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Weekly Forex Market Commentary

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The factory goods orders report for April is due on Tuesday

Tue, Jun 3 2008, 06:28 GMT
by Cornelius Luca

GFT

Past Week's Data and Events

The financial markets got a little euphoric last week, as some of the US economic data suggested that recession has been avoided so far. Hope is nice, but doesn’t have a long shelf life. The economic growth remains under pressure, but the Fed will first hike rates to fight inflation, so the recession will be extended. The dollar looked pretty last week, but this rosy picture is unlikely to last.

United States
The dollar rallied last week against most of the major, and only cable held its own, despite the UK’s housing, economic and inflationary problems. A drop in oil prices was taken as the possible burst of the insane commodity bubble, but one should be very careful when jumping in front of a speeding train. Other commodities fell as well, but the our-of-control spec has not been leashed in. The CFTC is investigating US crude oil trading to determine whether the surge in prices to record levels is the result of manipulation or fraud. Earlier in the week, the NYMEX increased margins on futures by about 6.5 percent, not enough to plaster specs. The Conference Board's confidence index declined more than forecast to 57.2, the lowest level since October 1992, from an upwardly revised 62.8 in April (from a previously reported 62.3). The sub-index of present conditions fell to 74.4 in May from 81.9 in April, while the expectations sub-index for the next six months declined to 45.7 from 50.0.

New-home sales unexpectedly expanded 3.3 percent to an annual pace of 526,000 in April after readings for the prior month were revised down to a 509,000 rate (from 526,000), which was the lowest in 17 years. So, it was a wash, really. On an annual basis, it fell but fell 42 percent.

But the S&P/Case-Shiller home-price index contracted 14.4 percent in March on a yearly basis, following a 12.7 percent decline in the 12 months ended in February. The dollar rallied in Wednesday on news that the durable goods orders fell only 0.5 percent in April following a 0.3 percent drop in March. Ex- transportation, orders rose 2.5 percent, the biggest gain since July, after a previously reported 1.5 percent gain for March. Orders for non-defense capital goods excluding aircraft expanded 4.2 percent, the most this year.

The GDP was revised upward to 0.9 percent in the first quarter, as expected, from 0.6 percent because of lower demand for imports and a rise in investment in non-residential structures. The economy grew 0.6 percent in the fourth quarter of 2007. Consumer spending was left at a 1.0 percent increase for the first quarter.

Initial claims for state unemployment insurance benefits climbed to 372,000 in the week ended May 24 from an (as almost always) upwardly revised 368,000 for the prior week.

Consumer spending slowed to 0.2 percent in April from 0.4 percent in March as income gains weakened to 0.2 percent from a revised +0.4 percent increase in March. Disposable income also slowed to 0.2 percent from +0.3 percent the previous month.

The Chicago PMI rose in May to 49.1 from a seasonally adjusted 48.3 in April.

The final reading of the University of Michigan index of consumers’ confidence was revised up to 59.8 from 59.5 in May, but remained below from April's 62.6.

The Eurozone
The euro/dollar fell broadly last week, but is stuck in an inside range, so this weakness should not last much longer. The ECB won’t cut rates any time soon, given the inflation situation, while the Fed may hike rates for the same reason. The Eurozone inflation accelerated to 3.6 percent in May, matching a 16-year high, from 3.3 percent in April. French producer prices rose 0.7 percent in April from 0.6 percent in March; core PPI increased 0.3 percent. On an annual basis, the PPI rose 5.4 percent. Germany's seasonally adjusted jobless rate remained unchanged at 7.9 percent in May, but the number of jobless rose 4,000 versus expectations for a decline of 25,000.

Retail sales in Germany unexpectedly contracted 1.7 percent in April on top of 2.2 percent decline in March. On a yearly basis, sales fell 1 percent.

The Eurozone consumer confidence sank to –15 in May, a 32-month low, from -12 in April. Meanwhile, the economic sentiment index remained unchanged at 97.1 and the business climate indicator improved to 0.54 from April's revised 0.43. Confidence among French executives fell four points to 102 in May, the lowest in more than two years, from 106 in April. In addition, French housing starts fell 18.8 percent in April. In the same vein, the French consumer confidence index fell to -41 in May, the lowest level since the series began in 1987, from April's -38. Italy services confidence rises to 19 in May from 4 in April. GfK AG's measure of confidence among German shoppers declined to 4.9 in June from 5.6 in May. Meanwhile, Italian business confidence rose to 89.6 in May from 87.6 in April. The German GDP was confirmed to have grown 1.5 percent in the first quarter. German import prices rose 0.9 percent in April and 5.7 percent on a yearly basis, the same as in March. Meanwhile, the Eurozone unemployment remained at a record low of 7.1 percent in April.

Elsewhere, the Eurozone current account came in at a deficit of 7.8 billion euros in March from a revised surplus of 8.1 billion euros in February.

Japan
Dollar/yen rallied to a three-week high, but in the last five weeks it had only alternated up and down weeks, so this week should ease slightly. But the uptrend remains in place. The Japanese economy should expand less than initially expected, but this is still more than the US will. Japanese retail sales rose only 0.1 percent in April on a yearly basis, well below a revised 1.0 percent increase in March. Household spending fell 2.7 percent in April from a year earlier, the most since September 2006. The jobless rate rose to a seven-month high of 4 percent in April from 3.8 percent in March and industrial output fell 0.3 percent in April.

Housing starts contracted 8.7 percent in April on a yearly basis after another contraction of 15.6 percent in March. Core consumer prices rose 0.9 percent from a year earlier after surging 1.2 percent in March, the fastest rate since 1998. Meanwhile, core inflation in Tokyo accelerated to a decade high of 0.9 percent in May.

The UK
The sterling ahs made little progress against the dollar during the past week. The upside looks limited, unlike the UK economic problems. The housing sector remains in a tight place. Nationwide's house price index contracted 2.5 percent in May, the biggest decline since the survey began in 1991. On a yearly basis, it fell 4.4 percent. Still, mortgage approvals rose 9 percent in April but fell 39 percent from a year earlier, according to BBA. The CBI retail sales balance improved to -14 in May from -26 in April, and the pound drew support on Thursday. The pound fell on Friday on news that local consumer confidence fell to -29 in May, the lowest since November 1990, according to GfK NOP.

Canada
Dollar/Canada surged on Friday on news that the economy faltered early this year. Dollar/Canada surged on Friday on news that the Canadian GDP contracted 0.1 percent in the first quarter from 0.8 percent in the fourth quarter. Certainly, this small decline can easily be revised upward, but the damage from a strong currency and weakening US demand for Canadian exports is clearly taking their toll. This is the only G7 economy to have contracted so far.

Inflation remained in place, as industrial product prices rose 1.4 percent in April, while raw materials prices rose 5.1 percent.

Switzerland
Dollar/Swiss franc has alternated up and don weeks for five weeks. Last week’s gains preserved the uptrend, but the upside looks limited. The employment rate in the Switzerland increased at a faster pace of 2.8 percent in the first quarter on a yearly basis than expectations for 2.6 percent.

Australia
The Australian dollar made little progress last week, as the market is careful near the top while commodities at least look like turning lower.

This Week's Data and Events

United States
The US economic agenda will open on Monday with the release of the ISM manufacturing PMI report for May and of the construction spending report for April. Keep your eyes on the PMI report.

The factory goods orders report for April is due on Tuesday.

The non-farm productivity report for the first quarter will be seen on Wednesday.

It’s the first Friday of the month, so prepare for some volatile morning following the release of the nonfarm payrolls and unemployment rate for May. With the market vacillating between recession and lack of, this report should be very important for FX.

The Eurozone
The Eurozone economic agenda will begin on Monday with the release the manufacturing PMI report for May. Tuesday will see the release of the Eurozone GDP for the first quarter and of the PPI report for April.

The Eurozone services PMI report for May and the retail sales report for April are due on Wednesday. On Thursday, the ECB will leave its refi rate unchanged at 4.0 percent. The same day, be on the lookout for the German factory orders report for April. The week will end with the release of the German industrial production report for April.

Japan
Following the avalanche of data last Friday, the Japanese economic calendar doesn’t feature any significant reports this week.

The UK
The UK calendar will start on Monday with the release of the Halifax house report for May. A weak reading is likely. The manufacturing PMI report for May is due on Wednesday. On Thursday, the Bank of England will leave rates unchanged at 5.0 percent.

Canada
Canada’s economic calendar will start on Thursday with the release of the Ivey Purchasing Managers report for May. The unemployment rate for May is likely to have remained unchanged at 6.1 percent. The report is due on Friday.

Overview

Euro/dollar

Last week's range: 1.5463 – 1.5817 (Down)
Previous range: 1.5487 – 1.5811 (Up)

The euro/dollar sank last week to form a bearish engulfing pattern. My model went short. (Follow my daily reports for timing). Last time that happened, the pair fell for another week. The interim inversed head-and-shoulders is out, but I’m not sure how much more weakness we will see. Initial resistance is at 1.5643. Above 1.5817, euro/dollar retains additional resistance at 1.5930. Distant resistance is then seen at 1.6020 and 1.6135. Immediate support is now seen at 1.5463. The next level is 1.5415. Below 1.5287, euro/dollar now has distant support at 1.5225.

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

Dollar/yen
Last week's range: 103.13 – 105.73 (Up)
Previous range: 102.73 – 104.68 (Down)

Dollar/yen rallied to a three-month high late last week, but the Gann pivots were stubborn again, and I don’t expect much more strength. My model went long on Tuesday – quite timely. Immediate resistance is at 105.60 from a 50-point pivot that targets 105.10 and 106.10. The next level is at 106.83. Distant resistance is perched at 107.92. Strong support is now seen at 104.50 from a 50-point pivot, which targets 104.00 and 105.00. The next level comes at 103.40 from a 50-point pivot, which targets 102.90 and 103.90.

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

Sterling/dollar
Last week's range: 1.9624 – 1.9964 (Down)
Previous range: 1.9454 – 1.9850 (Up)

Sterling/dollar has alternated up and down days for the last seven days. My model remains long, but once again, I’m not sure that cable will rally much more. Initial resistance remains 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 still 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:Mixed to slightly bullish
MEDIUM-TERM:Bearish
LONG-TERM:Mixed

Dollar/Swiss franc
Last week's range: 1.0223 – 1.0527 (Up)
Previous range: 1.0235 – 1.0572 (Down)

Dollar/Swiss rallied last week but got stuck in an inside range. My model remains short though; given the break below the rising trendline, the outlook is negative. Immediate support is now seen at 1.0390. This is followed by 1.0335. The bottom of the rising channel looms at 1.0290. Support is then pegged at 1.0215. Distant support is at .9985. Initial resistance now comes at 1.0525. This is followed by 1.0622. Distant resistance remains at 1.0720.

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

Dollar/Canada
Last week's range: 0.9825 -.9979 (Up)
Previous range: 0.9820 – 1.0003 (Down)

A massive rally on Friday overturned losses on the week, but dollar/Canada was confined to an inside range. My model went long again, but I expected choppy trading. Immediate resistance is now seen at 0.9979. The next level is 1.0017. Above 1.0065, strong resistance is at 1.0170. Distant resistance is perched at 1.0325. Initial support is at 0.9874. Below 0.9756, support comes at 0.9670. Distant support is now pegged at 0.9490.

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

Euro/yen
Last week's range: 162.28 – 164.47 (Up)
Previous range: 161.46 – 163.86 (Up)

Euro/yen rallied for a third consecutive week, which matched my bias on the upside. My system went long, but I need more confirmation for further strength, as the cross has been prodding long-term resistance since Wednesday. Key resistance comes at 164.47. Above the pivot high at 164.96, distant resistance is seen at 166.66. Immediate support is at 163.10. This is followed by 162.35. The next level is at 161.30 and distant support is now seen at 160.30.

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

Euro/sterling
Last week's range: 0.7833 – 0.7984 (Down)
Previous range: 0.7926 - .08034 (Mixed)

Euro/sterling fell last week following a doji in the previous week. My model is short, but only a close below 0.7855 signals another downmove. Below this level, support comes at 0.7817. Below the pivot low at 0.7766, distant support remains at 0.7670. Immediate resistance is now seen at 0.7894. This is followed by 0.7935, 0.7984 and 0.8035. Above 0.8100, distant resistance is then seen at 0.8155.

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

Published on  Tue, Jun 3 2008, 06:44 GMT