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Weekly Forex Market Commentary

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The dollar/Japanese yen slipped weakly amid cross trading

Mon, Sep 29 2008, 13:11 GMT
by Cornelius Luca

GFT

Past Week's Data and Events

With the US financial world topsy turvy and with its jewels up for sale at fire prices all eyes on Monday will be on the US Congress and its political games in ratifying the Treasury's Troubled Asset Relief Program (TARP). This is not the time for games and details are very important. The money market is broken and on this milieu, currencies took a back seat to other asset classes. The dollar is lacking much direction, but given the illiquid trading conditions and the ratification of the TARP, its bias is up.

United States
It's the worst of times, it's the best of times… Another week, another failure – last week that meant Wa Mu finally disappeared under the weight of its misguided investments in mortgages. It was seized by the Fed and sold to JP Morgan for $1.9 billion. While the doom continues for most of the US financial sector, JP Morgan is now the second-largest bank in the United States after Bank of America after also getting Bear Stearns at fire sale prices.

As evidence that the risk of financial meltdown was greater than we all had feared, Goldman Sachs and Morgan Stanley, the last big investment banks on Wall Street, were turned into regulated banks literally overnight, faster than you can press CTRL-ALT-DLT? This “commercialization” of the IBs means less risk taking, less profit, but does it bring more financial equality or less risk? Not really. And the liquidity in FX dried up in the past two weeks.

Weekends have become more frightening than horror movies, and we all just hope we’ve seen the last of it. But this is only human hope and doesn’t get too far. The Treasury’s plan to extricate the cancerous mortgage assets from banks’ books is still unclear and the Congress needs to decide and approve the vital details – as if it had expertise in doing that. The Treasury plan is inflationary and gold and oil were bought at an unprecedented pace early last week.

Recession, which at one point looked like it might skirt us, is now closer than ever, and looks deep and morbid. But enough with this unbridled optimism.

We need the TARP badly, but we need a good plan.

The US economic data provided little reason for optimism and the Federal Reserve will have to cut rates soon and probably by 50 basis points.

Durable goods orders 2008 fell 4.5 percent in August after rising 0.8 percent in July and 1.4 percent in June. Ex-transportation, orders fell 3.0 percent from +0.1 percent, while ex-defense they sank 5.0 percent after +1.9 percent.

New home sales collapsed 11.5 percent to 460,000 rate in August after a revised 520,000 in July and 500,000 in June.

And existing home sales fell 2.2 percent to 4.91 million rate in August from July's 5.02 million rate. The median price fell 9.5 percent to $203,100 on the year.

OFHEO home prices contracted 0.6 percent in July and 5.3 percent on the year.

The GDP was revised down to an annual rate of 2.8 percent in the second quarter from a preliminary estimate of 3.3 percent. Let's worry about the next three quarters, I'd say.

It came to no surprise that that the University of Michigan final index of household sentiment declined to 70.3 in September from an initial reading of 73.1.

The initial claims for unemployment benefits rose 32,000 to 493,000 in the week ending September 20 from the previous week's revised figure of 461,000. The reading was worsened by the tropical storms.

The Eurozone
The euro made little progress as the market got confused.

Business confidence dropped in Germany, France and Italy in September, adding to concern the Eurozone economy is sinking into recession.

The Ifo institute survey of German business confidence fell in September to its lowest level since May 2005. The business climate index fell to 92.9 from 94.8 in August; the expectations sub-index fell to 86.5, its worst reading since February 1993, from 87.0, and the current situation to 99.8 from 103.2.

Also, French business confidence indicator fell to 92 in September from 97 in August and Italian business confidence to 82.7 in September from 83.5 previously.

In addition, the Eurozone composite index of manufacturing and service PMI contracted to 47, the lowest since November 2001, from 48.2 in August.

On the plus side, Italian retail sales expanded 0.6 percent in July after contracting 0.4 percent previously.

The German import price index fell 0.8 percent in August after rising 0.6 percent in July, but remained at +9.3 percent on the year.

The French consumer confidence indicator improved to -44 in September from -47 in July and -46 in June.

The French GDP was confirmed to have contracted 0.3 percent in the second quarter, reversing the 0.4 percent growth in the previous two quarters.

Household consumption expenditure fell 0.1 percent, same as in the first quarter.

Japan
The dollar/Japanese yen slipped weakly amid cross trading.

The trade balance fell into deficit of f 324 billion yen in September on an annual basis amid high commodity prices. Imports grew 17.3 percent and exports edged up 0.3 percent. Exports to the United States fell by a record 21.8 percent in August.

Japan's CPI slipped 0.1 percent in August after rising 0.4 percent in July and 0.7 percent in June. The core rose 0.1 percent. On the year, the CPI slowed to 2.1 percent from 2.3 percent and the core slowed to 2.1 percent from 2.3 percent. The Tokyo CPI was flat in September, with the core up 0.2 percent. On the year, it rose 1.4 percent and the core to 1.7 percent.

The UK
The pound ended higher, but well off its highs. More information is needed.

The UK housing sector remains in dire straits and there is little reason to expect an expeditious solution. In the latest report, prices fell 1 percent in September, for a fourth consecutive month, and 3.3 percent on the year, according to a report by Rightmove.

The CBI retail sales survey improved to -27 in September.

Canada
The Canadian dollar strengthened last Monday and then it stalled. More information is needed here.

Retail sales rose a less-than-anticipated 0.1 percent in July after an upwardly revised 0.6 percent gain the month before.

CPI came in at -0.2 percent in August after rising +0.3 percent in July. But the core CPI rose 0.3 percent from 0.1 percent.

Switzerland
The dollar/Swiss franc trimmed its losses last week and the market needs new impetus.

The Swiss KOF Swiss Leading Indicator slipped to 0.62 in September from a downwardly revised 0.68.

Australia
The Australian dollar closed the week little changed and the cross was surprisingly quiet, given the rise in adversity for risk.

This Week's Data and Events

United States
D Date GMT Event Period UBS Previous Market

The US economic agenda will open on Monday with the release of the personal income and spending reports for August.

The Chicago PMI and the Conference Board's consumer confidence reports for September are due on Tuesday.

Wednesday will see the release of the construction spending report for August and the ISM manufacturing report for September.

The factory goods orders for August are due on Thursday.

The first Friday of the month means the release of the nonfarm payrolls and of the unemployment rate for September. Given the current situation expect a bad number and an extra volatile day of trading.

The Eurozone
The Eurozone agenda will start on Monday with the release of the regional retail PMI report, business climate indicator, consumer confidence, economic sentiment indicator and industrial confidence reports for September.

Germany's retail sales report for August and of the unemployment rate report for September are due on Tuesday.

The Eurozone PMI Manufacturing report for October and the unemployment rate for August are due on Wednesday.

On Thursday, the ECB will leave rates unchanged at 4.25 percent. The Eurozone PPI report for August is due on Thursday as well.

Friday will see the release of the Eurozone PMI Services report for September and of the retail sales report for August.

Japan
Japan's agenda will start on Monday with the retail trade report for August.

Tuesday will see the release of significant batch of Japanese data for August: unemployment rate, household living expenditure, industrial production and housing starts.

The Tankan large manufacturing Index for the third quarter is due on Wednesday.

The UK
The UK economic agenda will begin on Tuesday with the release of the GfK consumer confidence report for September, and of the revision of the second quarter GDP report and of the business investment for the second quarter.

The PMI Manufacturing for September is due on Wednesday.

The Nationwide house prices report for September is due on Thursday and the PMI Services report for September on Friday.

Canada
Canada's calendar is very light this week. It only included the monthly GDP report for July.

Overview

Euro/dollar
Last week's range: 1.4438 – 1.4865 (Up)
Previous range: 1.4075 – 1.4539 (Up)

Euro/dollar hit a five-week high last Monday before returning most of the gains. It’s basically stuck and needs more information before the next move. My model remains long, but the bias is down.

Immediate support is at 1.4486. The next level is 1.4438. Below 1.4370, support is at 1.4255. Distant support is at 1.4153.

Initial resistance is seen at 1.4600. The next level is 1.4685. Above 1.4735, resistance is still seen at 1.4810. This is followed by 1.4910. Distant resistance is at 1.5015.

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

Dollar/yen
Last week's range: 105.04 – 107.46 (Down)
Previous range: 103.56 – 108.01 (Up)

Dollar/yen edged lower in an inside range, as the yen was a passive ingredient for cross trading. My model remains long. The medium-term outlook is mixed.

Immediate resistance is at 106.75 from another 50-point pivot, which targets 106.25 and 107.25. The next level is 107.95 from a 50-point pivot, which targets 107.45 and 108.45. Above 108.80, look for a test of the 50-point pivot at 109.15, which targets 109.65 and 108.65.

Good support is at 105.60 from a 50-point pivot that targets 105.10 and 106.10. This is followed at 104.50 by a 50-point pivot, which targets 104.00 and 105.00. The next level is 103.40 from another 50-point pivot, which targets 102.90 and 103.90.

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

Sterling/dollar
Last week's range: 1.8264 – 1.8668 (Up)
Previous range: 1.7733 – 1.8386 (Up)

Just like the euro/dollar, cable reached a five-week high, as expected, before surrendering most of the gains. It remains in a downtrend after failing to stay above the median of that channel. My model remains long but the downside is favored first.

Initial support is at 1.8250. Below this level, strong support now comes at 1.8110. This is followed by 1.7917. Distant support comes at 1.7776.

Initial resistance is at 1.8355. Good resistance follows at 1.8475 and 1.8515. Above the strong level at 1.8668, further resistance is at 1.8750. Distant resistance is now seen at 1.8865.

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

Dollar/Swiss franc
Last week's range: 1.0698 – 1.1060 (Down)
Previous range: 1.0901 – 1.1305 (Down)

Dollar/Swiss recovered most of its losses after sinking to a seven-week low last Monday. My model is short, but the risk is on the upside.

Initial resistance now comes at 1.0973. The next level is 1.1055. This is followed by 1.1185 and 1.1279. Above 1.1417 there is a pivot high at 1.1605.

Immediate support is at 1.0890. Below 1.0790, support is now pegged at 1.0698. Distant support moved down to 1.0555.

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

Dollar/Canada
Last week's range: 1.0299 – 1.0514 (Down)
Previous range: 1.0570 – 1.0782 (Down)

Dollar/Canada remained soft after falling to a seven-month low, but the support at 1.0299 was incredibly strong. My model remains short, but the initial outlook is slightly bullish.

Initial resistance is at 1.0400. The next levels are 1.0470 and 1.0550. Above 1.0645, resistance is at 1.0821 from a new pivot high.

Immediate support is at 1.0299. This is followed by 1.0265. Below 1.0180, distant support remains at 0.9974.

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

Euro/yen
Last week's range: 153.49 – 156.83 (Mixed)
Previous range: 147.07 – 155.54 (Up)

Euro/yen had an uncharacteristically quiet behavior and closed the week unchanged. The medium-term outlook is mixed, and my model remains long.

Good resistance level remains at 156.80. The next level is 158.50. This is followed by 159.90. Distant resistance is still seen at 161.15.

Immediate support is now seen at 153.50. Below 152.30, distant support is now at 147.07.

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

Euro/sterling
Last week's range: 0.7884 – 0.7980 (Mixed)
Previous range: 0.7848 – 0.8009 (Down)

Euro/sterling traded in a tight range and closed little changed, as its components traded in sync last week. The initial outlook is mixed.

Initial support is at 0.7900. This is followed by 0.7848, 0.7814 and 0.7794. Below 0.7766, distant level is at 0.7640.

Above 0.7960, resistance remains at 0.8010. Strong resistance is still seen at 0.8038. The cross then sees resistance at 0.8093 and at 0.8077 from a pivot high. Distant resistance remains is at 0.8262.

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

Published on  Mon, Sep 29 2008, 13:44 GMT