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Weekly Forex Market Commentary

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Canada's agenda is light this week

Mon, Oct 13 2008, 12:19 GMT
by Cornelius Luca

GFT

Past Week's Data and Events

The crisis affecting the financial markets, especially in the US, is unprecedented. The house of cards built over many years on unreasonably cheep money, financial fraud, power abuse and lack of competent regulation has been blown away. The force of gravity always works, even if it takes longer than normal to assert itself. Those responsible for this historical disaster will remain largely unpunished and most of them will actually be rewarded. And so it goes. With the appetite for risk annihilated, the European and the commodity currencies were sold in panic against the Japanese yen. Baring a significant recovery of the battered stock markets, this pattern will continue in the medium term. But in the short term, the opposite should be true.

United States
Governments and central banks have attacked the financial monster threatening our livelihood from all sides, sometimes better and sometimes worse. But everyone that is able is now up in arms. The Main Street has been typically slow to catch on, but the tidal waves will be coming. Only the optimists now hope for a standard recession. The equity markets have nearly doubled the losses required to enter a bear phase and all during the past week.

On Tuesday, the Federal Reserve set up the Commercial Paper Facility Fund, a special-purpose facility to buy commercial paper, in another attempt to thaw the frozen credit markets. The minutes from the FOMC September 16 meeting hinted at the potential for an interest rate cut, consistent with remarks made by Fed Chairman Bernanke earlier in the day. A day later, six central banks cut rates by 50 basis points in a coordinated move, while the Bank of Japan kibitzed. The Fed cut the Fed Funds to 1.5 percent and the discount rate to 1.75 percent, the ECB to 3.75 percent, the BoE to 4.5 percent, the BoC to 2.50 percent, the SNB to Libor range 2-3 percent, and the Riksbank to 4.25 percent. Even China cut 27 basis points from the 1-year deposit rate to 3.87 percent and the Reserve requirement by 50 bps to 17 percent.

With the G7 coming with statements even more vague than those of the US presidential contestants, the European Central and the Governments of the Eurozone on Sunday pledged readiness to take proper action in a concerted and coordinated manner to improve liquidity in longer term maturities.

In the US, the Treasury Department is considering buying stock in banks in effect, partially nationalizing the industry.

But in the short term, all eyes will be the ability of Morgan Stanley to survive for two days to Tuesday. Mitsubishi was pressing for more favorable terms after the former top investment bank lost nearly half its market value last week.

The currency markets trade at exceptional levels of volatility, with ranges that would have been laughable only weeks ago, and there is no reason to expect a change. The carry trade is dead, and the liquidation of long-term positions has been aggressive.

What FX and all the other markets need is a catalyst to bring divergent interests together. But where do you find one when you need it?

On the plus side, while liquidity in FX remains sub-par, our industry doesn’t suffer from a bear market or silly regulation. In fact, currencies should emerge one of the asset victors from this crisis.

Based on contracts signed in June, the National Association of Realtors Pending Home Sales Index rose 7.4 percent in August to 93.4 from an upwardly revised index of 87.0 in July. On an annual basis, the August report rose 8.8 percent to the highest level since June 2007.

As I expected, the trade deficit narrowed 3.5 percent to $59.1 billion in August as oil prices fell from July’s revised deficit to $61.3 billion from an initially reported $62.2 billion. Imports decreased 2.4 percent and exports declined 2 percent

Initial jobless claims declined by 20,000 to 478,000 in the week that ended October 4, from a revised 498,000 the prior week.

The Eurozone
The euro/dollar collapsed to a 1 ½-year low last week amid general dollar strength and long liquidation.

Yet, the regional data were unexpectedly solid. But who cares about that in a crisis?

The volatile German factory orders surged 3.6 percent in August after contracting 1.7 percent in July, but fell -7.6 percent from -0.7 percent a month earlier.

The final Eurozone GDP for second quarter was confirmed at -0.2 percent on the quarter and to +1.4 percent on the year.

The German industrial production unexpectedly surged 3.4 percent in August after contracting 1.6 in July and this pushed the annual increase up by 1.7 percent from +0.1 percent.

The French industrial production contracted by a less than expected 0.4 percent in August and -2.6 percent on the year, from +1.4 percent in July and -2.0 percent, respectively.

Meanwhile, Italy’s industrial production rose 1.4 percent in August but fell 5.3 percent on the year after falling 1.1 percent in July and -3.2 percent on the year.

German trade balance declined to 10.6 billion euros in August from 13.8 billion euros in July, as imports fell 2.5 percent and exports 0.5 percent.

France trade deficit expanded to 5.4 billion euros in August from 4.8 billion euros in July.

Japan
Heavy sales of carry trades sent the dollar/Japanese yen reeling down to a seven-month low last week. A volatility reading as high as over 40% really surprised.

The Bank of Japan left policy rates unchanged at 0.5 percent, as expected.

The data didn’t carry much weight early in the week. The leading index fell to 89.3 in August from 91.4 and the coincident index to 100.7 from 103.5.

But the week orders for machinery hurt the yen on Thursday. They declined 14.5 percent in August.

The UK
The high-yielding pound sank aggressively for the second week and nailed a near-five year low, as the dollar took no prisoners. Long-term long cable positions were unceremoniously squeezed our last week.

The UK economic data highlighted the weakness of the pound.

Industrial production contracted by a more than expected 0.4 percent in August and -2.3 percent on the year from –0.4 percent in July and –1.9 percent. The overall industrial production fell by 0.6 percent and 2.3 percent from a year earlier, the biggest decline since 2005.

HBOS house prices contracted 1.3 percent in September on top of -1.8 percent in August, and -12.4 percent on the year from 10.9 percent.

The trade deficit was flat at 8.2 billion pounds in August after the July report was revised from -7.7 billion pounds.

Canada
The Canadian dollar was creamed last week, along with most commodities. Dollar/Canada surged to an over three-year high and if the trend continues, which it should, we will afford to go skiing in Canada once again!

Employment increased by 107,000 in September, but the unemployment rate was unchanged at 6.1 percent because the increase in employment was matched by a similar rise in labor force participation.

The trade surplus increased to $5.8 billion in August from $4.2 billion in July. The trade surplus with the United States expanded to $8.6 billion from $8.4 billion in July.

Switzerland
The dollar/Swiss franc climber to a new high for the uptrend, but lacked the drama of the other majors. Sales of euro/Swiss, in line with the stock markets, directed its traffic.

Switzerland’s unemployment rate remained unchanged at 2.4 percent in September.

Australia
The Australian dollar fell of bed and hit a near 5 ½-year low. The high yielding currency was tossed by both former carry trade and commodity owners. That economy will take longer to suffer because of the Chinese demand for commodities, but will suffer.

The Reserve Bank of Australia cut its benchmark interest rate by one percentage point, the most since a recession in 1992, to bring it down to 6 percent, the lowest since November 2006. Reserve Bank Governor Stevens said that the unusually large cut was appropriate in order to reduce in costs to borrowers. The Aussie has tumbled approximately 26 percent since hitting a 25-year high of 98.49 cents on July 16.

Not surprisingly, consumer confidence tumbled 11 points to 82 points in October, the most in more than two years, according to a Westpac Banking Corp. and Melbourne Institute survey.

This Week's Data and Events

United States
D Date GMT Event Period UBS Previous Market

The US economic agenda will open on Wednesday with the release of the PPI report and retail sales reports for September, and of the Empire State manufacturing Survey for October.

Thursday will see the release of the industrial production and capacity utilization reports for September, the CPI report for September, and of the Philly Fed Survey and Homebuilders' survey NAHB for October

The housing starts report for September and the University of Michigan survey for October are due on Friday.

The Eurozone
The Eurozone calendar will open on Tuesday with the release of Germany’s ZEW current situation report for October and the regional industrial production report for August.

Wednesday will see the release of Germany’s CPI report for October

Japan
The Japanese agenda will start on Wednesday with the release of the current account balance for August and of the industrial production report for September.

The tertiary industrial activity report for August is due on Thursday.

The UK
The UK economic agenda will stat on Monday with the release of the PPI input/output report for September.

Tuesday will see the release of the RICS House Price Balance for September, DCLG house prices report for August, and BRC retail sales and CPI reports for September.

The unemployment report for August is due on Wednesday.

Canada
Canada’s agenda is light this week. It only features the survey of manufacturing shipments report for August. This is due on Thursday.

Overview

Euro/dollar
Last week's range: 1.3261 – 1.3784 (Down)
Previous range: 1.3705 – 1.4565 (Down)

Euro/dollar fell to a 1 ½-year low last week amid general dollar strength despite struggling higher between Tuesday and Thursday. My model remains short, but only the medium-term bias remains bearish.

Initial resistance is seen at 1.3620. This is followed by 1.3705, 1.3785 and1.3845. Above 1.3935, resistance is pegged at 1.4200.

Immediate support is at 1.3550. The next level is 1.3460. Below 1.3261, support comes at 1.3040 and 1.2935. Distant support is at 1.2490.

NEAR-TERM:Mixed with upside risk
MEDIUM-TERM:Bearish
LONG-TERM: Bearish

Dollar/yen
Last week's range: 97.92 – 105.39 (Down)
Previous range: 103.54 – 106.96 (Down)

Dollar/yen succumbed to a seven-month low below parity under the weight of heavy sales of carry trades. My model remains short. The medium-term outlook is bearish after the pair confirmed a head-and-shoulders formation.

Good support is at 100.25 from a 50-point pivot, which targets 99.75 and 100.75. The next level is 99.25 from another 50-point pivot, which targets 98.75 and 99.75. The next level is 98.25 from a 50-point pivot, which targets 97.75 and 98.75. Distant support follows at 97.30 from another 50-point pivot, which targets 96.80 and 97.80.

Immediate resistance is at 101.25 from another 50-point pivot, which targets 100.75 and 101.75. The next level is 102.30 from a 50-point pivot, which targets 101.80 and 102.80. Above 103.00, distant resistance is at 103.40 from another 50-point pivot, which targets 102.90 and 103.90.

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

Sterling/dollar
Last week's range: 1.6790 – 1.7719 (Down)
Previous range: 1.7551 – 1.8366 (Down)

Sterling/dollar fell to a near-five year low and my model remains short.  The downside remains favored in the medium term, but there is upside risk in the short term. 

Initial resistance is at 1.7180. Good resistance follows at 1.7230 from a Fibonacci retracement level. Above the strong level at 1.7500, distant resistance is now seen at 1.7765.

Immediate support is at 1.7095. The next levels are 1.7020, 1.6920 and 1.6790. Below 1.6710, support now comes at 1.6540 from a pivot low. Distant support is seen at 1.6075.

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

Dollar/Swiss franc
Last week's range: 1.1130 –1.1489 (Mixed)
Previous range: 1.0818 – 1.1412 (Up)

Dollar/Swiss rallied to an eight-month high last week and my model remains long since the previous Tuesday. Once again, the risk remains on the upside, but a pause is due.

Immediate support is at 1.1240. The next level is 1.1220. Below 1.1140, support is seen at 1.1055. Distant support comes 1.0800.

Good resistance is pegged at 1.1360. The next levels are 1.1412 and 1.1605 from a pivot high. This is followed by 1.1767. Distant resistance is at 1.1865.

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

Dollar/Canada
Last week's range: 1.0815 – 1.2119 (Up)
Previous range: 1.0335 – 1.0843 (Up)

Dollar/Canada soared to an over three-year high last week, and my model remains long. The initial outlook is bullish, but a pause is due.

Immediate support is at 1.1655. This is followed by 1.1520. Below 1.1440, distant support now comes at 1.1280.

Initial resistance is at 1.1890. The next level is 1.2119. Above 1.2225, resistance follows at 1.2495.

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

Euro/yen
Last week's range: 132.25 – 145.28 (Down)
Previous range: 144.04 – 155.33 (Down)

Euro/yen collapsed to an over three-year low, and this weakness was expected. The medium-term outlook remains bearish, and my model remains short. The short term outlook is bullish.

Good resistance level is now at 137.70. The next level is 139.70. This is followed by 141.85. Distant resistance is now seen at 147.30.

Immediate support is now seen at 136.35. The next levels are 135.15, 134.10 and 132.25. Below 129.97, distant support is now at 124.20.

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

Euro/sterling
Last week's range: 0.7702- 0.8069 (Up)
Previous range: 0.7754 – 0.8024 (Down)

Euro/sterling reversed from a seven-month low to a one month high and then gave back half of these gains on Friday. The initial outlook is slightly bullish.

Above 0.7945, resistance now comes at 0.7980. Strong resistance follows at 0.8025 and 0.8083. Distant resistance is now perched is at 0.8187.

Initial support is at 0.7885. The next level is 0.7840. This is followed by 0.7780. Distant levels are at 0.7700 and 0.7640.

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

Published on  Mon, Oct 13 2008, 12:30 GMT