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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 existing home sales report for July

Mon, Aug 25 2008, 06:59 GMT
by Cornelius Luca

GFT

Past Week's Data and Events

The US currency consolidated during the past week and the same should happen during the last week of August and ahead of the Labor Day holiday. The geopolitical pressures have (officially) alleviated, but all eyes should remain on commodities. The dollar remains overbought in the short term, but any corrective decline this week should be brief and shallow. This is because most of the market missed buying dollars on July 22 and is waiting for the second chance.

United States
The US financial woes are very far from being solved, and they go well beyond Fannie Mae and Freddie Mac. Consolidation/bankruptcy among large name in the industry should continue, and in addition to that we have to gauge the ongoing impact of the housing sector crisis on US employment and consumer confidence. It all sounds horrible, but the rest of the world is only starting to experience this weakness. Events that only months ago would have propelled the oil prices, the Russian destruction of Georgia and the tropical storm in the Gulf, are now ignored. The oil price is going down on long liquidation and this means the dollar should strengthen further in the medium term. And the trigger for the second wave of buying can be pulled at any time.

Housing starts melted away another 11.0 percent to an annual rate of 965,000 units in July from the upwardly revised June estimate of 1.084 million units. On an annual basis, they contracted 29.6 percent. Building permits tumbled 17.7 percent to an annual rate of 937,000; on annual basis the damage was 32.4 percent. The horror show must go on!

The National Association of Homebuilders/Wells Fargo sentiment index remained unchanged at 16 in August. Readings under 50 mean the conditions are poor.

Producer price index jumped 1.2 percent in July following an unrevised 1.8 percent increase in June. On an annual basis, PPI expanded 9.8 percent. The core producer price index rose 0.7 percent in July after edging up 0.2 percent in each of the two previous months.

Claims for initial unemployment benefits decreased to 432,000 from the previous week's downwardly revised figure of 445,000. What is highly unusual is that the previous week’s number was revised down from 450,000 because the revisions are nearly 100 percent revised upward – that means they do that only 99 percent!

The Conference Board’s leading economic indicators fell 0.7 percent in July after being in unchanged in June. Recession? Of course.

Philly Fed Factory Index improved to-12.7 in August from –16.3 in July. No good news here, the last time we had a positive report was back in November.

The Eurozone
The euro/dollar made only a weak retracement last week on profit taking, as evidence of economic weakness in the Eurozone is piling up. There is no decoupling, or if you wish, an economic re-coupling.

The French index of manufacturing confidence declined to 92 in July, the lowest since May 2003, from 95 in June.

German investor confidence improved to - 55.5 in August from - 63.9 in July, the lowest since the survey began in 1991, according to the ZEW Center. Nice, but that is still a very weak number.

Along the same lines, the ZEW economic sentiment for the Eurozone rose 8 points to -55.7 in August. Still a bad number, I’m afraid.

German producer-price inflation rose 2 percent in July and accelerated to 8.9 percent on the year, the fastest pace since October 1981.

The Eurozone trade came in at -0.1 billion euros in June from -4.6 billion euros (revised from -3.9 billion euros) in May.

The Eurozone construction output contracted 0.6 percent in June and 2.4 percent on a yearly basis.

The Eurozone services PMI dipped to 48.2 in August from 48.3 in July, while the manufacturing PMI edged up to 47.5 from 47.4 in July. Both numbers suggest that the Eurozone will slip into technical recession in the third quarter. The German index fell to 50.3 from 52.2, the lowest in five years, and the French index was unchanged at 47.0.

The Eurozone current account deficit came in at -1.0 billion euros in June, while the regional industrial new orders contracted 0.3 percent during the same period.

Japan
Dollar/yen made a failed attempt to correct lower last week, but the uptrend remains intact. But expect choppy trading during the last week of official vacation.

The final leading index for June came in at 91.3, up from 91.2, while the final coincident index slipped to 101.6 from 101.7.

There was no reaction to news that all industry activity index fell 0.9 percent in June, as expected.

The merchandise trade balance in Japan contracted 86.6 percent to 91.1 billion yen in July on a yearly basis from the revised 121.9 billion yen surplus in June. The trade balance with the United States fell 19 percent on the year. Imports jumped 18.2 percent from a year earlier, while exports rose 8.1 percent.

The final machine tool orders report fell 3.6 percent in July after another 3.5 percent fall in June. On an annual basis, orders contracted 8.9 percent in July and 2.7 percent in June.

The UK
Sterling/dollar consolidated in an inside range last week, but remains just above the low price of the sharp decline. There aren’t too many spots of light in the local economy, so any recovery of cable should be temporary.

The UK second quarter GDP was revised downward to unchanged from 0.2 percent, while the annual growth was only 1.4 percent, the weakest since 1992. Given the weakness seen in the past several months that’s hardly a surprise.

The house prices fell 2.3 percent in August and 4.8 percent on the year, the weakest reading since 2002, according to Rightmove. No surprise here, the housing sector remains in trouble.

CBI industrial trends survey worsened to -13 in August from -8 in July.

Minutes from the Bank of England’s MPC meeting on August 7th emphasized a shift in the MPC outlook. The policy makers split three ways, with one arguing for higher rates to fight inflation, another voting for a cut to fight recession, and the others wanting to keep the benchmark rate at 5 percent.

UK business investment fell 1.9 percent in the second quarter.

Retail sales unexpectedly expanded 0.8 percent in July after contracting a downwardly revised 4.3 percent the month before (-3.9 percent initially), which was the biggest decline since at least 1986.

Canada
Dollar/Canada fell for the second week despite the fact that the commodities declined as well. And strong economic data only painted half of the picture.

Wholesale sales rose 2 percent to C$45.2 billion in June, the fastest pace in 16 months, and the May's gain revised down to 1.5 percent from the initially reported 1.6 percent.

Meanwhile, Consumer Price Index rose 3.4 percent in July on an annual basis from 3.1 percent in June. The core CPI rate rose 1.5 per cent in July for the fourth consecutive month.

Retail sales rose 0.5 percent in June, the fourth consecutive month of gains, after a downwardly revised 0.3 percent gain the month before. It wasn’t a good number, as excluding high gasoline prices, retail sales would have contacted 0.4 percent.

The index of leading economic indicators was unchanged for a second straight month in July.

Switzerland
The dollar/Swiss franc failed to hold above the rising channel line last week, some profit taking on long positions is likely – but only on a temporary basis.

Switzerland June retail sales expanded only 0.7 percent on a yearly basis.

Australia
The Australian dollar consolidated in an inside range last week after sinking sharply for a month. The RBA is set to cut rates in early September and the economy is slowly faltering. Use the commodity prices for guidance, but remember that Australia doesn’t have oil to export.

The leading index edged up 0.1 percent in June, according to Westpac.

This Week's Data and Events

United States
D Date GMT Event Period UBS Previous Market

The US economic calendar will start on Monday with the release of the existing home sales report for July. It’s hard to expect a good number, so it should carry no weight.

Tuesday will see the release of the new home sales report for July and of the Conference Board’s consumer confidence report for August. The latter one might move the market.

The volatile durable goods orders report for July is due on Wednesday.

Thursday will see the revision of the second quarter GDP.

Friday before the long weekend we will face an avalanche of significant data: personal income and spending reports for July, the Chicago PMI report for August, the University of Michigan survey for September, and the core PCE deflator report for July.

The Eurozone
The Eurozone economic agenda will begin on Tuesday with the release of the German IFO Business Climate Economic report for August and of the revision of the German second quarter GDP. Only a modest improvement is likely in the IFO report.

Italy’s Consumer Confidence Index report for August is due on Wednesday.

Thursday will be a busy day for the Eurozone. Be on the lookout for Germany’s unemployment rate for August, and the Eurozone Retail PMI, Business Climate Indicator, Consumer Confidence, Economic Sentiment Indicator, and Industrial Confidence reports for August.

The Eurozone unemployment rate report for July is due on Friday.

Japan
The Japanese economic data for July will be released as a large batch on Friday: it includes the unemployment rate, household living expenditure, industrial production, retail trade, housing starts and national CPI.

The Tokyo CPI report for August is due on Friday as well.

The UK
The UK markets are closed on Monday.

The agenda will start on Thursday with the release of the Nationwide house prices and of the CBI distributive trades survey reports for August.

The GfK NOP consumer confidence report for August is due on Friday.

Canada
Canada’s economic agenda only features the monthly GDP for June.

Overview

Euro/dollar
Last week's range: 1.4631 – 1.4910 (Up)
Previous range: 1.4660 – 1.5083 (Down)

Euro/dollar recovered from a six-month low after nearly reaching the target of a double top in the 1.4600 area. My model reversed its short position since July 22, but the risk is on the downside. Again, after a brief bounce, the decline should resume.

Initial support is now seen at 1.4700. The next level is 1.4631. Below the target at 1.4600, further supports remain at 1.4505 and 1.4440. Distant support is at 1.4265.

Immediate resistance comes at 1.4800. This is followed by 1.4845, 1.4902 and 1.4950. The next levels remain at 1.5015, 1.5065 and 1.5110. Distant resistance is at 1.5320.

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

Dollar/yen
Last week's range: 108.14 – 110.57 (Mixed)
Previous range: 108.38 – 110.30 (Up)

Dollar/yen faked an aggressive decline and a double top on Thursday, but its rally on Friday called the bluff. The medium-term outlook is bullish and my model is long. The Gann pivot at 110.35 still ruled last week and will continue to do so at least early this week.

Immediate resistance remains at 110.35 from a 50-point pivot, which targets 109.85 and 110.85. The next key level remains 111.60 from another 50-point pivot, which targets 112.10 and 111.10. Distant resistance is at 112.90 from yet another 50-point pivot, which targets 113.40 and 112.40.

Support remains at 109.85. Further strong support is at 109.15 from a 50-point pivot, which targets 109.65 and 108.65. Distant support follows at 107.95 from a 50-point pivot, which targets 107.45 and 108.45.

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

Sterling/dollar
Last week's range: 1.8505 – 1.8796 (Down)
Previous range: 1.8514 – 1.9256 (Down)

Sterling/dollar failed its attempt to recover and closed on a very bearish tone last week. Again, cable formed a long-term head-and-shoulders pattern that targets the 1.7550 area. The medium term outlook remains negative.

Immediate support is at 1.8405. Further supports are at 1.8330 and 1.8190. Distant support is now pegged at 1.8190.

Initial resistance now comes at 1.8480. The next likely caps are 1.8620 and 1.8700. Above 1.8786, further resistance comes at 1.8867. Distant resistance remains in the 1.9100 area.

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

Dollar/Swiss franc
Last week's range: 1.0844 – 1.1040 (Up)
Previous range: 1.0743 – 1.1008 (Up)

Dollar/Swiss has alternated up and down days last week and reached a six-month high. My model reversed its long position since July 22, but the risk is on the upside. Again, after a brief pullback, the upmove should resume.

Immediate resistance is at 1.1040. Above it, key resistance remains at 1.1185. Distant resistance moved up to 1.1360.

Initial support is pegged at 1.0910. Below 1.0855, support remains at 1.0725. Distant support is at 1.0620.

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

Dollar/Canada
Last week's range: 1.0423 – 1.0669 (Down)
Previous range: 1.0564 – 1.0730 (Down)

Dollar/Canada fell for the second week but only gave back half of the gains made two weeks earlier. My model remains short. The market turned up on Friday, but only mildly so, but the next move is unclear even though the commodity prices are falling.

Immediate resistance is now seen at 1.0530. Above 1.0575, the next level is 1.0615. Distant resistance is 1.0730.

Initial support comes at 1.0423. Below 1.0385, support is now seen at 1.0280. Distant support comes at 1.0170.

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

Euro/yen
Last week's range: 160.19 – 163.09 (Up)
Previous range: 161.41 – 165.68 (Down)

Euro/yen reversed aggressively from a 3 1/2-month low late last week and my model reversed its short position. Hold small long positions with a tight stop.

Immediate support is now seen at 162.20. The next levels are 161.35 and 160.85. Distant support remains at 158.63.

Strong resistance is at 162.95. The next level is 164.30. Above 165.05, distant resistance is seen at 167.30.

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

Euro/sterling
Last week's range: 0.7871 - 0.7989 (Up)
Previous range: 0.7794 – 0.7993 (Up)

Euro/sterling rallied last week but got stuck in an inside range. The cross barely remained in a slightly declining channel. My model turned long, so stay long.

Immediate resistance is seen at the nearby level of 0.8015. Above the pivot highs at 0.8022 and 0.8034, further resistance follows at 0.8055. Distant resistance is at 0.8141.

Initial support is at 0.7966. The next supports come at 0.7930 and 0.7900. The next level is 0.7870. Distant support is at 0.7794.

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

Published on  Mon, Aug 25 2008, 07:12 GMT