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Weekly Forex Market Commentary

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The US economic agenda is unusually thin this week

Mon, Oct 6 2008, 12:39 GMT
by Cornelius Luca

GFT (Global Forex Trading)

Past Week's Data and Events

The demand for funding out of Europe and ongoing liquidation of yen crosses pushed the dollar sharply higher versus the European currencies last week. While profit taking should be seen this week, the outlook for the currency remains strong. The risk to it is the equity markets, which have fallen sharply and should sink further, despite the no short-selling rule for financial stocks.

United States
All in not well on our financial body. The organs seem to be in satisfactory condition, but the blood is not really circulating. The rapid changes of fortunes among the top firms did not bring a solution to the crisis, but created a short-term period of grace. But it’s grace under fire. The Federal Reserve's lending surged by a record $285 billion last week, and discount window borrowings rose $10.2 billion to $49.5 billion, as the financial crisis has been worsening.

The dollar exploded higher against the European currencies, initially after the House of Representatives unexpectedly failed to ratify the Bush administration's $700 billion TARP to rescue banks, and then on expectations that the House will actually pass the TARP by the end of the week. But it edged slightly lower on Friday after the House of Representatives (finally) approved the $700 billion TARP in a 263-171 vote. The revised plan is expected to thaw the frozen credit markets, but the traders doubt it will fail to prevent an economic recession.

We are not alone in this historical crisis. The European banking system is also under fire.

The acceleration of the downturn in Europe and the lack of liquidity underpinned demand for dollars. French President Sarkozy said the France is basically in recession. The fallout from the failed initial $700 billion bailout for Wall Street accelerated the financial crisis, which spilled over Europe (B&B in the UK, Fortis in Benelux, and West LB in Germany). Germany struggled to rescue lender Hypo Real Estate, and Ireland promised to guarantee all bank deposits. But the 300 billion euros Euro-TARP proposed by France was promptly torpedoed by Germany. EU governments to breach deficit limits, saying the financial crisis was so severe they could waive their usual strict application of budget rules.

It was the first time the EU appeared ready to invoke a 2005 clause that allows countries to bend the rules laid down in the Stability and Growth Pact if they fall victim to exceptional events outside their control.

Another week, another big name gone from the US financial roster– this time, Wachovia was initially morphed into Citigroup, just to switch out on Friday and merge with Wells Fargo, outside the realm of the FDIC. But the high-stake drama continues; Citigroup won a court order late on Saturday blocking Wells Fargo from buying Wachovia Corp until the court rules otherwise.

Surprisingly, the US jobless data, horrible as it was, only mattered for about 60 pips of nervous trading. It’s gotten so bad that this key report was put on the back burner, as in “what did you expect?” While the number might have been skewed by the tropical storms down south, don’t hope for an improvement – the opposite will happen. Payrolls fell by a more than expected 159,000 in September after a, upwardly revised 73,000 decline (from –84,000) in August and downwardly revised –67,000 from –60,000 in July. The jobless rate remained at 6.1 percent but only because it surged 0.4 percent a month earlier.

Initial jobless claims increased 1,000 to 497,000 in the week that ended September 27 from an upwardly revised (as nearly 100% of the times) 496,000 (initially 493,000) the prior week. What happened to the “exceptionally” high number from the previous week? Haven’t the tropical storms passed already? Let’s not kid ourselves, the total number of people collecting benefits is the highest since 2003.

For all it’s worth, the ADP's decline of 8,000 in private employment in September from 37,000 the month before was modest.

Consumer spending was flat in August from a revised +0.1 percent in July. Personal income rose by 0.5 percent after a revised 0.6 percent drop, the personal savings rate fell to 1 percent from 1.9 percent in July, while the disposable income fell by 0.9 percent after -.8 percent.

The Conference Board's confidence index increased to 59.8 September, a third consecutive increase, from 58.5 in August. That’s nice but irrelevant, since the survey was taken before the most recent financial meltdown.

In the same vein, the Chicago Purchasing Management index fell to 56.7 in September from 57.9 the prior month.

The ISM manufacturing index collapsed to 43.5 in September from 49.9 in August. This is a recessionary level as the credit crunch is strangulating the economy. Looking into details, new orders fell to 38.8 from 48.3, production to 40.8 from 52.1, and employment to 41.8 from 49.7.

Construction spending was flat in August after falling 1.4 percent in July.

Factory goods orders contracted 4 percent in August, as orders for motor vehicles succumbed 10.6 percent, the most since December 2002.

Elsewhere, the S&P/Case-Shiller 20 city index fell 0.9 percent in July and 16.3 percent on the year.

The Eurozone
The euro suffered colossal losses, as long liquidation has been taking its toll. The money markets in the Eurozone remain basically frozen, and the 3-month euro interbank rates climbing to a record high. The financial crisis spread further in Europe last week, and Fortis was rescued by a 11.2 billion euros package from the governments of Belgium, the Netherlands and Luxembourg. The troubles are piling high and fast.

The Eurozone PPI contracted 0.5 percent in August after expanding 1.3 percent in July, and decreased to 8.5 percent on the year from 9.2 percent. On this milieu, ECB head Trichet sounded confusing (sort of standard for central banks heads): risks for future growth to the downside, but no cutting of borrowing costs. With the Eurozone economy weakening, this talk is euro bearish.

The Eurozone services confidence index was flat in September 0 from 3 in August, the consumer confidence was stable at –19, the industrial confidence worsened to -12 from –10, the business climate indicator to -0.79 from -0.33, and the economic confidence to 87.7 from 88.8.

Meanwhile, the Eurozone retail PMI fell to 46.2 in September from 47.7 in August.

But the Eurozone PMI services managed to edge up to 48.4 in September from 48.2 in August. On an individual basis, the German PMI rose to 50.2 from 49.3, while the French PMI slipped to 50.1 from 50.4.

The Eurozone retail sales rose 0.3 percent in August but contracted 1.8 percent on the year. That monthly strength won’t last, as the regional economy is going down the drain.

German unemployment fell by 29,000 to 3.18 million in September after falling 40,000 in August. The ILO jobless rate was 7.2 percent, down from 7.3 percent in July. It is 7.3 percent in France it and 4 percent in Japan.

German retail sales expanded 3.1 percent in August after contracting an upwardly revised -1.0 percent in July. That number is too exotic, so it should be reversed next month. On the year, sales sank 3.0 percent from 0.6 percent previously.

The Eurozone unemployment rate climbed up to 7.5 percent in August from 7.4 percent in July, economic slowdown is spreading.

The final Eurozone PMI came in at 45.0 in September from 45.3 previously. On an individual basis, the German report fell to 47.4 from 48.1 and the French PMI to 43.0 from 43.6.

The EurozoneCPI probably peaked in July at a record 4.1 percent annual basis, after the August and September preliminary reports came in at 3.8 percent and then 3.6 percent, respectively.

Along the same lines, French PPI fell 0.5 percent in August from 0.7 percent in July, and slipped to 6.9 percent from 7.7 percent on a yearly basis.

Also, Italian PPI fell 0.2 percent in August from 0.8 percent previously and to 8.2 percent from 8.7 percent on the year.

Japan
The dollar/Japanese yen remains the odd major pair out, and its lack of direction should continue. Yen crosses should help with direction.

Japanese retail trade rose to +0.7 percent in August from +0.1 percent in July, but slowed to 0.7 percent on a yearly basis from 2.0 percent.

That was the exception to the rule, as the rest of the economic data was atrocious.

Industrial production contracted 3.5 percent in August, the fastest pace in at least five years, after expanding 1.3 percent in July, while the unemployment rate rose to a two-year high of 4.2 percent from 4.0 percent previously and household spending contracted 4 percent, the most since September 2006, after -0.5 percent previously.

Housing starts for 53.6 percent in August on the year from 19.0 percent previously.

Construction orders contracted 0.3 percent in August on an annual basis from +42.3 percent in July.

The index of small business confidence slipped to 40.2 in September from 41.4 previously.

On this milieu, the Tankan index of confidence among big makers of cars and electronics fell to -3 in the third quarter from 5 in the second quarter. This is the first time that pessimists outnumbered optimists since 2003.

The UK
The pound sank as well under the weight of the credit crunch, housing problems and slowing economy. But it fared better than the euro.

The Bank of England’s measure of mortgage approvals fell to a new record low of 32,000 in August from 33,000 in July, and this is 75 percent below their peak. The crisis continues, as expected.

Not exactly unexpectedly, the net balance of lenders reporting a decline in the availability of secured credit to households was 39 percent in the three months to September. This was slightly better than the 47 percent fall reported in the three months to June.

Also, the Nationwide House prices contracted 1.7 percent in Septemberon top of -1.9 percent in August. On a yearly basis they fell 12.4 percent from -10.5 percent.

The current account deficit widened to 11 billion pounds, the largest in three quarters.

The manufacturing PMI fell to 41 in September from 45.3 the previous month, the lowest since the report began in January 1992, services PMI contacted to 46 in September, the lowest since the gauge began in 1996, from 49.2 in August, and the PMI construction fell to 38.8 in September from 40.5 in August.

The gross domestic product was unrevised at flat in the second quarter but was revised upward to 1.5 percent on a yearly basis from the previous estimate of 1.4 percent. In addition, services grew 0.2 percent from the first quarter, the weakest pace since 1995.

To make a long story short, the UK is probably already in its first recession since 1991, so the BoE must cut interest rates.

Canada
The Canadian dollar closed the week at a near 14-month low, amid widespread liquidation of both commodities and carry trades. Any recovery should be temporary.

Canada’s economy grew a mammoth 0.7 percent in July, due to a surge in crude oil and natural gas production from June’s + 0.1 percent.

Switzerland
The dollar/Swiss franc rallied sharply last week but not as much as dollar/euro.

The Swiss PMI fell to 47.8 in September from 52.5 in August.

Australia
The Australian dollar closed the week at a near 14-month low as well, as the liquidation of both commodities and carry trades continues. Any recovery should be only temporary.

Australian manufacturing improved 0.2 points to 47.2 in September from August, when it gained 0.1 points, according to the Australian Industry Group and PricewaterhouseCoopers. But it remains below the key 50 mark.

Surging exports of coal and iron ore boosted Australia's trade balance from a deficit of A$697 million in July to the second-biggest surplus on record A$1.36 billion in August.

This Week's Data and Events

United States
D Date GMT Event Period UBS Previous Market

The US economic agenda is unusually thin this week.

It will feature only the trade balance for August and this is due on Friday. The deficit will probably improve because of the decline in oil process during that period.

The Eurozone
The Eurozone economic agenda will start on Tuesday with the release of the German factory orders report for August.

Wednesday will see the revision of the Eurozone GDP for the second quarter and of the German industrial production report for August.

The German trade balance for August is due on Thursday.

Friday will see the release of the French and Italian industrial production reports for August.

Japan
The Bank of Japan will leave rates unchanged on Monday.

The economic agenda only features the machinery orders report for August on Thursday.

The UK
The UK economic agenda will open on Tuesday with the release of the industrial production report for August.

The UK economy is slipping fast, and on Thursday, the Bank of England is likely to cut rates by 25 basis points to 4.75 percent.

Also on Thursday there will be the trade balance for August.

Canada
The Canadian economic agenda will open on Monday with the release of the Ivey Purchasing Managers report for September.

The housing mortgage report for September is due on Wednesday.

On Friday, be on the lookout for the release of the unemployment report for September, and of the trade and new housing price reports for August.

Overview

Euro/dollar
Last week's range: 1.3705 – 1.4565 (Down)
Previous range: 1.4438 – 1.4865 (Up)

Euro/dollar collapsed to a 14-month low last week, falling every day of the week. My model turned short last Monday, and the bias remains downward.

Immediate support is at 1.3615. Below 1.3465, support is at 1.3350. Distant support is at 1.3250.

Initial resistance is seen at 1.3705. This is followed by 1.3845. The next level is 1.3935. Above 1.4200, resistance is still pegged at 1.4385. Distant resistance is at 1.4600.

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

Dollar/yen
Last week's range: 103.54 – 106.96 (Down)
Previous range: 105.04 – 107.46 (Down)

Dollar/yen edged fell to a 4 ½-month low. My model is now short, but it vacillates. The medium-term outlook is mixed, after the pair failed to trigger a head-and-shoulders formation below 103.50.

Good support is 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.

Immediate resistance is at 105.60 from a 50-point pivot that targets 105.10 and 106.10. The next level is 106.75 from another 50-point pivot, which targets 106.25 and 107.25. Distant resistance follows at 107.95 from a 50-point pivot, which targets 107.45 and 108.45.

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

Sterling/dollar
Last week's range: 1.7551 – 1.8366 (Down)
Previous range: 1.8264 – 1.8668 (Up)

Sterling/dollar fell to a three-week low and my model went short early last Monday.  The downside remains favored in the medium term, but the recovery on Friday suggests an early bounce. 

Immediate support is at 1.7600. Below 1.7550, strong support now comes at 1.7448 from a pivot low. Distant support comes at 1.7200.

Initial resistance is at 1.7840. Good resistance follows at 1.7950 from a Fibonacci retracement level. Above the strong level at 1.8060, further resistance is at 1.8200. Distant resistance is now seen at 1.8668.

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

Dollar/Swiss franc
Last week's range: 1.0818 – 1.1412 (Up)
Previous range: 1.0698 – 1.1060 (Down)

Dollar/Swiss rallied to a three-week high and my model went long last Tuesday. The risk remains on the upside, but a pause is due.

Good resistance is pegged at 1.1412. The next level is 1.1605 from a pivot high. This is followed by 1.1767. Distant resistance is at 1.1865.

Immediate support is at 1.1290. The next level is 1.1220. Below 1.1140, support is seen at 1.1055. Distant support comes 1.0800.

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

Dollar/Canada
Last week's range: 1.0335 – 1.0843 (Up)
Previous range: 1.0299 – 1.0514 (Down)

Dollar/Canada exploded to an over 14-month high last week, and my model promptly went long early last Monday. The initial outlook is bullish, but a pause is due.

Initial resistance is at 1.0890. The next level is 1.1025. Above 1.1135, resistance follows at 1.1235.

Immediate support is at 1.0775. This is followed by 1.0635. Below 1.0570, distant support now comes at 1.0465.

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

Euro/yen
Last week's range: 144.04 – 155.33 (Down)
Previous range: 153.49 – 156.83 (Mixed)

Euro/yen collapsed to a 28-month low. The medium-term outlook remains bearish, and my model turned short early last Monday.

Immediate support is now seen at 143.60. Below 141.43, distant support is now at 140.30.

Good resistance level is perched at 145.30. The next levels are 147.05 and 148.90. This is followed by 150.40. Distant resistance is now seen at 152.00.

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

Euro/sterling
Last week's range: 0.7754 – 0.8024 (Down)
Previous range: 0.7884 – 0.7980 (Mixed)

Euro/sterling collapsed to a 6 ½-month low last week and touched the bottom of a declining channel. My model went short last Tuesday. The initial outlook is bearish.

Initial support is at 0.7720. This is followed by 0.7680. Distant level remains at 0.7640.

Immediate resistance is at 0.7705. Above 0.7805, resistance now comes at 0.7850. Strong resistance follows at 0.7890, 0.7920 and 0.7965. Distant resistance is now perched is at 0.8024.

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

Published on  Mon, Oct 6 2008, 12:50 GMT