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Weekly Forex Market Commentary

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The US economic calendar is light this week

Mon, Aug 4 2008, 06:11 GMT
by Cornelius Luca

GFT (Global Forex Trading)

Past Week's Data and Events

The US currency rallied further last week versus the European and commodity currencies as the market is starting to understand that economic and financial problems from the US are spreading hard and fast outside our country. Talk of decoupling is not a real option in today’s small world and the rest of the world has fewer tools than the US to deal these types of imbalance. The dollar should see strength this week as well.

United States
The dollar paid little attention to further evidence of the depth of our financial and economic sins and rallied further last week. PIMCO’s head Bill Gross, for instance, expected in $1 trillion losses before the financial crisis is over, and if he’s right, that means not even half is over. But who wants to listen?

Meanwhile, coordinated steps by the Federal Reserve, the European Central Bank and the Swiss National Bank to extend liquidity offers investment banks through January 2009 and introduce a new term auction facility also helped the dollar on Wednesday.

The economy expanded by a less than expected 1.9 percent in the second quarter. The number still looks exciting until you remember that it was boosted by the temporary stimulus of federal tax rebates. Excluding trade, the economy would have contracted by 0.5 percent. First-quarter figures were revised down to 0.9 percent from a prior estimate of 1 percent. The report also contained annual revisions that lowered the growth rate back to 2005 and showed the economy contracted 0.2 percent in the fourth quarter last year, compared with a previously reported 0.6 percent gain. So, if you let a few months pass by, you can say that the recession, if there was one, is already gone…sweet!

Consumer spending last quarter grew 1.5 percent from +0.9 percent gain in the previous quarter, but that was the smallest in 13 years. The price index declined to an annual rate of 1.1 percent, the smallest increase since 1998, from 2.6 percent in the first quarter.

The dollar rallied early on Friday following the US employment data for July. Non-farm payrolls fell “only” 51,000 versus expectations for -75,000, and previous readings were revised to less horrible levels; June was revised upward to -51,000 from -62,000 and May to -47,000 from -62,000.The market ignores the worsening unemployment rate to 5.7 percent from 5.5 percent.

Consumer confidence unexpectedly increased to 51.9 in July from an upwardly revised 51.0 in June (originally reported at 50.4). The dollar surged. It’s all warm and fuzzy, but the index remains near its bottom.

Just in case you needed more proof that the US housing remains in trouble - the S&P/Case-Shiller home-price index contracted 15.8 percent in May on a yearly basis, the biggest decline since records began in 2001, on top of a decrease of 15.2 percent in April. The index has fallen every month since January 2007.

President Bush signed a significant housing bill to provide mortgage relief for 400,000 struggling homeowners and help stabilize financial markets. The measure allows homeowners who cannot afford their mortgage payments to refinance into more affordable government-backed loans rather than to give up their homes.

ADP Employer Services said that companies in the US unexpectedly added an estimated 9,000 jobs in July after a revised decline of 77,000 for the prior month. There is a large divergence between the government and ADP reports. In the first half of the year, the Labor Department reported a monthly average decline in payrolls by 94,000, while the ADP estimate shows gains of nearly 11,000.

Initial jobless claims increased by 44,000 to 448,000 in the week ended July 26, from a revised 404,000 the prior week. The total number of people seeking unemployment benefits rose to the most since December 2003.

The Chicago PMI rose to 50.8 in July – insignificant report this time.

Construction spending fell 0.4 percent in June 2008 and 5.9 percent on a yearly basis.

The Eurozone
The euro/dollar tumbled further amid piling evidence the Eurozone economy is getting hurt hard and fast by the world slowdown. No contagion from the US, huh?

The euro was strong across the board on Monday despite weaker-than-expected German consumer confidence data; GfK consumer climate index fell to 2.1 points in August, its lowest level since June 2003, from 3.6 points in July. Investors continued to focus on the weakness of the US finance sector.

Consumer prices in five German states increased in July, led by surging energy costs, with prices in Bavaria rose 0.6 percent from June’s 0.3 percent. The annual inflation rate fell to 3.3 percent from 3.4 percent.

The Eurozone inflation rate rose to 4.1 percent in July on a yearly basis, the fastest pace since April 1992, from 4 percent in June. In the same vein, Italy's inflation rate rose 4.1 percent in July from 4 percent last month.

German unemployment, fell 20,000 to 3.25 million in July after falling 38,000 in June. The adjusted unemployment rate held at 7.8 percent, a 16-year low.

Meanwhile, the Eurozone unemployment rose to 7.3 percent in June.

Consumer confidence in France fell to a record low of -48 in July from -46 in June.

Moreover, French housing starts contracted 28.2 percent in three months to June from -21.6 percent during three months to May. Housing permits fell 15.3 percent.

The Eurozone confidence in the outlook for the economy fell 5.3 points to 89.5 in July amid record energy costs and the strength of the euro. In addition, the regional services confidence fell to 1 from 9 in June and industrial confidence to -8 from -5 in June.

The Eurozone manufacturing PMI slowed to 47.4 in July from 47.5 in June. On an individual basis, Germany’s report fell to 50.9 from 52.6. France’s fell to 47.1, andItaly’s fell to 45.3 from 46.9.

German machinery orders fell 5 percent in June on a yearly basis.

The euro suffered on Friday on news that the German retail sales contracted 1.4 percent June, almost three times more than the expectations, and that the May report was revised downward to 0.5 percent from 1.3 percent.

Japan
Dollar/yen was all over the place, but got nowhere last week.

Japan's unemployment rate rose to 4.1 percent in June, the highest since September 2006, from 4 percent. Household spending rose 1.5 percent in June after falling 0.9 percent in May, but fell 1.8 percent from a year earlier.

Meanwhile, retail sales rose 0.3 percent in June from a year earlier.

Industrial production fell 2 percent in June after expanding 2.8 percent in May. So, it’s a wash, or a more normal rate of growth on the average. But, if the market is right in its expectations and the GDP actually contracted an annualized 0.5 percent, that will be a very different ball game.

The Purchasing Managers Index (rose to a seasonally adjusted 47.0 in July from 46.5 in June, which was the lowest since February 2002. Still, the index remained below 50, suggesting a contraction, for the fifth straight month on falling output and new orders.

The UK
Sterling/dollar remained under selling pressure last week.

It slipped temporarily last Monday on news that Hometrack reported that house prices fell 1.2 percent in July. The report simply adds to the mountain of proof that the UK housing sector remains weak.

It sank aggressively on Tuesday on news the CBI Distributive Trends survey showed retail sales collapsing to -36 in July, lowest since the survey began in July 1983, from -9 in June.

UK mortgage approvals fell to 36,000 in June, the lowest since at least 1999, from 41,000 in May.

House prices declined 1.7 percent in July and 8.1 percent from a year earlier, the biggest decline since at least 1991, according to Nationwide Building Society.

GfK then said that an index of confidence fell 5 points to minus 39 in July, the lowest since the data began in 1974.

The pound was hurt on Friday by news that the Chartered Institute of Purchasing and Supply's index of manufacturing fell to 44.3 in July, the lowest since December 1998, from 45.9 in June. Obviously, the PMI extended its move below the 50 boom/bust level.

Canada
Dollar/Canada rallied further on concern about the negative impact of the US slowdown in demand for Canadian exports.

Canadian producer prices rose 1.3 percent in June from May, while the price of raw materials increased by 4.4 percent from May. Industrial prices rose 5.4 percent on a yearly basis while raw material prices rose 31.9 percent.

Meanwhile, the economy shrank 0.1 percent in May, the fourth decline in six months.

Switzerland
Dollar/Swiss franc made a choppy upmove last week.

The Swiss KOF leading index fell to 0.9 in July from June's downwardly revised 0.99 from 1.01.

Australia
The Australian dollar slumped hard last week, hitting a three-month low, and should remain under pressure. Chinese demand for commodities will continue, but spec appetite is

Australian Prime Minister Kevin Rudd said the nation's banks have a responsibility to lower borrowing costs and the Reserve Bank of Australia should cuts its benchmark interest rate early this week.

Retail sales contracted 1 percent years in June after expanding 0.9 percent in May – just a wash. But the trade balance turned to a surplus of A$411 million in from a revised deficit of A$253 million in May.

This Week's Data and Events

United States
D Date GMT Event Period UBS Previous Market

The US economic calendar is light this week.

It will start on Monday with the release of the personal income and spending, factory goods orders and core PCE prices reports for June.

Tuesday will see the release of non-manufacturing ISM index for July. This is important.

Also on Tuesday, the FOMC will leave rates unchanged at 2.00 percent.

The pending home sales report for June is due on Thursday.

The Eurozone
The Eurozone economic agenda will start on Monday with the release of the PPI report for June

The final Eurozone Services PMI report for July is due on Tuesday, along with the retail sales report for July.

The German factory orders for June are due on Wednesday.

The German and French trade balances for June are due on Thursday.

The German and Italian industrial production reports for June are due on Thursday as well.

Also on Thursday, the ECB will leave its interest rates at 4.25 percent. Fine, but let’s make sure we listen to what Trichet will have to say after.

Japan
The Japanese economic calendar will start on Tuesday with the release of the coincident and leading indices for June.

The machinery orders report for June is due on Tuesday.

The Cabinet Office will release its monthly Economic Report for August on Thursday. Expect a bit of doom and gloom.

The UK
The UK economic agenda will start with the release of the PMI construction index for July on Monday.

The industrial production June, the PMI Services and the consumer confidence index for July are due on Tuesday.

The BRC Shop Price Index for July is due on Wednesday.

On Thursday, the BoE will leave rates unchanged at 5.00 percent.

Canada
The Canadian economic calendar will start on Wednesday with the release of the Ivey Purchasing PMI for July.

The building permits report for June is due on Thursday.

Finally, be on the lookout for the release of the unemployment rate report for July is on Friday.

Overview

Euro/dollar
Last week's range: 1.5517 – 1.5768 (Down)
Previous range: 1.5629 – 1.5943 (Down)

Euro/dollar fell for the third consecutive week and is testing the 100-day moving average at 1.5559. A close below this confirm further weakness. My model is short.

Below 1.5517, support now comes at 1.5460. Below 1.5395, distant support remains at 1.5305.

Immediate resistance is seen at 1.5625. The next level is 1.5700. An in initial pivot high is at 1.5768. Distant pivot highs follow at 1.5943 and 1.6036.

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

Dollar/yen
Last week's range: 107.29 – 108.38 (Mixed)
Previous range: 106.06 – 108.01 (Up)

Dollar/yen encountered very choppy trading but slipped from a five-week high to close unchanged. The key level remains the 107.95 Gann pivot. My model remains long, but the upside bias needs reinforcement.

So, immediate resistance is at 107.95 from a 50-point pivot, which targets 107.45 and 108.45. Distant resistance is at 109.15 from another 50-point pivot, which targets 109.65 and 108.65.

Strong support remains at 107.35. Strong support follows at 106.75 from a 50-point pivot, which targets 106.25 and 107.25. The next level is 105.60 from a 50-point pivot, which 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.

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

Sterling/dollar
Last week's range: 1.9728 – 1.9968 (Down)
Previous range: 1.9818 – 2.0076 (Down)

Sterling/dollar fell for the second consecutive week. That ended in a down week but within an inside range. The pair must quit the alternating pattern before a new direction can emerge.  Monday should see some weakness. Be careful, the rising trendline support was tested twice late last week.

Immediate support is at 1.9693. Below 1.9650, further supports are seen at 1.9605 and 1.9560. Distant support is pegged at 1.9410.

Initial resistance now comes at 1.9780. Above 1.9840, further resistance comes at 1.9870 and 1.9925. Distant resistance is now seen at 2.0155.

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

Dollar/Swiss franc
Last week's range: 1.0319 – 1.0522 (Up)
Previous range: 1.0138 – 1.0406 (Up)

Dollar/Swiss rallied for the third consecutive week and closed above the top of the triangle. The strength turned the medium-term outlook positive and my model is long. But remember, the week of gains only meant one big rally on Tuesday and then there was choppy trading. Choppy trading should persist, but the bias is on the upside.

Above 1.0522, resistance comes at 1.0550. This is followed by 1.0622. Distant resistance now comes at 1.0723.

Initial support is pegged at 1.0440. Below 1.0400, support is now seen at 1.0330 and 1.0310. Distant support now comes at 1.0250.

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

Dollar/Canada
Last week's range: 1.0174 – 1.0300 (Up)
Previous range: 0.9992 – 1.0206 (Up)

Dollar/Canada rallied for the second consecutive week and broke above the top of a triangle. Only a close above 1.0300 would now signal a break higher, so the immediate risk is lower.

Immediate resistance is now seen at 1.0300. The next levels are 1.0325 and 1.0380. Distant resistance remains between 1.0470 and 1.0485.

Initial support comes at 1.0228. Below 1.0165, support is seen at 1.0110. Distant support remains pegged at 0.9974.

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

Euro/yen
Last week's range: 167.01 – 169.72 (Down)
Previous range: 167.53 – 169.97 (Mixed)

Euro/yen fell sharply last week and my model promptly went short. The cross remains heavily overbought, still near a 26 1/2-year high. Hold on to short positions until a bullish reversal is confirmed. But remember that it’s pressing against a trendline rising since March.

Immediate support is now seen at 167.01. The next levels are 166.73, 165.85 and 165.33. Distant support is now seen at 165.15.

Initial resistance is at 168.00. The next level is at 168.90. Above 169.97, distant resistance is perched at 171.70.

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

Euro/sterling
Last week's range: 0.7846 – 0.7942 (Mixed)
Previous range: 0.7841 - 0.7975 (Down)

Euro/sterling traded sideways last week after closed flat. My model remains short now, but sideways trading is likely.

Initial support remains at 0.7841. The next support comes at 0.7817 and 0.7766. Distant support is at 0.7670.

Immediate resistance is still seen at 0.7935. The next levels are 0.7975 and 0.8026. Above the 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, Aug 4 2008, 06:23 GMT