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Weekly Forex Market Commentary

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Friday's CPI report for May is very important, given the newly stated inflation concern at the Fed

Mon, Jun 9 2008, 06:09 GMT
by Cornelius Luca

GFT

Past Week's Data and Events

It was a very confusing week that saw hopes for a recovery in the dollar and an end in the spiraling energy prices smashed into smithereens. Bottom line: the US economy continues to weaken, the credit risk is rising again, and the Federal Reserve opted to focus on inflation rather that on the economy. This is a lethal cocktail for the dollar. And an Israel warning that it will attack Iraq to stop it from making nukes propelled the oil price to record levels and limit up.

United States
The dollar ended the week miserably lower versus the euro, franc and Aussie, but up against the loonie. That’s not what the market expected.

Federal Reserve Chairman Bernanke came out of the left field on Tuesday and boosted the US currency by saying that policy makers are “attentive” to the impact of the falling dollar. He also said that interest rates are well positioned to promote growth and stable prices, but that’s not really important to traders.

But in hindsight, that was only a pre-emptive move made by ECB President Trichet, who basically pledged to tighten borrowing costs as early as next month. The dollar then plunged.

There was also an economic trap.

Initial data was fairly supportive for the US currency.

The Institute for Supply Management's manufacturing index rose to 49.6 in May from 48.6 in April. That’s nice, but fifty is of course the dividing line between contraction and expansion, and the index was last above it back in January.

Meanwhile, the services Institute for Supply Management's index fell to 51.7 in May from 52 in April.

Factory goods orders accelerated by a more-than-expected 1.1 percent in April after an upwardly revised increase of 1.5 percent in March (from +1.3 percent).

Productivity was revised to a slightly faster-than-expected 2.6 percent annual rate in the first quarter from a previously estimated 2.2 percent rate.

But then, the unemployment data was released. The dollar succumbed on Friday on news that the jobless rate increased to 5.5 percent in May from 5 percent, in the biggest jump since February 1986. It could easily reach 6 percent by the end of the year. Non-farm payrolls fell by a less than expected 49,000, but the April contraction was revised to 28,000 from –20,000 and the March decline became –88,000 from –81,000. The number was apparently bumped by teenagers seeking summer jobs (one month early), but I don’t expect a massive improvement next month. The horror show is only starting.

The ADP index showed that companies added 40,000 jobs in May after an upwardly revised gain of 13,000 for the prior month. There goes its ability to forecast the real jobless report.

Initial jobless claims decreased by 18,000 to 357,000 in the week that ended May 31 after the previous week’s number was bumped up by 3,000 to 375,000. This way, the “improvement” looks better!

Elsewhere, construction spending contracted another 0.4 percent in April after an upwardly revised 0.6 percent drop the prior month.

The Eurozone
The euro/dollar aggressively reversed late last week from a three-week low after European Central Bank President Trichet signaled a possible rise in euro zone interest rates in July. All eyes will now be on 1.6000.

Economic fundamentals didn’t matter for this currency on steroids.

German manufacturing orders fell 1.8 percent in April and this is the fifth consecutive month if contraction. However, orders rose 15 percent in the year.

Industrial production in Germany unexpectedly declined 0.8 percent in April and the March report was revised to -0.8 percent from -0.5 percent.

There was no reaction to news that the European manufacturing PMI slipped to 50.6 in May from 50.7 in April.

The Eurozone GDP was revised upward to 0.8 percent in the first quarter from an earlier estimate of 0.7 percent.

Meanwhile, the Eurozone CPI fell to 3.3 percent in April from 3.6 percent on a yearly basis.

The Eurozone retail sales fell 0.6 percent in April and 2.9 percent on the year, amid surging fuel and food prices.

Eurozone services PMI slipped to 50.6 in May from 52 in April.

Japan
Dollar/yen ended oddly unchanged, and looks too expensive at these levels.

Japanese capital spending declined 4.9 percent on a yearly basis in the first quarter of 2008.

The UK
The sterling/dollar was only able to recover its losses and remained the weakest of the European currencies. But then the UK has US-style problems.

The pound got clobbered on Monday following another batch of weak data, which suggests the UK economy is approaching recession fast.

Manufacturing PMI fell to 50 in May, signaling no expansion, according to the Chartered Institute of Purchasing and Supply.

Another bit of information that highlighted the dire straits of the housing sector, mortgage approvals fell 58,000 in April, the lowest since 1999.

UK services PMI fell to 49.8 in May, for the first time in five years, and of course a reading below 50 means contraction.

Along the same lines, the Nationwide Building Society's consumer sentiment index fell 1 point to 69, the lowest since the survey started in May 2004.

The cost of an average home fell 2.4 percent in May to the lowest since September 2006, and 3.8 percent from a year earlier.

Canada
Dollar/Canada rallied aggressively last week on expectations that the Bank of Canada will cut rates this week to help the local economy, which contracted in the first quarter. The weakness in US consumption started to take its toll to our Northern neighbor’s exports.

Ivey PMI index rose to 62.5 in May from 57.6 in April.

The economy added 8,400 jobs in May because employers hired 40,600 part-time workers and fired 32,200 full-time staff. The unemployment rate was unchanged at 6.1 percent.

Canadian building permits surged 14.5 percent in April after falling 4.6 percent in March.

Switzerland
Dollar/Swiss franc plunged late last week in sympathy with the euro’s gains, and an Israel warning that it will bomb Iraq to stop it from making nukes propelled both the oil price and the Swissy.

The Swiss economy slowed to 0.3 percent in the first quarter from a downwardly revised 0.9 percent in the final quarter of last year (initially estimated at 1 percent).

Australia
The Australian dollar ended the week higher. That’s because it has the strongest economy among the commodity exporters, high yields and China still needs all of its minerals.

As universally expected, the RBA left its overnight cash rate target at a 12-year high of 7.25 percent to see whether the economy is slowing enough to dampen the fastest inflation since 1991.

The GDP grew rose 0.6 percent t in the first quarter, twice as fast as expected, but that was down from the fourth quarter, when it increased a revised 0.7 percent.

Retail sales fell 0.2 percent from March, when they climbed a revised 0.2 percent.

The trade deficit narrowed in April to A$957 million, the smallest gap in 14 months, from a revised A$2.55 billion in March.

This Week's Data and Events

United States
The US economic calendar will begin on Tuesday with the release of the trade balance report for April. It should show a worsening of the deficit.

Thursday will see the release of the retail sales report for May and of the manufacturing and trade inventories report for April.

Friday’s CPI report for May is very important, given the newly stated inflation concern at the Fed.

The final University of Michigan survey report for May is due on Friday as well.

The Eurozone
The Eurozone economic agenda will open on Monday with the release of Germany’s trade balance report for April.

The French and Italian industrial production reports for April are due on Tuesday, along with the final Italian first quarter GDP.

Wednesday will see the release of the French CPI report for May.

The Eurozone industrial production report for April is due on Thursday.

Finally, Friday will see the final CPI data for France and Italy, and the Bank of France Business Sentiment report for May.

Japan
Japan’s economic calendar will start on Tuesday with the release of the important machinery orders report for April.

On Wednesday, there will be the current account balance report for April and the final GDP reading for the first quarter.

The industrial production report for May will be seen on Friday.

The UK
The UK economic agenda will start on Monday with the release of the input/output PPI report for May.

Tuesday will see the release of the BRC retail sales report for May, RICS house price balance for May, DCLG house prices report for April and industrial production report for April. Fasten your seatbelt.

The trade balance and the unemployment reports for April are due on Wednesday.

On Thursday, the Bank of England will release its quarterly inflation report.

Canada
Canada’s economic calendar will begin on Tuesday with the release of the merchandise trade report for April.

The same day, the Bank of Canada is likely to cut rates by 25 basis points to 2.75 percent.

Wednesday will see the release of the new housing price report for April and the industrial capacity reading for the first quarter.

The manufacturing shipments survey for April is due on Friday.

Overview

Euro/dollar
Last week's range: 1.5367 – 1.5776 (Up)
Previous range: 1.5463 – 1.5817 (Down)

The euro/dollar’s weakness expired abruptly early Thursday and since then the pair surged with help from the tough talk from ECB. It closed above the resistance line declining since April 22 and the outlook is pretty bullish now. The market wants to see 1.6000 again.

Initial resistance is at 1.5817. Above it, euro/dollar retains additional resistance at 1.5930. Further resistance is then seen at 1.6020 and 1.6135.

Immediate support is now seen at 1.5740. Strong support follows at 1.5650. The next level is 1.5565. Below 1.5541, euro/dollar now has distant support at 1.5367.

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

Dollar/yen
Last week's range: 103.88 – 106.42 (Mixed)
Previous range: 103.13 – 105.73 (Up)

Dollar/yen rallied to a 3 1/2-month high by Thursday, with the Gann pivots helping all along. But it then collapsed on Friday and made a bearish reversal, and my model went short. Only a close below 104.50 would warrant further weakness.

So, support is 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.

Above 105.00, 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.

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

Sterling/dollar
Last week's range: 1.9462 – 1.9774 (Mixed)
Previous range: 1.9624 – 1.9964 (Down)

Sterling/dollar sank sharply through early Thursday and then rallied aggressively to recover these losses. My model is long but I expect mostly directionless trading.

Initial resistance now comes at 1.9745. Above the pivot high at 1.9850, there is further resistance at 1.9960. Distant resistance comes at 2.0025.

Immediate support is still seen at 1.9640. The next level is 1.9585. This is followed by 1.9462. Distant support remains at 1.9338.

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

Dollar/Swiss franc
Last week's range: 1.0187 – 1.0521 (Down)
Previous range: 1.0223 – 1.0527 (Up)

Intense sales since early Thursday sent dollar/Swiss to a 1 ½-month low. My model remains short.

Immediate support is now seen at 1.0135. This is followed by 1.0015. Support is then pegged at .9985. Distant support is at .9850.

Initial resistance now comes at 1.0250. This is followed by 1.0325. Above 1.0525, distant resistance comes at 1.0620.

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

Dollar/Canada
Last week's range: 0.9929 – 1.0219 (Up)
Previous range: 0.9825 -.9979 (Up)

Dollar/Canada rallied for six consecutive days to reach a five-week high. My model remains long, but with the oil exploding higher, the risk is on the downside.

Immediate resistance is now seen at 1.0270. The next level is 1.0325. Above 1.0380, strong resistance is at 1.0485.

Initial support comes at 1.0130. Below 1.0070, support is seen at 1.0010. Distant support is now pegged at 0.9820.

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

Euro/yen
Last week's range: 161.73 – 166.14 (Up)
Previous range: 162.28 – 164.47 (Up)

Euro/yen reversed sharp losses to rally for a fourth consecutive week and to the highest levels since late December. My system is long and the outlook bullish.

Key resistance comes at 166.14. Above the pivot high at 166.66, the next level is 167.64. Distant resistance is seen at 168.86.

Immediate support is at 165.00. This is followed by 164.25. The next level is at 163.40. Below 161.83, distant support remains at 160.30.

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

Euro/sterling
Last week's range: 0.7855 – 0.8008 (Up)
Previous range: 0.7833 – 0.7984 (Down)

Euro/sterling rallied the last three days of the week and closed above a resistance line declining since April 17. My model went long, but only another close above this line signals more strength.

Immediate resistance is now seen at 0.8034. Above 0.8100, distant resistance is then seen at 0.8155.

Initial support is at 0.7972. Below the strong 0.7974 level, support comes at 0.7817. Distant support is at 0.7766.

NEAR-TERM: Mixed with upside bias
MEDIUM-TERM: Mixed
LONG-TERM: Bullish

Published on  Mon, Jun 9 2008, 06:17 GMT