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Weekly Forex Market Commentary

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The US economic calendar will start on Thursday with the release of the trade balance report for July

Mon, Sep 8 2008, 06:05 GMT
by Cornelius Luca

GFT

Past Week's Data and Events

The dollar rallied big across the board and the surge started in a sneaky way during the Labor Day holiday. This upmove reflects mainly liquidation of long-term short dollar positions. The burst of the commodity bubble helped, but let’s not get carried away while a barrel of oil still costs more than $100. Only dollar/yen collapsed because of ongoing long liquidation of yen crosses, including carry trades. But mind you, only the dollar and the yen can rally while their economies suffer. So, hold long dollar/Europe and dollar/antipodeans with ginger care. Just in case it wasn’t crystal clear before, the horrible US jobless data told us that we are in a practically (if not technically) we are in a recession.

United States
The burst of the commodity bubble is far from over while the oil price is still floating in the stratosphere above $100 per gallon, but natural gas is starting to get reacquainted with the gravity force, and many other commodities are following suit. Metals should be next. A commodity fund already folded, and there is more where this one came from. Plus, pension funds (among other large players) got greedy and dipped into the commodity well as well. There is much more exposure, and a stampede to the exit doors is pending. We have already seen a couple of fire sales, but there should be more. The experience with the 1999 unabated love for dot.coms was not enough, so in the past several years we replaced them with mortgage and commodity investments. Easy come, easy (or should I say hard?) go. FX guys blame the strength of the buck on commodity weakness and vice versa. But all in all the equity market is not all that excited and sees blood in the economic street. I’ve said that in this forum and I’ll say that again: the worst is yet to come. The high yielding currencies will suffer the most, and the low yielding yen the last.

Late Friday, as if the crazy markets hadn’t been enough, talk of that the Treasury Department was close to finalizing a plan to help shore up mortgage giants Fannie Mae and Freddie Macvaulted the dollar against the low yielding yen and Swiss franc, and tripped it against the pound, euro and commodity currencies. This pattern should continue early this week, as it was confirmed that the government’s Federal Housing Finance Agency seized control of Fannie Mae and Freddie Mac, which have nearly half the U.S. home-loan market.

Looking into the details, the Treasury will receive $1 billion of senior preferred stock, with warrants representing ownership stakes of 79.9 percent of Fannie and Freddie. The government will receive annual interest of 10 percent on its stake. Fannie and Freddie eventually will have to reduce their holdings of mortgages and securities backed by home loans.

Now, back to recession.

The unemployment rate surged to 6.1 percent in August, its highest since December 2003, from July's 5.7 percent, as employers are facing the recessionary reality and cut payrolls for an eighth straight month. Non-farm payrolls contracted 84,000 jobs in August, July's job losses were revised up to -60,000 and June's to -100,000 from a previously reported -51,000 in each month. That’s reality, that’s the start of it!

The weekly jobless claims rose by a more than expected 15,000 to 444,000 in the week ended August 30 from an upwardly revised 429,000 (from 425,000) in the prior week. Well, sure.

For all it’s worth, companies cut 33,000 jobs in August and the July report was revised lower to a gain of 1,000 from 9,000, according to ADP Employer Services.

Meanwhile, Challenger layoffs fell 14 percent to 88,736 in August.

There was no reaction to news the manufacturing ISM slipped to 49.9 in August from 50.0 in July.

But the Institute for Supply Management's index of non-manufacturing businesses unexpectedly increased to 50.6 in August from 49.5 in July. Of course, 50 is the dividing line between growth and contraction.

Construction spending fell 0.6 percent in July and the June report was revised upward to +0.3 percent.

Factory goods orders expanded by a more-than-expected 1.3 percent in July and the June increase was revised upward to a 2.1 percent gain from 1.7 percent. Orders have risen for five consecutive months.

Productivity was revised to a much stronger annual rate of 4.3 percent in the second quarter from the 2.2 percent gain that the department previously reported and from the first quarter's 2.6 percent increase. That’s typical in an economic downturn, as companies boost output while cutting jobs.

The Eurozone
The euro fell aggressively for the second time in five weeks but reached significant support on Friday. Only a close below 1.4193 would signal a decline without a pause. More importantly in the medium term is the fact that the Eurozone economy is fading quickly and later than the US economy, so euro/dollar should remain under overall pressure.

German retail sales volumes fell by 1.5 percent in July after -1.4 percent in June.

German factory orders unexpectedly fell 1.7 percent in July after contracting a revised 2.9 percent (from -2.6 percent). Orders slid 0.7 percent from a year earlier on top of -6.1 percent (revised down from -6.0 percent).

Adding to the overwhelming flood of evidence of the downturn in the Eurozone, German industrial production plunged 1.8 percent in July, due to a drop in demand for investment goods, from June, when it rose a downwardly revised 0.1 percent. On a yearly basis, production fell 0.6 percent.

The French unemployment rate stayed at 7.6 percent in the second quarter while its economy contracted.

Italy Retailer's Confidence General rose to 106.5 in August from 98.4 in July, while the Services Survey rose to 7 from –8.

The Eurozone data were mixed last week.

The GDP remained unrevised at a 0.2 percent decline in the second quarter. On a yearly basis, the economy slowed to 1.4 percent from the 1.5 percent initial estimate. Government spending rose 0.5 percent from a 0.3 percent gain in the previous quarter, while exports fell 0.4 percent.

The retail sales contracted 0.4 percent in July after an additional 0.9 percent fall in June.

The producer prices rose 1.1 percent in July from +1 percent in June. On an annual basis, producer prices soared to a 26-year high of 9.0 percent in July from June’s +8.0 percent. July’s figure was broadly in line with the consensus expectation of 9.1 percent. The core PPI rose to 4.3 percent, its highest rate since September 1995, from 4.0 percent.

The PMI edged up to 47.6 in August from July's 47.4 report. The French PMI came in at 45.8 and the German PMI came it at 49.7. Meanwhile, the services PMI edged up unexpectedly to 48.5 in August from 48.2 in July. Germany’s PMI rose to 51.4 from 50.6, while France’s PMI fell to 48.0 from 48.5.

On this milieu, the European Central Bank kept interest rates at a seven-year high of 4.25 percent to fight inflation, but ECB President Trichet acknowledged the risk of a recession.

Japan
The Japanese yen moved counter from the European and antipodean currencies on severe liquidation of carry trades. The opposite moves should continue.

The UK
The pound remains under pressure, as the high yielding European currency suffers from the same problems as the U.S.: housing problem, credit crunch, economic downturn and high inflation. Except for brief bounces, the selling pressure should continue.

As universally expected, the Bank of England kept the benchmark interest rate unchanged at 5 percent because the fastest inflation in over a decade outweighed the risk of economic downturn.

The number of new mortgage approvals for house purchase fell to 33,000 in July, the lowest figure since 1999.

But the CIPS manufacturing PMI rose to 45.9 in August from 44.1 in July. This is the fourth month the report remained below the 50 boom/bust level. Still, services PMI unexpectedly jumped to 49.2 August from 47.4 in July, but obviously remained below the 50 percent mark.

Consumer confidence held at 52 in August, the same as in July, which was the lowest since the survey began in May 2004, according to Nationwide Building Society.

House prices declined 1.8 percent in August and 12.7 percent from a year earlier, according to Halifax. No news here, the housing sector remains a mess.

Canada
The Canadian dollar continued to lack much direction last week.

The Bank of Canada left its key interest rate unchanged at 3.0 percent, as expected, and rates should remain flat for this year and probably longer. The decline in commodity prices will slow inflation, while the Canadian economy has been hit hurt by the slowdown in the US economy.

Employers added 15,200 to the payrolls on a full-time basis August after cutting 55,000 jobs in July, the biggest monthly job loss since 1991. But the unemployment rate in August remained unchanged at 6.1 percent.

The PMI Ivey index fell to 51.5 in August, missing expectations for a reading of 63.0, from 65.5 in July.

Switzerland
The dollar/Swiss franc rallied on Monday and Friday on general dollar strength. The Swissy should catch up with the rest of the European currencies.

The Swiss GDP unexpectedly rose 0.4 percent in the second quarter from 0.3 percent in the first quarter. The Swiss PMI declined to 52.5 in August from 54.1 in July, but remained above the 50 mark.

Australia
The Australian dollar fell aggressively for the second time in the past seven weeks, and with commodity positions being pared sharply, expect further weakness.

Gross domestic product slowed to 0.3 percent in the second quarter from a revised 0.7 percentin the first quarter.

This Week's Data and Events

United States
D Date GMT Event Period UBS Previous Market

The US economic calendar will start on Thursday with the release of the trade balance report for July.

Friday will be important in terms of economic reports, as all eyes will be on inflation and consumer confidence in the face of the economic downturn. It features the PPI and the retail sales reports for August, and the University of Michigan survey report for September.

The Eurozone
The Eurozone economic agenda will start on Tuesday with the German trade balance for July.

Wednesday with the release of the French industrial production report for July and with the revision of Italy’s the second quarter GDP. The data should not help the euro.

Friday will see the release of the French Bank of France Business Sentiment report for August, the French CPI report for August, and the Eurozone and Italian industrial production reports for July.

Japan
Japan’s economic calendar will start on Wednesday with the release of the current account balance report for July.

The machinery orders report for July is due on Thursday.

Friday will see the revision of the second quarter GDP and of the industrial production report for August.

The UK
The UK housing and consumption numbers will remain in focus.

The economic calendar will start on Monday with the release of the PPI input/output reports for August. Inflation is a major concern while the economy is deteriorating, so the BoE will carefully watch this report. So will we.

Tuesday will see the release of a batch of important data: the industrial production report for July, and the RICS House Price Balance and the BRC retail sales reports for August. We know where the housing sector is, but what about the consumer confidence? The selling pressure on cable should continue.

Canada
Canada’s economic calendar will begin on Wednesday with the release of the Labor Productivity report for the first quarter.

The trade report and the new housing price report for July are due on Thursday.

Friday will witness the release of the industrial capacity for the first quarter.

Overview

Euro/dollar
Last week's range: 1.4198 – 1.4722 (Down)
Previous range: 1.4572 – 1.4811 (Mixed)

Euro/dollar collapsed to an 11-month low, but my model went long on profit taking (after going short on September 1). It must close below 1.4198 to signal a decline without a pause, but this is unlikely.

Initial resistance is at 1.4385. Above 1.4450, resistance is at 1.4625. This is followed by 1.4910. Distant resistance is at 1.5015.

Immediate support is at 1.4271. Below 1.4198, support is at 1.4085. Further support comes at 1.3835. Distant support is at 1.3695.

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

Dollar/yen
Last week's range: 105.53 – 108.41 (Mixed)
Previous range: 108.43 – 110.29 (Down)

Dollar/yen fell to a six-week low late Thursday and early Friday, but then reversed to limit weekly losses. It then rallied early Monday. The yen remains the favorite in crosses against the European currencies in the medium term, but not in the short term, as my model went long. The medium-term outlook is mixed to slightly bearish.

Above 108.70, resistance follows at 109.15 from another 50-point pivot, which targets 109.65 and 108.65. Distant resistance is at 110.35 from a 50-point pivot, which targets 109.85 and 110.85.

Initial support is at 107.95 from a 50-point pivot, which targets 107.45 and 108.45. 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 another 50-point pivot, which targets 105.10 and 106.10. A pivot low is at 103.78.

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

Sterling/dollar
Last week's range: 1.7538 – 1.8153 (Down)
Previous range: 1.8174 – 1.8589 (Down)

Sterling/dollar fell to a near 2 ½-year low last week and reached the targets of a long-term bearish flag and of a head-and-shoulders pattern in the 1.7650 area. But it rallied early Monday and my model just went long (profit taking on the short opened on August 22). Except for brief recoveries, the downside remains open in the medium term.

Initial resistance is at 1.7930. Above the strong line at 1.8000, further resistance looms at 1.8100. Distant resistance is at 1.8190.

Immediate support is at 1.7717. Below 1.7672, a pivot low is at 1.7538. Further supports are at 1.7444 and 1.7267.

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

Dollar/Swiss franc
Last week's range: 1.0950 – 1.1189 (Up)
Previous range: 1.0884 – 1.1086 (Mixed)

Dollar/Swiss climbed to the highest levels since the start of the year and my model is long. The Swissy should catch up with the rest of the European lot, so the upside of the pair is more limited.

Initial resistance comes at 1.1260. Above 1.1360 there is a pivot high at 1.1605.

Below 1.1154, support is pegged at 1.1090. This is followed by 1.1010. Below 1.0935, support is at 1.0844. Distant support is at 1.0740.

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

Dollar/Canada
Last week's range: 1.0544 – 1.0778 (Mixed)
Previous range: 1.0412 – 1.0644 (Mixed)

Dollar/Canada hit a 13-month high before giving up all of its gains. The outlook remains mixed.

Support comes first at 1.0550. This is followed by 1.0515 and 1.0470. Below 1.0412, distant support is at 1.0300, but this level should not be seen anytime soon.

Above 1.0620, resistance remains at 1.0700. Above 1.0778 from a new pivot high, resistance looms at 1.0805. Distant resistance is at 1.0867 from another pivot high.

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

Euro/yen
Last week's range: 150.64 – 159.34 (Down)
Previous range: 159.22 – 162.86 (Down)

Euro/yen fell last week to a 13-month low, but then rallied sharply early Monday. The medium-term outlook is negative, but the short term looks positive on profit taking and my model went long (after selling on August 28).

Initial resistance level is at 156.85. This is followed by 158.26 and 158.70. The next level is 160.05. Distant resistance is seen at 162.00.

Immediate support is now seen at 154.50. The next level is 153.70. Below 150.64, distant support is at 147.55.

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

Euro/sterling
Last week's range: 0.8055- 0.8187 (Mixed)
Previous range: 0.7940 – 0.8060 (Up)

Euro/sterling closed the week little changed after falling from the highest level in nearly 12 years. The bearish engulfing pattern formed on Thursday was followed by a slide on Friday. The initial risk is lower.

Initial support is at 0.8022. The next level is at 0.7990. Below 0.7970, distant support is seen at 0.7938.

Immediate resistance is at 0.8085. Above 0.8137, the cross now has resistance at 0.8187. Further caps remain perched at 0.8230 and 0.8262.

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

Published on  Mon, Sep 8 2008, 06:14 GMT