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Weekly Forex Market Commentary

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The US economic agenda will open on Monday

Mon, May 19 2008, 06:18 GMT
by Cornelius Luca

GFT

We have been treated to an appetizing array of strong US reports that seem to tell us that recession talk is for the wimps. But the cold fact is that consumer confidence is down, jobs are disappearing and the housing sector is a disaster.

The dollar fell last week and this seems to have been the end of its recovery. The dollar should encounter more weakness this week.

United States
The dollar sank aggressively and comprehensively on Friday, as a series of good economic reports failed to pull the wool over the eyes of traders. We are in a recession and this will get only worse as we go into the end of the year. Optimists about the new-found strength of the dollar should be disappointed. More weakness is in the store.

The dollar rallied early in the week following a better than expected retail sales report. They fell 0.2 percent in April following an unrevised 0.2 percent increase in March. But ex-auto sales, retail sales increased by 0.5 percent in April on top of a 0.4 percent increase in March.

CPI rose a smaller-than-expected 0.2 percent in April and the core CPI expanded only 0.1 percent. Energy prices were unchanged after a 1.9 percent rise in March, as gasoline prices dropped 2 percent but rose 15.9 percent on a yearly basis. Low inflation? You got to be joking!

Housing starts rose by a surprisingly strong 8.2 percent at a 1.032-million-unit annual rate in April from an upwardly revised 954,000-unit rate in March, while permits gained 4.9 percent to 978,000 from an upwardly revised 932,000 in March. The report boosted the dollar on Friday, but didn’t come close to fixing the housing sector. This is only a brief and insignificant recovery.

The preliminary University of Michigan Survey of consumer confidence fell to 59.5 in May, its lowest level since June 1980, from April’s 62.6.

Business inventories edged up 0.1 percent in March following a revised 0.5 percent increase in February. Meanwhile, the volatile sales jumped 1.0 percent in March after falling by 1.0 percent in the previous month.

The Philly Fed survey of manufacturing conditions improved to -15.6 in May from -24.9 in April. But that’s still six consecutive months in negative territory. The current employment index rose to -1.0 from -11.1.

Industrial production contracted 0.7 percent in April from a downwardly revised 0.2 percent gain in March. Capacity utilization fell to 79.7 percent, the lowest since September 2005, from 80.4 percent the prior month.

The New York Federal Reserve Bank’s "Empire State" manufacturing activity index fell in May to -3.23 from 0.63 in April. Adding insult to injury, the prices paid measure of inflation rose to 69.57, the highest since the start of the report in July 2001, from April’s 57.29. The weak report briefly hurt the dollar.

Initial claims for unemployment benefits rose 6,000 to 371,000.

Treasury International Capital (TIC) data for March 2008 showed that net foreign purchases of long-term securities were $80.4 billion. Of this, net purchases by foreign official institutions were $48.1 billion, and net purchases by private foreign investors were $32.1 billion.

The Eurozone
The euro/dollar marched higher last week and this confirms the end of its corrective decline. It should gain further.

Germany's GDP surged 1.5 percent in the first quarter, five times the rate of the fourth quarter, and French GDP rose by 0.6 percent. This helped the Eurozone GDP to increase 0.7 percent. At the other end, the US GDP edged up only 0.1 percent in that period.

Italian industrial production fell by 0.2 percent for the second consecutive month in March, and this brought the annual growth down from -0.7 percent to -2.5 percent. Overall, the German, French and Italian data suggest a decline in the Eurozone production.

Meanwhile, the Eurozone industrial production growth fell by 0.2 percent in March, following the weak reports from the regional economies. The annual growth rate slowed to 2.0 percent from 3.2 percent.

French current account deficit widened to 2.5 billion euros in March from 1 billion euros in February.

The Eurozone unexpectedly reported a trade deficit of 2.3 bln in March euros compared with a 1.6 billion euro surplus the month before.

Japan
Dollar/yen barely managed to hold on to some of the gains made earlier in the week. While the trading range should continue, the selling pressure should persist.

Japan's economy grew a more than expected Japan expanded 0.8 percent in the first quarter and 3.3 percent on an annual basis, but the fourth-quarter GDP was revised sharply down to 2.6 percent from 3.5 percent. A wash.

The current account surplus fell 12.3 percent in March from the same month a year earlier.

Machinery orders fell more than expected by 8.3 percent in March from February, when they contracted 12.7 percent.

The industrial production was revised downward to -3.4 percent in March from a 3.1 percent fall in a preliminary reading. The capacity utilization index fell 3.5 percent from a month earlier.

The UK
The sterling/dollar ended the week higher, but that requires significant effort, as it had to reverse from a new low for the downtrend.

Initially, it sank against the euro and dollar on Tuesday.

UK producer prices expanded 2.6 percent in April and 23.3 percent on the year to a record high. The report will stop the MPC from cut interest rates any faster.

Also, consumer prices rose 0.8 percent in April, the fastest pace since May 2001. This helped thee annual CPI to accelerate to 3 percent in April from 2.5 percent in March. The core annual inflation came in at 1.4 percent. Inflation has exceeded the central bank's 2 percent target for seven months.

The RICS house price balance fell by 15.7 points to -95.1 percent in March.

Meanwhile, house prices grew 5.2 percent in March from the previous year, according to DCLG.

The trade deficit narrowed to 4.0 billon pounds in March from 4.3 billon pounds in February.

The Bank of England’s May Inflation Report suggests that its MPC will not cut rates. The CPI forecast has been revised up sharply from February’s Report, while the forecast for GDP growth has been pulled down quite sharply to just 1 percent at the end of 2008 before recovering in 2009.

The claimant count measure of unemployment rose by a fairly hefty 7,200 to 806,300 in April, but down 82,300 on a yearly basis. The claimant count rate remained at 2.5 percent for the sixth consecutive month, while the jobless rate remained at 5.2 percent.

Canada
Dollar/Canada fell for the second week in a row, and the renewed strength of the commodity prices helped.

Canadian new-home prices rose 0.2 percent in March, and edged lower to +6.1 percent on a year-over-year basis, from 6.2 percent in February.

Manufacturing sales unexpectedly contracted 1.6 percent in March and the February expansion was revised down to 1.3 percent from 1.6 percent.

Switzerland
Dollar/Swiss franc ended barely higher, but well off its intraweek highs.

Australia
The Australian dollar surged on Friday in line with the oil price. After some corrective decline, the uptrend should resume.

This Week's Data and Events

United States
The US economic agenda will open on Monday with the release of the Leading indicators report for April – should not be a market mover.

On Tuesday, the PPI report for April will probably show that we don’t really have inflation, just like the CPI. Really!

US Fed releases minutes for the April 29-30 meeting on Wednesday.

Friday will see the release of the existing Home sales report for April.

The Eurozone
The Eurozone economic calendar will start in force on Tuesday with the release of Germany’s ZEW report for May and its PPI report for April. Both reports are very important, even though the ECB looks clear to keep rates on hold.

Equally important is the IFO German Business Climate report for May, which is due on Wednesday.

Much less important is the Italian Consumer confidence Index for May, on Thursday.

Friday will see the release of the Eurozone Services and Manufacturing PMI reports for May, the French consumer spending report for April, and the Italian GDP report for the first quarter.

Japan
Japan’s calendar will start on Tuesday with the release of the Tertiary index activity and of the Coincident and Leading indices reports for March.

The Trade Balance report for April and the All Industry activity report for March are due on Thursday.

The UK
The Bank of England MPC minutes for May are due on Wednesday.

Thursday will see the release of the Retail sales report for April and of the CBI industrial trends survey for May.

The GDP for the first quarter and the Index of services report for March are due on Friday.

Canada

The Canadian economic calendar report will start on Wednesday wit the release of the CPI and of the Leading indicators reports for April.

The Retail sales report for March is due on Thursday.

Overview

Euro/dollar
Last week's range: 1.5367 – 1.5600 (Up)
Previous range: 1.5287 – 1.5593 (Mixed)

The euro/dollar rallied to a two-week high and recovered 38.2% of the decline between April 23 and May 8. Its corrective decline is over and the pair should march higher. My model went long on Friday. Are we facing an interim inversed head-and-shoulders?

Initial resistance is at 1.5600. Above 1.5645, euro/dollar has additional resistance at 1.5685. Distant resistance is then seen at 1.5760 and 1.5820.

Immediate support is now seen at 1.5530. The next levels are 1.5460 and 1.5415. These are followed by 1.5287. Below 1.5230, euro/dollar still has distant support at 1.5150.

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

Dollar/yenLast week's range: 102.58 – 105.43 (Up)
Previous range: 102.62 – 105.61 (Down)

Dollar/yen ended only slightly higher and got stuck in an inside range. My model remains short, and this is a good strategy. Are we fading a double top? It’s a little early to tell.

Initial support is at 103.40 from a 50-point pivot, which targets 102.90 and 103.90. The next big level is 102.30 from another 50-point pivot, which targets 101.80 and 102.80. Distant support is at 101.25 from a 50-point pivot, which targets 100.75 and 101.75.

Immediate resistance is at 104.50 from a 50-point pivot, which targets 104.00 and 105.00. Distant resistance remains at 105.60 from a 50-point pivot that targets 105.10 and 106.10.

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

Sterling/dollar
Last week's range: 1.9365 – 1.9633 (Up)
Previous range: 1.9459 – 1.9786 (Down)

Sterling/dollar rallied from a three-month low after failing to cut a new low for the downtrend. The hammer on Wednesday accurately predicted the recovery to Friday. My model went long.

Initial resistance remains at 1.9620. Above 1.9680, there is further resistance at 1.9760. This is followed by 1.9875. Distant resistance comes at 2.0025.

Immediate support is now seen at 1.9500. The next level is 1.9459. This is followed by 1.9400, 1.9363 and 1.9338. Distant support is at 1.9184.

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

Dollar/Swiss franc
Last week's range: 1.0389 – 1.0600 (Mixed)
Previous range: 1.0389 – 1.0622 (Down)

Dollar/Swiss gave up gains made earlier in the week to end unchanged. The remained in an inside range. My model remains short.

Immediate support is now seen at 1.0430. This is followed by 1.0350 and 1.0300. Support is then still pegged at 1.0255. Below 1.0130, distant support is at 1.0020.

Initial resistance now comes at 1.0500. If this close level gives way, expect a test of 1.0550. This is followed by 1.0622. Distant resistance now comes at 1.0795.

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

Dollar/Canada
Last week's range: 0.9944 – 1.0108 (Down)
Previous range: 1.0000 – 1.0201 (Down)

Dollar/Canada fell to a two-moth low after closing below the bottom of the Ichimoku cloud on Thursday. Still, expect more consolidation.

Initial support comes at 0.9945. Below 0.9865, distant support is pegged at 0.9745.

Immediate resistance is now seen at 1.0017. The next level is 1.0095. This is followed by 1.0175. Above 1.0250, strong resistance is at 1.0325. Distant resistance is perched at 1.0415.

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

Euro/yen
Last week's range: 158.67 – 162.95 (Up)
Previous range: 158.63 – 163.10 (Down)

Euro/yen rallied aggressively into early Thursday to erase all of the losses incurred the previous week, but remained in an inside range. The bias is on the upside, and my system remains barely short.

Initial resistance comes at 162.50. The next resistance is at 162.95. Above 163.30, resistance is seen at 164.20. The euro/yen retains distant resistance at 165.00.

Immediate support is at 161.85. This is followed by 161.00. The next level is at 160.10. Distant support is still in place at 158.63.

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

Euro/sterling
Last week's range: 0.7877 – 0.7987 (Up)
Previous range: 0.7817 – 0.7941 (Up)

Euro/sterling climbed up for the second consecutive week to erase 61.8% of the losses incurred during the previous three weeks. My model remains long.

Immediate resistance is still seen at 0.7987. 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.

Immediate support is at 0.7925. The next levels come at 0.7890 and 0.7845. Below the pivot low at 0.7766, distant support remains at 0.7670.

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

Published on  Mon, May 19 2008, 06:26 GMT