the first annual decline since 1996, according to Nationwide Building Society.

Canada
Dollar/Canada failed to make much progress despite a sharp rally in the second half of last week.

Canadian industrial product and raw materials prices rose 1.7 percent in March following a 0.2 percent increase in February.

The monthly GDP unexpectedly contracted 0.2 percent in February following a 0.6 percent increase in January. The decrease came as a surprise to economists, who had expected a 0.2 percent increase.

Switzerland
Dollar/Swiss franc continued its recovery from oversold levels. This upmove should slow down.

Australia
The Australian dollar failed to participate in the general rally last week and this suggests that any selling of commodities should not go that far.

This Week's Data and Events

United States
The US economic calendar will open on Monday with the release of the non-manufacturing ISM report for April.

The Productivity report for the first quarter is due on Wednesday.

Finally, Friday will see the release of the Trade Balance report for March.

The Eurozone
The Eurozone economic calendar will start on Tuesday with the release of the final PMI Services report for April and of the PPI report for March.

Wednesday will see the release of the German Factory Orders and the Eurozone Retail sales reports for March.

More important will be the German Trade Balance and Industrial Production reports for March, which are due on Thursday.

The same day, the ECB will leave its rates unchanged at 4.0 percent.

The French Industrial Production report for March ends the week on Friday.

Japan
The Japanese economic calendar is very light this week.

It only consists of the Coincident and Leading Indices for March, and these are not market movers.

The UK
The UK economic calendar will start on Tuesday with the release of the services PMI report for April.

The Nationwide Consumer Confidence report for April and the Industrial Production report for March are due on Wednesday.

The Bank of England will leave its rate unchanged at 5.0 percent on Thursday.

Canada
The Canadian economic calendar will start on Tuesday with the release of the Ivey Purchasing Managers report for April.

On Friday, be on the lookout for the release of the unemployment rate report for April and of the trade report for March.

Overview

Euro/dollar
Last week's range: 1.5362 – 1.5690 (Down)
Previous range: 1.5556 - 1.6020 (Down)

The euro/dollar fell for the second consecutive week and gave back 38.2 percent of the leg of the uptrend between February and April. My model remains short since 1.5900.

Immediate support is now seen at 1.5362. Below 1.5230, euro/dollar has support at 1.5150. Distant support comes at 1.5040.

Initial resistance is at 1.5485. The next level is 1.5540. Above 1.5600, euro/dollar has additional resistance at 1.5685. Distant resistance is now seen at 1.5760.

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

Dollar/yen
Last week's range: 103.23 – 105.69 (Up)
Previous range: 102.89 – 104.81 (Up)

Dollar/yen rallied for the third consecutive week to an over two-month high. It has already recovered half of the losses between the end of 2007 and March 17. My model is long, but the upmove should slow down.

Immediate resistance is at 105.60 from a 50-point pivot that targets 105.10 and 106.10. The next level is at 107.45. Above the 106.75 50-point pivot, which targets 106.25 and 107.25, distant resistance is at 107.95 from another 50-point pivot, which targets 107.45 and 108.45.

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. Distant support 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: 1.9624 – 1.9964 (Down)
Previous range: 1.9677 - 2.0025 (Down)

Sterling/dollar fell for the second consecutive week, but remained within recent ranges. My model kept on alternating long and short positions and is short at the end of the week. The initial move should be up, though.

Immediate support is seen at 1.9690. This is followed by 1.9624. Below 1.9597, support is 1.9495. Distant support is at 1.9363.

Initial resistance now comes at 1.9760. Above 1.9885, there is a pivot high at 2.0046. This is followed by 2.0190. Distant resistance remains at 2.0275.

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

Dollar/Swiss franc
Last week's range: 1.0301 – 1.0608 (Up)
Previous range: 0.9998 – 1.0430 (Up)

Dollar/Swiss rallied for the third consecutive week to erase nearly half of the losses registered between December and March. My model remains long.

Initial resistance now comes at 1.0623. This is followed by 1.0795. The next level is 1.0855. Distant resistance now comes at 1.1100.

Immediate support is now seen at 1.0465. This is followed by 1.0375. Support is then pegged at 1.0255. Below 1.0130, distant support is at 1.0020.

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

Dollar/Canada
Last week's range: 1.0038 – 1.0242 (Up)
Previous range: 1.0000 – 1.0214 (Up)

Dollar/Canada rallied for the second consecutive week, but remained within an inside range – and the tip of a suborn triangle. Expect more consolidation.

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

Initial support remains at 1.0100. The next levels are 1.0000 and 0.9945. Below 0.9865, distant support is pegged at 0.9745.

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

Euro/yen
Last week's range: 160.62 – 163.88 (Down)
Previous range: 162.69 – 164.96 (Down)

Euro/yen fell to a two-week low and my system remains short. Stay cautiously short.

Immediate support is at 161.45. This is followed by 160.62. The next level is at 159.10. Distant support is still in place at 158.25.

Initial resistance comes at 163.30. 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: Slightly bearish
LONG-TERM: Bullish

Euro/sterling
Last week's range: 0.7766 – 7946 (Down)
Previous range: 0.7852 – 0.8050 (Down)

Euro/sterling fell for the third consecutive week and gave up nearly 23.6 percent of the uptrend between July and April. My model is short but the pace of the downmove should decelerate.

Immediate support is at 0.7766. The next level comes at 0.7700. Below 0.7670, distant support remains at 0.7605.

Immediate resistance is now seen at 0.7980. This is followed by 0.7935 and 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: Slightly bearish
LONG-TERM: Bullish

Published on  Mon, May 5 2008, 10:38 GMT