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Weekly Forex Market Commentary

The US economic calendar is light this week

Mon, Jul 7 2008, 06:24 GMT
by Cornelius Luca

Global Forex Trading

Past Week's Data and Events

The market remains divided about the next direction of the US currency, even though the weakness of the US economy clearly points south. But currency traders are looking forward, and the Eurozone and Japanese economies don’t look too hot either. With oil prices going up for a variety of real and fake reasons, the world economy is slowly getting chocked up. Expect violent moves in both directions, as directional confusion shouldn’t dissipate.

United States
The dollar managed to recover aggressively on Friday and thus to end the week higher, after sinking earlier last week. This shows the nervousness of the market, as the reasons for strength were simply not there. The US economy is slowly descending in what could be a depression and the rest of the G7 economies cannot be too far behind.

The ECB met the market expectations and tightened borrowing costs by a quarter percentage point to 4.25 percent, but then President Jean-Claude Trichet signaled the ECB wasn't planning another rate rise, also as expected. But the market was not about to vault euro/dollar to 1.6000 before the long weekend and the subsequent short covering of the US currency went out of hand.

Take a good look at the US economic data. It’s not suggesting anything good.

The Chicago PMI increased a more than expected 49.6 in June from 49.1 in May, but remained below the fifty mark, which is the border between growth and contraction. Close, but no cigar!

However, the manufacturing Institute for Supply Management index rose to 50.2 in June from 49.6 in May. This was the first reading above 50 since January. But a gauge of prices paid climbed to 91.5 from 87.

However, the ISM non-manufacturing index fell to 48.2 in June from 51.7 in May. A reading below 50 means contraction.

But construction spending fell 0.4 percent in May.

The ADP report on private sector employment fell by 79,000 jobs in June following a downwardly revised increase of 25,000 jobs in May.

Non-farm payrolls fell by 62,000 in June, roughly as expected, but the revisions of the previous two months were horrendous. In May there was a 62,000 drop that was worse than initially reported (-49,000), and April’s report was revised the same direction. The jobless rate unexpectedly remained at 5.5 percent after jumping in May by the most in two decades. The market was speculating that the previous report that showed a worsening to 5.5 percent from 5.0 percent was an error, so the June reading would show the correction. That wasn’t the case, which means the next months’ reports can show little or no change, as the bad report was already digested. Clever!

The jobless claims rose to 404,000 from the previous week's upwardly revised (as almost always) figure of 388,000 (from the 384,000 originally reported for the previous week).

Factory goods orders slowed to +0.6 percent in May from an upwardly revised +1.3 percent in April.

The Eurozone
The euro/dollar failed to reach 1.6000 and made a spectacular bearish reversal on Thursday in a classic case of “buy on the rumor, sell on the fact.” As mentioned above, the European Central Bank met the market expectations and hiked its refi rate by 25 basis points to 4.25 percent. Then ECB President Jean-Claude Trichet signaled that was a one-time event, also as widely expected. That was enough to trigger long liquidation in a thinning market. The euro looks bad here, but I doubt we are facing anything but sideways summer trading.

The euro/dollar had encountered early strength on Monday following news that inflation accelerated more than expected in June. The Eurozone inflation burgeoned to 4 percent from 3.7 percent in May, adding confidence to expectations that the ECB will tighten rates by 25 bps to 4.25% on Thursday.

Along the same lines, Italian inflation rose 4 percent in June on a yearly basis, the most since the index was created in January 1997, from 3.7 percent last month.

Germany's retail sales increased 1.3 percent in May, while April’s report was revised upward to -0.6 percent from a 1.7 percent decrease reported earlier. On the year, they increased 0.7 percent from a revised -0.2 percent in April.

The euro had rallied on Wednesday, on news that the Eurozone producer prices rose 1.2 percent in May from 0.9 percent in April and jumped a record 7.1 percent on the year from 6.2 percent. The move was fueled by a Die Zeit interview with ECB’s Trichet, who warned that inflation risks “exploding” if the ECB didn’t not act decisively. Which it sort of did a day later.

Germany's unemployment rate declined to 7.8 percent in June, the lowest since August 1992, from 7.9 percent in May. The number of people out of work fell 38,000 from May to 3.27 million.

Meanwhile, the Eurozone unemployment rate was flat in May at an upwardly revised level of 7.2 percent.

The European manufacturing PMI fell to 49.2 in July, a fifth month of contraction.

There was no reaction to news that German manufacturing orders unexpectedly declined 0.9 percent in May from April, when sales were revised upward to -1.7 percent from -1.8 percent. This was the sixth straight month of contraction. Orders fell 2 percent on a yearly basis.

Japan
Dollar/yen, oh, yes, dollar/yen. Failing the upside and then the downside. Luckily, we like technicals and they help us survive dollar/yen’s silly behavior.

The yen surged early on Monday on general dollar weakness and following news its credit rating was raised one level to Aa3 by Moody's Investors Service, due government efforts to curb spending and reduce debt.

Meanwhile, Japanese housing starts declined 6.5 percent in May on a yearly basis, and this is the eleventh consecutive month of contraction. But this is better than April’s reading of -8.7 percent. Construction orders plunged 25.2 percent year-on-year in May after -8.4 percent decline in the previous month.

The Tankan index of manufacturer sentiment fell to 5 points in the second quarter from 11 in the first quarter, a third quarterly decline, according to the Bank of Japan.

The UK
Cable retested the 2.0000 mark before retreating on Friday. The UK has US headaches and the European proximity adds a twist. The pound should remain the weakest of the European lot.

Sterling/dollar managed to pair early losses on Monday after mortgage approvals tumbled to the lowest level since the bank's series began in 1999. Banks approved only 42,000 mortgages in May, down from 58,000 in April, according to the Bank of England.

Consumer confidence dropped fell 5 points to minus 34 in June, the lowest since March 1990, according to GfK NOP, as house prices fell across the nation. The measure of confidence in the economic outlook dropped 6 points to -45, and for personal finances it fell 5 points to -9, GfK said.

Cable climbed up on Tuesday despite another set of poor UK data. House prices fell 6.3 percent in June, the biggest drop since November 1992, according to Nationwide Building Society, while manufacturing PMI fell to 45.8 in June, the least since 2001, according to the Chartered Institute of Purchasing and Supply.

Property prices fell 1 percent in June, according to Hometrack Ltd.'s housing index, led by a 1.3 percent drop in the London region.

Housing equity withdrawals totaled 5.04 billion pounds in the first quarter, and the Bank of England revised fourth quarter housing equity withdrawals to 7.4 billion pounds from 7.3 billion pounds.

The CIPS/Markit Purchasing Managers' Index for the construction sector fell to 38.3 in June from 43.9 in May.

Moreover, services PMI contracted to 47.1 in June, the most since October 2001, from 49.8 a month earlier, according to the Chartered Institute of Purchasing and Supply. Of course, a reading below 50 shows contraction.

A separate Bank of England survey showed banks plan to reduce the availability of credit to consumers and businesses this quarter.

Canada
Dollar/Canada continued to consolidate, as the prospects of lower exports to the US were countered by dangerously high commodity prices.

Canada's monthly gross domestic product expanded 0.4 percent in April, the first time in three months. But the first quarter GDP remains under water.

Meanwhile, the Ivey purchasing managers' index advanced to 69.6 in June from 62.5 in the prior month.

Switzerland
Dollar/Swiss franc, which initially sank to mimic the surging euro/dollar and to reflect renewed worries of the never-stable Middle East, recovered on Thursday. That’s nice, and the recovery could last for a few more days, but the downtrend remains in place.

Australia
The Australian dollar failed to suffer much last week, as its peachy economy, high interest rates and the wealth of commodities provide perfect support. Expect a choppy strength for as long as the appetite for risk doesn’t implode (read for as long as Iran plays ball, which seems to be, despite the childish rhetoric directed at local hot heads).

Australian manufacturing contracted 4.2 points to 47 in June from May, when it fell 1.5 points, according to Price Waterhouse Coopers and the Australian Industry Group.

Retail sales rose 0.7 percent in May from April, when they fell a revised 0.1 percent.

The trade deficit was A$965 million in May, while the April trade balance was revised from a deficit to a A$12 million surplus, the first surplus in six years.

But the home-building approvals fell 6.5 percent in May from April, when they rose a revised 5.4 percent.

Economic growth rate will slow as the highest borrowing costs in 12 years and record gasoline prices force households to cut spending, the Reserve Bank of Australia argued, and left its benchmark interest rate at 7.25 percent for a fourth month.

This Week's Data and Events

United States
The US economic calendar is light this week.

It will begin on Tuesday with the release of the Consumer Credit report for May. This is not a market mover. But the pending homes report could be.

Friday will see the release of the Trade Balance report for May. Expect another weak report.

The Preliminary University of Michigan survey for July is due as well.

The Eurozone
The Eurozone economic calendar will begin on Monday with the release of the German Industrial Production report for May.

Wednesday will see the release of the German Trade Balance report for May and of the revision of the first quarter regional GDP.

The French and Italian Industrial Production reports for are due on Thursday.

Japan
Japan’s economic calendar will begin on Tuesday with the release of the Economy Watchers Survey Current Conditions and Survey Expectations report for June. Expect no reaction.

Wednesday will see the release of the Machinery Orders report for May.

The Current Account Balance report for May and the Domestic Corporate Goods report for June are due on Thursday.

The UK
The UK economic calendar will start on Monday with the release of the Industrial Production report for June.

Tuesday will see the release of the DCLG house prices report for May. It should be soft.

The Nationwide Consumer Confidence report for June and the Trade balance report for May are due on Wednesday.

On Thursday, the Bank of England is likely to keep rates on hold at 5.0 percent.

Canada
The Canadian Unemployment rate for June will be released on Friday.

Overview

Euro/dollar
Last week's range: 1.5656 – 1.5908 (Down)
Previous range: 1.5469 – 1.5793 (Up)

Euro/dollar fell from a 2 ½-month high and closed lower last week, giving up a third of the rally between June 13 and July 3. My model went short. The market is on the verge here, after spearing the rising trendline in the non-market on Friday. Only a close below 1.5650 would encourage further weakness.

Below 1.5650, support is at 1.5605. The next good level is at 1.5685. Below 1.5630, further supports remain at 1.5575 and 1.5470. Distant support is at 1.5305.

Immediate resistance is at 1.5740. Above 1.5820, euro/dollar faces key resistance at 1.5905 and then at 1.6020. Distant resistance remains at 1.6250.

NEAR-TERM:Mixed with bearish risk
MEDIUM-TERM:Slightly bullish
LONG-TERM: Bullish

Dollar/yen
Last week's range: 105.00 – 106.92 (Mixed)
Previous range: 105.86 – 108.42 (Down)

Jus because dollar/yen got unglued from the 107.95 Gann pivot and slipped, didn’t mean it found direction. My model remains short, though, as a double top targeting 105.75 remains in play. Immediate direction comes from the 50-point pivot at 106.75, which targets 106.25 and 107.25.

Below 106.25, support remains at 105.60 from a 50-point pivot that targets 105.10 and 106.10. Distant support is at 104.50 from another 50-point pivot, which targets 104.00 and 105.00.

Immediate resistance is seen at 107.25. Distant resistance still comes at 107.95 from a 50-point pivot, which targets 107.45 and 108.45.

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

Sterling/dollar
Last week's range: 1.9798 – 2.0005 (Down)
Previous range: 1.9587 – 1.9952 (Up)

Sterling/dollar fell from a 2 ½-month high and my model went short. It looks like a bearish reversal on the weekly chart, but I wouldn’t get too excited yet, as we need more information.  Just like the euro/dollar, cable pierced the rising trendline in extra-thin trading on Friday, but only a close below 1.9785 would encourage more sustained weakness.

Below 1.9785, support is now seen at 1.9745 and 1.9710. These are followed by 1.9605. Distant support remains at 1.9560.

Initial resistance now comes at 1.9885. The next levels are 1.9940 and 2.0005. Above 2.0040, further resistance comes at 2.0145. Distant resistance still comes at 2.0395.

NEAR-TERM:Mixed with downside risk
MEDIUM-TERM: Slightly bullish
LONG-TERM:Mixed

Dollar/Swiss franc
Last week's range: 1.0113 – 1.0283 (Up)
Previous range: 1.0166 – 1.0493 (Down)

Dollar/Swiss reversed from a 2 ½-month low on Friday and closed higher last week. My model went long, but the pair is only half way through the channel declining since May 8. A close above 1.0325, which is the former trendline rising since March 17, would encourage a more sustainable rally.

So, above 1.0325, resistance now comes at 1.0415 and 1.0450. This is followed by 1.0540. Distant resistance remains at 1.0622.

Initial support is at 1.0215. Below 1.0166, support is seen at 1.0113, 1.0065 and .9996. The next big level is .9825. Distant support remains at .9642.

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

Dollar/Canada
Last week's range: 1.0064 - 1.0239 (Up)
Previous range: 1.0049 – 1.0195 (Down)

Dollar/Canada is lacking any direction as it approaches the tip of a triangle. Wait until it breaks out.

Immediate resistance is now seen at 1.0239. The next level is 1.0285. Above 1.0301 there is resistance at 1.0380. Distant resistance remains between 1.0470 and 1.0485.

Initial support comes at 1.0155. Below 1.0050, support is seen at 1.0015. The next floor is at .9980. Distant support is now pegged at 0.9910.

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

Euro/yen
Last week's range: 166.10 – 169.13 (Mixed)
Previous range: 166.80 – 169.45 (Mixed)

Euro/yen held below a near 26-year high and closed the second week on the verge of making a bearish reversal. The cross remains heavily overbought and the risk is on the downside is increasing. Again, sell it only on a confirmation.

Immediate support is at 167.20. The next level is at 166.80. This is followed by 165.55. The next level is at 164.95. Below 163.25, distant support remains at 161.45.

Initial resistance comes at 168.12. Above 168.86, there is resistance at 168.45 and 170.00. Distant resistance is seen at 171.55.

NEAR-TERM: Mixed with downside risk
MEDIUM-TERM: Bullish
LONG-TERM: Bullish

Euro/sterling
Last week's range: 0.7871 – 0.8001 (Mixed)
Previous range: 0.7891 – 0.7951 (Mixed)

Euro/sterling traded in another tight range as it approached the tip of a triangle. More information is still needed.

Initial support remains at 0.7870. Below the strong 0.7330 level, support remains at 0.7817. Distant support is at 0.7766.

Immediate resistance is still seen at 0.7933. The next level is 0.7955. 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
LONG-TERM: Bullish

Published on  Mon, Jul 7 2008, 06:32 GMT

Archive

• The US economic calendar will start on Monday with the release of the existing home sales report for July
  Published On Mon, Aug 25 2008, 06:59 GMT
• Tuesday will see the more important data on the housing starts and the PPI reports for July
  Published On Mon, Aug 18 2008, 08:03 GMT
• Thursday will see the release of the CPI report for July
  Published On Mon, Aug 11 2008, 12:42 GMT
• The US economic calendar is light this week
  Published On Mon, Aug 4 2008, 06:11 GMT
• The French Consumer confidence index for July is due on Tuesday
  Published On Mon, Jul 28 2008, 06:24 GMT

[ View All ]

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