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Weekly Forex Market Commentary

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The US markets are closed on Monday for the Memorial Day

Wed, May 28 2008, 06:04 GMT
by Cornelius Luca

GFT

Past Week's Data and Events

Dreams that the US economy will be able to skirt recession were doused last week, when the Federal Reserve practically acknowledged stagflation. The out of control oil price will only accelerate the misery. The dollar fell last week as optimism faded, and the selling pressure should continue.

United States
The Federal Reserve on Wednesday slashed its 2008 US economic growth forecast and signaled that mounting concerns over inflation would make further interest rate cuts unlikely. The dollar got hurt, and its pain should only increase. The oil price is surging, we are getting desensitized to that and what we will pay next time at the pump, and reasons of dubious significance abound. No, we haven’t sucked the oil fields dry, but spec at a variety of levels makes it look like that. The housing sector remains under pressure, as years of ridiculous excess are being unwound. There is no medium-term cure, and the long-term outlook is pretty bleak for the US economy.

The dollar should remain under pressure, as the ECB will not cut rates any time soon, while the BoE can’t afford to do it anymore. But I don’t expect a rapid meltdown of the US currency.

The index of leading economic indicators rose 0.1 percent in April, as expected. The report was rightfully ignored, although some read that the US economic weakness is bottoming.

PPI rose by only 0.2 percent in April after gasoline prices (at the time) sank, but core PPI increased by 0.4 percent, twice as in the previous month. OK, perhaps a fair “assumption” is that gasoline prices surged after that??

Elsewhere, the Chicago Fed said its National Activity Index contracted 1.17 in April from a downwardly revised -0.98 in March, originally reported at -0.78. The index has been negative since August, suggesting below-trend growth.

Sales of existing homes fell 1 percent to an annual rate of 4.89 million in April. We obviously haven’t seen the worst yet.

First-time claims for state unemployment fell by 9,000 to 365,000 from an upwardly revised 374,000 (from 371,000) for the prior week. Initial claims were the lowest since the week ended April 5.

The Eurozone
The euro/dollar rallied last week and there little to slow its advance. More strength is likely, and the uptrend looks in good shape.

There was no drag on the euro following news that the ZEW index of German investor and analyst expectations declined by a more than expected - 41.4 from - 40.7 in April.

German business confidence unexpectedly increased in May, according to Ifo institute. Its business climate index rose to 103.5 from 102.4 in April, the current business situation sub-index rose to 110.1 in May from 108.4 in April, while the expectations for future business sub-index rose to 97.3 from 96.7.

Along the same lines, Italian consumer confidence rose to 103.2 in May, its highest level since December 2007, from April's revised reading of 99.9.

Elsewhere, Italian retail sales declined 0.5 percent in March, more reversing an increase of 0.2 percent in February, and contacted 1.0 percent on a yearly basis after expanding 2.7 percent in February.

Finally, the Eurozone industrial new orders unexpectedly fell 1% in March from a revised growth of 0.2% in February, and 2.5% on a yearly basis, from 9.9% in February.

The Eurozone manufacturing PMI fell to a five-year low in May of 51.1 from 51.9 in April. The German manufacturing PMI slipped to 53.5 from 53.6 and the French one to 51.3 from 52.9 in April.

Meanwhile, the Eurozone services PMI fell from 52.0 to 50.6.

France reported that personal consumption in April fell 0.8 percent, while the March decline was revised upward to -1 percent from -1.7 percent.

Japan
Japanese accounts couldn’t make up their mind last week and dollar/yen closed only slightly lower. There is little reason to expect a departure from this consolidation.

Japan's trade surplus fell a more than expected 46.3 percent in April from a year earlier. Exports rose 4.0 percent and imports by 11.9 percent.

The tertiary index increased only 0.3 percent in March after declining a revised 1.6 percent in February. Meanwhile, all-industries index, which includes the tertiary activity index, rose 0.5 percent in March.

The Bank of Japan kept interest rates on hold at 0.5 percent, as universally expected, after reducing its growth estimate and giving up a two-year policy of seeking higher borrowing costs.

The UK
Unexpectedly strong economic data pushed the sterling/dollar higher and above the declining trendline. It looks great, but I think too great - the UK economy remains weak.

The Bank of England voted 8-1 to keep the benchmark interest rate at 5 percent in May, thus opting to fight inflation at the detriment of helping the sagging economy.

UK retail sales fell only 0.2 percent in April and March’s 0.4 percent contraction was revised upward to -0.2 percent. The annual growth rate in April came in at 4.2 percent.

The CBI trends survey showed a rise in the price expectations balance to +30 in May from +25 in April. This is another 13-year high and supports fears of inflation.

Finally, the UK GDP for he first quarter remained at 0.4 percent, which is the slowest pace since 2005.

Canada
Dollar/Canada sank last week amid surging oil and other commodities, but its weakness is overdone.

Heavy snowfall at the end of the Canadian winter dampened March retail sales, which edged up just 0.1 percent despite gains in the heavyweight auto sector, after contracting 0.7 percent in February.

Wholesale sales rose 0.6 percent in March following February's revised drop to 2.1 percent from 1.8 percent.

There was little reaction to news that the composite leading indicator climbed 0.1 percent in April as expected, after being flat in March.

Meanwhile, consumer prices rose 0.8 percent in April, the fastest in more than a year, and 1.7 percent from a year earlier. The monthly core inflation rate was 0.3 percent and the yearly rate advanced 1.5 percent from 1.3 percent in March.

International investors bought C$5.3 billion of Canadian securities, led by C$5.94 billion of stocks, the highest since May 2006. They also sold C$401 million of Canadian bonds and C$239 million of money-market paper.

Switzerland
Dollar/Swiss franc fell last week and technically remains weak.

Australia
The Australian dollar surged further, as the RBA is issuing more debt and reducing some taxes. Naturally, high commodity prices didn’t hurt a bit.

This Week's Data and Events

United States
The US markets are closed on Monday for the Memorial Day.

The economic agenda will open in force on Tuesday with the release of the Conference Board Consumer Confidence report for May and the New Home Sales report for April. Both reports are important and both are expected to be lousy.

Wednesday will see the release of the volatile Durable Goods Orders report for April.

The revision of the GDP report for the first quarter is due on Thursday.

Friday is chuck full of market-moving reports: the Personal Spending and Income report for April, the Chicago PMI report for May and the University of Michigan survey for June.

The Eurozone
The Eurozone economic calendar will begin on Tuesday with the release of the revision of the German GDP report for the first quarter, the German GfK Consumer Confidence report for June, the French Business Survey for May, and the Italian Business Confidence report for May.

Germany’s CPI and the French Consumer confidence reports for May are due on Wednesday.

Thursday will see the release of the German Unemployment report for May, and the Eurozone retail PMI, the Eurozone Business Climate Indicator, Consumer Confidence, Economic Sentiment Indicator and Industrial Confidence reports for May.

Germany’s Retail sales and the Eurozone Unemployment Rate reports for April are due on Friday. The first one is important.

Japan
The Japanese economic reports will be released in bulk on Friday: the CPI National report for April and of the Tokyo CPI report for May, the Unemployment Rate, the Household Living Expenditures, the Industrial Production, and the Housing Starts reports for April.

The UK
The UK markets are closed on Monday for a Bank holiday.

The economic calendar begins on Wednesday with the release of the Nationwide House Prices and the CBI distributive trades reports for May.

The GfK consumer confidence report for May is due on Friday.

Canada
There are no significant economic reports due for release in Canada this week.

Overview

Euro/dollar
Last week's range: 1.5487 – 1.5811 (Up)
Previous range: 1.5367 – 1.5600 (Up)

The euro/dollar rallied to a one-month high last week and recovered more than 61.8% of the decline between April 23 and May 8. An interim inversed head-and-shoulders worked fine and the pair should march higher. My model remains long.

Initial resistance is at 1.5811. Above 1.5865, euro/dollar faces additional resistance at 1.5930. Distant resistance is then seen at 1.6020 and 1.6135.

Immediate support is now seen at 1.5700. The next level is 1.5655. This is followed by 1.5610. Below 1.5570, euro/dollar now has distant support at 1.5460.

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

Dollar/yen
Last week's range: 102.73 – 104.68 (Down)
Previous range: 102.58 – 105.43 (Up)

Dollar/yen was all over the place, but nowhere clear, and was stuck in an inside range. The Gann pivots helped the survival. My model remains short, and this is a good strategy.

Sticky support is still seen 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: 1.9454 – 1.9850 (Up)
Previous range: 1.9365 – 1.9633 (Up)

Sterling/dollar surged to a three-week high and recovered over 38.2% of the downtrend since March. My model remains long, but I’m not sure that cable will rally much more.

Initial resistance now comes at 1.9850. Above 1.9880, there is further resistance at 1.9960. This is followed by 2.0025. Distant resistance comes at 2.0155.

Immediate support is now seen at 1.9755. The next level is 1.9675. This is followed by 1.9585. Distant support is the pivot low at 1.9338.

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

Dollar/Swiss franc
Last week's range: 1.0235 – 1.0572 (Down)
Previous range: 1.0389 – 1.0600 (Mixed)

Dollar/Swiss has alternated up and down weeks for four weeks and ended at a one-month low after closing below the rising trendline. My model remains short and the outlook is only cautiously negative.

Immediate support is now seen at 1.0235. This is followed by 1.0020. The target of a double top is 1.0115. Support is then pegged at 1.0020. Distant support is at .9950.

Initial resistance now comes at 1.0335. A break above this level would signal a test of 1.0040. This is followed by 1.0545. Distant resistance now comes at 1.0622.

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

Dollar/Canada
Last week's range: 0.9820 – 1.0003 (Down)
Previous range: 0.9944 – 1.0108 (Down)

Dollar/Canada fell for the third consecutive week and the selling pressure should persist, but at a slower pace. Key support now comes at 0.9756 from the bottom of the Ichimoku cloud on a weekly basis.

Initial support is at 0.9820. Below 0.9756, support comes at 0.9670. Distant support is now pegged at 0.9490.

Immediate resistance is now seen at 0.9894. The next level is 0.9970. This is followed by 1.0017. Above 1.0065, strong resistance is at 1.0170. Distant resistance is perched at 1.0325.

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

Euro/yen
Last week's range: 161.46 – 163.86 (Up)
Previous range: 158.67 – 162.95 (Up)

Euro/yen broke higher from an inside range but didn’t impress on the upside. The bias remains on the upside, and my system went long.

Immediate support is at 162.00. This is followed by 161.25. The next level is at 160.10. Distant support is still in place at 158.63.

Initial resistance comes at 163.860. The next resistance is at 164.25. Above the pivot high at 164.96, distant resistance is seen at 166.66.

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

Euro/sterling
Last week's range: 0.7926 - .08034 (Mixed)
Previous range: 0.7877 – 0.7987 (Up)

Euro/sterling climbed up to a one-month high, but closed the week unchanged. My model remains long, but we may be facing a doji, hence a bearish reversal.

Immediate resistance is still seen at 0.7987. This is followed by 0.8035. Above 0.8100, the next level is 0.8155. Distant resistance is then seen at 0.8270.

Immediate support remains 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: Mixed
MEDIUM-TERM: Slightly bullish
LONG-TERM: Bullish

Published on  Wed, May 28 2008, 10:27 GMT