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Weekly Forex Market Commentary

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The US economic calendar will start on Monday with the release of the Empire State manufacturing survey

Fri, Jun 20 2008, 06:58 GMT
by Cornelius Luca

GFT

Past Week's Data and Events

The US currency mounted an aggressive rally during the past week, as the prospect of higher rates in the US, premature as it may be, awakened thoughts that the dollar was severely oversold. And dreams that the G8 meeting will somehow prop up the ailing dollar triggered some significant buying. Don’t get fooled by the fluff – the US economy remains in trouble, inflation is rampant, and we all have less money to spend unless we stop eating and driving. The dollar remains in a large consolidation phase, especially versus the European currencies, so it should see some weakness initially before the next wave of strength.

United States
The dollar closed sharply higher, and that was unexpected at the time of writing of the report the previous week. What changed was talk of US higher rates and, more importantly, concerted hikes with our G7/8 central banks, and this supported the US currency. But the G7/8 central banks did not discuss FX, as they focused, as normal, on commodity prices' negative impact on economic growth. So, the dollar should decline here.

The data was not that bad overall last week, but we are in trouble deeper than we have ever been before. Lehman is on the edge of the abyss and rumor has it that it’s not the only one. And if you thought that Bear Stearns had it bad, you may be in for a big surprise.

Don't get tricked by the exciting reports or by the low inflation data. We eat food, not electronics, and we drive cars, not bikes! The good is going only until jobs start disappearing - that is, in addition to those in the financial sector. If that happens, we’ll see a lot of famous names disappearing. And then we may witness social unrest once high food prices start famine is poor countries or they destabilize governments that spend too much on subsidies.

The European currencies fell sharply last week, but I think the sell-off was only part of a consolidation phase. Only cable looks really soft.

The dollar extended its unexpected recovery on Monday on news that an index of existing homes sales rose 6.3 percent in April after a 1 percent drop in March, according to the National Association of Realtors. On a yearly basis, the index contracted 13.1 percent.

The trade deficit widened 7.8 percent to $60.9 billion in April, the highest level since March 2007, amid surging costs of energy. The March gap was revised down to $56.5 billion from a previously reported $58.2 billion. Imports grew 4.5 percent and exports climbed 3.3 percent.

The dollar augmented its gains after retail sales unexpectedly surged 1.0 percent in May and April’s report was revised upward to +0.4 percent from –0.2 percent. Could the Fed be right and had succeeded in propping up the economy? Ex-autos, sales rose 1.2 percent, the biggest rise in six months. Sounds tempting, but too good to be true…

Initial claims for state unemployment insurance benefits jumped to 384,000 in the week ended June 7 from an upwardly (surprise, surprise) revised 359,000 for the prior week (from 357,000).

Business inventories rose 0.5 percent in April following an upwardly revised 0.2 percent increase in March, and sales expanded 1.4 percent from +1.2 percent increase.

There was little reaction to news the CPI rose 0.6 percent in May, the most since November, after a 0.2 percent gain the prior month. On a yearly basis it reached 4.2 percent. The core CPI increased 0.2 percent.

The University of Michigan preliminary index of consumer sentiment fell by a more that expected to 56.7 in June from 59.8 in May.

The Eurozone
The euro/dollar sank sharply last week, but at the end of the day, it’s closing one week up and one week down. That would suggest gains this week.

The German trade surplus widened to 18.7 billion euros in April from 16.6 billion euros in March.

German wholesale prices rose 1.4 percent in May and 8.1 percent from a year earlier, the most since February 1982.

French industrial production rebounded 1.4 percent in April from a 1 percent drop in March.

Italian industrial production rose 0.7 percent in April and 8 percent on annual basis.

The euro/dollar got hurt since late Wednesday on news that Belgium’s InBev made a $46 billon bid for Anheuser-Busch.

The Eurozone industrial production expanded 0.9 percent in April from March’s -0.5 percent (initially –0.2 percent), and 3.9 percent on the year from 1.6 percent.

The Italian GDP was revised upward to 0.5 percent in the first quarter from 0.4 percent. The annual growth was revised to 0.3 percent from 0.2 percent.

French consumer prices rose 0.6 percent in May and climbed 3.7 percent on an annual, to the highest in over 12 years, from 3.4 percent in April. Meanwhile, household spending on manufactured goods fell 0.8 percent.

The Bank of France index of manufacturing confidence fell to 97 in May, the lowest level since July 2005, from a revised 100 in April. It also cut its GDP forecast for the second quarter to 0.2 percent from 0.3 percent.

Japan
Dollar/yen made an unexpected and aggressive rally last week and broke a significant trendline. But I feel it needs to pull back down before further strength is likely.

The local data was mixed, unexciting and carried no weight.

Japanese machine orders rose 5.5 percent in April after declining 8.3 percent in March and 12.3 percent in February.

Wholesale prices rose 4.7 percent in May, the fastest pace in 27 years, from 3.9 percent in April.

The current-account surplus narrowed 30 percent to 1.38 trillion yen in April from a year earlier.

Japan's first-quarter GDP was revised upward to 1 percent from 0.8 percent reported last month. The annualized rate came up at 4 percent from 3.3 percent estimated last month.

Consumer confidence index slipped to 33.9 in May from 35.2 in April

Japan revised industrial to output -0.2 percent in April from the initial –0.3 percent, and follows a 3.4 percent contraction in March.

The UK
The sterling/dollar fell sharply last week, but remained in a trading range.

The pound rallied on Monday on additional evidence of rampant inflation in the U.K., which implies higher rates. Producer prices rose 1.6 percent and input prices rose 3.8 percent in May, the highest rate from since comparable records began in 1986. On a yearly basis, prices rose 8.9 percent.

Retail sales increased 1.9 percent in May on an annual basis, according to the British Retail Consortium.

Factory production unexpectedly rose 0.1 percent in April after a 0.5 percent drop in March. On a yearly basis earlier, manufacturing rose 0.1 percent.

House sales fell to 17.4 in May, a 30-year low, from April's 18.5 in May, according to the Royal Institution of Chartered Surveyors. House prices fell to 92.9 percentage points in May from 94.7 percent the previous month, which was the most since the series began in 1978.

Unemployment rose by 9,000 to 819,300 in May amid staff cuts. But the claimant count rate stood unchanged at 2.5 percent in May.

Gross domestic product was revised down to +0.2 percent in the first quarter.

Meanwhile, the goods-trade deficit widened to 4.3 billion pounds in April from 3.8 billion pounds in March.

UK expectations of future inflation surged to a record high of 4.3 percent in May, a survey by the Bank of England showed.

Canada
Dollar/Canada rallied further last week, but the central bank didn’t cut rates and commodity prices didn’t fall either. So, only the exports to the US are suffering. Significant, at 75%, but maybe not for FX.

Canadian new-home starts rose a greater-than-expected 3.5 percent in May. But the local currency sank despite the data.

The trade surplus narrowed to C$5.11 billion in April, buy the March surplus was revised up to C$5.70 billion from an initial C$5.53 billion. Exports grew 0.8 percent and imports increased by 2.6 percent.

The Bank of Canada unexpectedly left its interest rates on hold at 3 percent, as G10 central banks have shifted their emphasis from the downside risks to economic growth to the upside risks to inflation.

Canadian capacity use sank to 79.8 percent in the first quarter, the slowest rate in 15 years, from 81.8 percent in the fourth quarter of last year. In the manufacturing sector, the rate fell to 77.2 percent from 80.3 percent in the previous quarter, as the auto and wood products industries were hurt by the US economic slowdown.

New home prices showed no change in April. On an annual basis, prices slowed to 5.2 percent in April, its weakest pace in 15 year.

Finally, labor productivity declined 0.3 percent in the first quarter due to a drop in manufacturing output, fewer working hours and bad weather, from 0.7 percent in the fourth quarter of last year. In the United States, productivity came in at +0.6 percent in the first quarter.

Switzerland
Dollar/Swiss franc had an outside week, but it’s trading one week up and one week down, and this week should see some weakness.

Australia
The Australian dollar ended the week sharply down, as the adversity for risk increased. But I think that it found support and should attempt to recover this week.

But let’s keep it in mind that the economy is no longer perfect.

Australia's economy unexpectedly lost 19,700 workers jobs in May, but the jobless rate held at 4.3 percent.

This Week's Data and Events

United States
The US economic calendar will start on Monday with the release of the Empire State manufacturing survey and the Homebuilders' survey report for June.

Tuesday will see the release of the PPI, Housing starts, and Industrial production and capacity utilization reports for May, and of the Current Account report for the first quarter. Busy day with market moving data.

The Leading indicators report for May and the Philly Fed Survey for June will be seen on Thursday.

The Eurozone
The Eurozone data is scarce this week.

Germany’s ZEW Expectations/Current Situation report for June is due on Tuesday and its Producer Prices report for May on Friday.

Japan
Japan’s economic calendar is light this week.

It consists of the Tertiary Industrial Activity report for April on Tuesday and of the All Industry Activity report for April on Thursday.

The UK
The UK economic calendar will begin on Tuesday with the release of the CPI report for May.

The Bank of England MPC minutes for June are due on Wednesday, the same day with the CBI Industrial Trends Survey total orders for June.

The Retail sales report for May will be released on Thursday.

Canada
Canada’s economic calendar will start on Wednesday with the release of the Leading Indicators report for May.

Thursday will see the release of the CPI report for May.

The Retail sales report for April is due on Friday.

Overview

Euro/dollar
Last week's range: 1.5305 – 1.5787 (Down)
Previous range: 1.5367 – 1.5776 (Up)

Following the tough US talk on inflation, the euro/dollar sank to a five-week low and closed at the lowest level since early March, which would suggest significant weakness in the future. The problem here is that the pair has been alternating up and down weeks for the past four weeks, and if he yo-yo pattern continues, this week should be bullish. The current level at 1.5380 is very important, and late buying on Friday saved it.

Immediate resistance is at 1.5458. Above 1.5510, euro/dollar sees additional resistance at 1.5586. Further resistance is then seen at 1.5727. Distant resistance comes at 1.5842.

Below the key 1.5380 level, support is now seen at 1.5305 and 1.5287. Strong support follows in the 1.5230 area from a massive trendline. If the line buckles on a closing basis, look out for possibly aggressive sales. The next level is 1.5150. Below 1.5043, euro/dollar now has distant support at 1.4778.

NEAR-TERM:Mixed to slightly bullish
MEDIUM-TERM:Bearish
LONG-TERM: Bullish

Dollar/yen
Last week's range: 104.44 – 108.39 (Up)
Previous range: 103.88 – 106.42 (Mixed)

Dollar/yen rallied to a four-month high and triggered a long-term bullish flag that targets 115.15. My model remains long, but let’s not get ahead of ourselves.

Above 108.60, resistance is at 109.15 from a 50-point pivot, which targets 109.65 and 108.65. Above 109.93, distant resistance is perched at 110.35 from another 50-point pivot, which targets 109.85 and 110.85. Very distant resistance looms at 111.60 from a 50-point pivot, which targets 112.10 and 111.10.

Initial support is seen at 107.95 from a 50-point pivot, which targets 107.45 and 108.45. Next strong level is at 106.75 from another 50-point pivot, which targets 106.25 and 107.25. Distant support is at 105.60 from a 50-point pivot that targets 105.10 and 106.10.

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

Sterling/dollar
Last week's range: 1.9410 – 1.9801 (Down)
Previous range: 1.9462 – 1.9774 (Mixed)

Sterling/dollar sank to a four-week low and closed at a four-month low. My model went short, but cable remains in a trading range near the tip of a long-term descending triangle. A close below 1.9346 would suggest a slide for about 300 pips; if this level holds, the trading range remains in play.

Immediate support is still seen at 1.9410. The next level is 1.9346, which a big. This is followed by 1.9290. Below 1.9185, distant support now comes at 1.9107. This is very important.

Initial resistance now comes at 1.9494. Above 1.9560, there is further resistance at 1.9625. Additional caps are at 1.9710 and 1.9760. Distant resistance comes at 1.9800.

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

Dollar/Swiss franc
Last week's range: 1.0149 – 1.0540
(Up) Previous range: 1.0187 – 1.0521 (Down)

Dollar/Swiss surged from a new 1 ½-month low to close higher last week. My model promptly turned long. But the pair has been alternating up and down weeks for SEVEN weeks, and if the lack of direction continues, this week should be the down week. Only a close above 1.0548 signals further strength, but the start of a massive bullish flag is less likely at this point.

Immediate support is now seen at 1.0375. This important level is followed by 1.0310. Below 1.0200, a pivot comes at 1.0149. Distant support is at .9996.

Initial resistance now comes at 1.0500. Key resistance is at 1.0548. This is followed by 1.0622. Above 1.0725, distant resistance is now perched at 1.0793.

NEAR-TERM: Mixed with upside risk
MEDIUM-TERM:Slightly bearish
LONG-TERM: Bearish

Dollar/Canada
Last week's range: 1.0152 – 1.0322 (Up)
Previous range: 0.9929 – 1.0219 (Up)

Dollar/Canada rallied to a 2 ½-month high last week and closed above a resistance declining since January 22. My model remains long, but with the oil exploding higher, the risk is on the downside.

Immediate resistance is now seen at 1.0322. The next level is 1.0364. Above 1.0380, strong resistance is between 1.0470 and 1.0485. Distant resistance is at 1.0645.

Initial support comes at 1.0245. Below 1.0190, support is seen at 1.0150. The next floor is at 1.0090. Distant support is now pegged at 0.9980.

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

Euro/yen
Last week's range: 164.98 – 167.14 (Up)
Previous range: 161.73 – 166.14 (Up)

Euro/yen rallied for a fifth consecutive week and to a six-month high and closed above a trendline declining since July. My system is long and the outlook is (still) bullish. Problem here is that the high price was put in place last Monday and after that the cross only traded sideways.

Initial resistance comes at 167.14. Above 167.64, there is a pivot high at next level is 167.64. Distant resistance is seen at 168.86.

Immediate support is at 165.40. This is followed by 164.25. The next level is at 163.40. Below 161.83, distant support remains at 160.30.

NEAR-TERM: Mixed to slightly bullish
MEDIUM-TERM: Bullish
LONG-TERM: Bullish

Euro/sterling
Last week's range: 0.7870 – 0.8033 (Down)
Previous range: 0.7855 – 0.8008 (Up)

The overbought euro/sterling fell sharply last week and this could be construed as a bearish reversal in a possible second top. But the cross alternated up and down weeks for three weeks and this week could be an up week. Moreover, its decline failed to penetrate the trendline rising since last year and the bottom of a triangle. My model went short, but only a close below this line would confirm a significant decline.

Initial support is at 0.7870. Below the strong 0.733 level, support remains at 0.7817. Distant support is at 0.7766.

Immediate resistance is now seen at 0.7933. Above 0.7970, there are pivot highs at 0.8033 and 0.8100. Distant resistance remains at 0.8155.

NEAR-TERM: Mixed
MEDIUM-TERM: Mixed L
ONG-TERM: Bullish

Published on  Fri, Jun 20 2008, 09:36 GMT