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Weekly Forex Market Commentary

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The US economic calendar is very light this week

Mon, Oct 20 2008, 08:01 GMT
by Cornelius Luca

GFT (Global Forex Trading)

Past Week's Data and Events

The financial crisis has only started and the wild gyrations in the stock markets may provide better levels to liquidate stocks. Hedge funds and pensions funds will probably face further distress. The outlook is extremely grim. But we focus on currencies, and this is and will remain the island of profitability for months and probably longer. The dollar should remain strong in the medium to long term, especially versus the European and the commodity currencies. But this week, the US currency could see some consolidation with a bearish tone.

United States
Dollar money-market rates fell after the European Central Bank, Bank of England and Swiss National Bank, plus the Bank of Japan, offered lenders unlimited dollars for the first time in a coordinated effort to thaw the frozen credit markets. Overnight money market conditions are improving slowly, but not in further out periods despite massive liquidity injections by central banks along with other steps to restore market conditions to a more normal state. After Lehman’s bankruptcy last month, no bank will rush to lend.

The dollar basically paused last week, as the FX market became a sideshow to the battered asset market. But EUR/CHF, which tracks pretty closely the US indices, got hurt. This lull is just a pause; the contraction of our life time is only gathering strength.

The US economic data is getting scarier by the day, and this means inflation will slow naturally. And I’m sure you’ve noticed the drop in energy prices, even though speculators keep gas pump prices still at ridiculously high prices.

Retail sales contracted 1.2 percent in September, nearly double the expectations, on top of a 0.4 percent decline the prior month. The weakness was accelerated by a 3.8 percent fall in auto sales. Ex-autos, sales fell 0.6 percent after falling 0.9 percent the prior month.

The producer price index fell 0.4 percent in September, as expected. The decline was helped by a 8.2 percent slide in natural gas prices, while gasoline prices fell by only 0.5 percent. The core PPI, however, surged by 0.4 percent, which confirms that food prices really surged again.

The consumer price index was unchanged in September after a 0.1 percent drop in August, while the core CPI rose 0.1 percent. CPI slowed to +4.9 percent on the year from 5.4 percent in August, and the core rate increased 2.5 percent, the same as in the prior month.

The TIC data showed a net overall capital outflow of $0.4 billion in August after a $33.6 billion outflow in July.

Initial jobless claims fell 16,000 to 461,000 in the week that ended Oct. 11 after the Gulf Coast hurricanes subsided.

Industrial production fell 2.8 percent in September, the most since December 1974, after a revised 1 percent decrease in August. Capacity utilization fell to 76.4 percent from 78.7 percent the prior month.

Confirming the deterioration in the factory sector, the Empire State Manufacturing Index collapsed to -24.6 in October from -7.4 in September.

Adding to the pile of bad news, the Philly Fed showed a manufacturing collapse to 37.5 in October from a +3.8 in September. This is the worst report since 1990.

Housing starts fell more than expected by 6.3 percent to 817,000 in September from August's downwardly revised 872,000. Building permits shrank 8.3 percent to 786,000 pace, the lowest level since November 1981, from 857,000.

The preliminary University of Michigan sentiment index tanked to 57.5 in October from 70.3 in September. The lowest level was registered in June at 56.4.Well, what can one expect?

Business inventories rose 0.3 percent in August from July’s +1.1 percent and sales fell 1.8 percent from +0.1 percent.

The budget deficit hit a record $455 billion in fiscal 2008 amid high war spending, bank failures and unemployment-related benefits.

As widely expected, economic activity weakened in September as businesses revised capital investments, consumers cut spending and the general outlook slowed, the Beige Book said.

The Eurozone
The euro/dollar consolidated last week, but the downtrend remains in place.

German investor confidence worsened to -63 in October, the second low ever, from -41.1 in September, according to the ZEW Center for European Economic Research. In the same vein, the Eurozone ZEW survey of economic sentiment fell to -62.7 in October from -40.9.

Eurozone industrial production expanded +1.1 percent in August after contracting 0.3 percent in July, but fell 0.7 percent on the year on top of the previous decline of -1.7 percent.

The French business sentiment worsened to 87 September from 94 in August.

The Eurozone CPI rose 0.2 percent in September after declining 0.1 percent in August. On an annual basis, it remained at +3.6 percent and the core CPI at +1.9 percent.

The German CPI fell 0.1 percent in September, the same as in August, and was unchanged at +2.9 percent on the year.

Also, the French CPI slipped 0.1 percent in September from flat in August. On a yearly basis, it slipped to +3.0 percent from +3.1 percent.

Moreover, Italy’s CPI fell 0.3 percent in September, the same as in August.

Finally, the Eurozone trade deficit came in at 6.1 billion euros in August from July’s revised to a record high of 6.7 billion euros. Exports fell 0.7 percent and imports by 1 percent.

Japan
Dollar/yen edged higher in an inside range as the liquidation of carry trades paused.

Producer prices slowed to 6.8 percent in September from a year earlier from a 7.2 percent increase in August.

The Japanese domestic CGPI fell 0.4 percent in September from -0.1 percent in August and slipped to +6.8 percent on the year from +7.2 percent y/y.

Surprisingly, the consumer confidence rose to 31.8 in September from 30.5 in August.

The current-account surplus narrowed 52.5 percent to 988.8 billion in August, as imports climbed 20.2 percent and exports rose only 0.9 percent.

The industrial production was confirmed at -3.5 percent in August from +1.4 percent in July, and remained at -6.9 percent on the year.

The final machine tool orders was revised to -20.1 percent in September from the initial -20.7 percent.

Elsewhere, the tertiary index fell 1.4 percent in August.

The UK
The pound consolidated in an inside range, but sits near the low of the downtrend.

PPI output fell 0.3 percent in September and expanded 8.5 percent on the year after contracting -0.6 percent in August and rising 9.7 percent y/y on the year. The core PPI output slipped to 5.4 percent from +5.6 percent on a yearly basis. Meanwhile, PPI input slipped to 24.5 percent from 28.8 percent on an annual basis.

The UK CPI slipped to 0.5 percent September from 0.6 percent in August, but rose to +5.2 percent on a yearly basis from +4.8 percent. Along these lines, the retail price index rose to 218.4 in September from 217.2.

As the UK housing sector remains under pressure, DCLG UK house prices declined 3.4 percent August on a yearly basis from -0.3 percent in July.

The claimant count rate edged up to 2.9 percent in September from 2.8 percent in August.

Canada
The Canadian dollar paused last week after collapsing a week earlier. With the Bank of Canada expected to cut rates on Tuesday, the selling pressure should continue. But more sideways trading is likely. Switzerland

The dollar/Swiss franc consolidated last week near the top of its recent uptrend.

Australia
The Australian dollar made a weak recovery within an inside range, but the specter of long liquidation of carry trades continues.

The leading index declined 0.1 percent to 259.2 points in August, according to Westpac Banking and the Melbourne Institute.

This Week's Data and Events

United States
D Date GMT Event Period UBS Previous Market

The US economic calendar is very light this week.

It will start on Monday with the release of the leading indicators report for September.

Friday will see the release of the existing home sales.

The Eurozone
The Eurozone economic agenda will start with the release of the German Producer Prices report for September.

Friday will see the release of the Eurozone PMI manufacturing and services reports for October, and also of the Italian consumer and business confidence indices for October.

Japan
The Japanese agenda will start on Tuesday with the release of the Industry Activity Index.

Thursday will see the release of the trade balance.

The UK
The UK economic agenda will open on Tuesday with the release of the CBI industrial trends for October

The Bank of England’s minutes are due on Wednesday.

The retail sales report for September is due on Thursday.

Friday will see the release of the third quarter GDP and of the index of services report for August.

Canada
On Tuesday, the Bank of Canada is expected to cut rates by a minimum of 25 basis points.

The retail sales report for August is due on Wednesday.

Friday will see the release of the CPI report for September.

Overview

Euro/dollar
Last week's range: 1.3349 – 1. 3767 (Mixed)
Previous range: 1.3261 – 1.3784 (Down)

Euro/dollar traded mostly sideways in an inside range after falling to a 1 ½-year low the previous week. My model went long but only the medium-term bias remains bearish. The short term is bullish.

Above 1.3515, 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 1.3400. The next level is 1.3350. Below 1.3261, support remains 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: 99.27 – 103.06 (Mixed)
Previous range: 97.92 – 105.39 (Down)

Dollar/yen made an inconclusive recovery after branding a seven-month low a week before. My model went long. The medium-term outlook is still bearish, as the pair remains in a head-and-shoulders formation. The short term is slightly bullish.

Immediate resistance is at 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.

Good support is at 101.25 from another 50-point pivot, which targets 100.75 and 101.75. The next level is 100.25 from a 50-point pivot, which targets 99.75 and 100.75. This is followed by 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.

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

Sterling/dollar
Last week's range: 1.6926 – 1.7630 (Mixed)
Previous range: 1.6790 – 1.7719 (Down)

Sterling/dollar made a mild recovery after kneeling to a near-five year low a week before, but my model went long.  The downside remains favored in the medium term, but there still is upside risk in the short term. 

Initial resistance is at 1.7380. Above the strong level at 1.7500, distant resistance is now seen at 1.7765.

Immediate support is at 1.7230. The next levels are 1.7140, 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: 1.1240 – 1.1490 (Mixed)
Previous range: 1.1130 –1.1489 (Mixed)

Dollar/Swiss made little progress last week after climbing to an eight-month high the previous week but my model went short. Again, the risk remains on the upside, but a pause is due.

Immediate support is at 1.1283. 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 1.1445. Above 1.1490, the next level remains at 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: 1.1307 – 1.1996 (Up)
Previous range: 1.0815 – 1.2119 (Up)

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

Below 1.1755, support is seen at 1.1700 and 1.1655. This is followed by 1.1520. Below 1.1440, distant support now comes at 1.1280.

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

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

Euro/yen
Last week's range: 133.39 – 141.72 (Mixed)
Previous range: 132.25 – 145.28 (Down)

Euro/yen made a choppy consolidation last week after collapsing to an over three-year low the week before. The medium-term outlook remains bearish, but my model went long. The short term outlook is only slightly bullish.

Good resistance remains 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 135.15. The next levels are 134.10 and 132.25. Below 129.97, distant support is now at 124.20.

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

Euro/sterling
Last week's range: 0.7735 - 0.7965 (Down)
Previous range: 0.7702- 0.8069 (Up)

Euro/sterling fell in an inside range and remains under pressure. The initial outlook is slightly bullish.

Above 0.7795, resistance now comes at 0.7857. Strong resistance follows at 0.7945 and 0.7982. Distant resistance is now seen is at 0.8069.

Initial support is at 0.7735. The next level is 0.7700. This is followed by 0.7702. Distant levels are at 0.7640 and 0.7573.

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

Published on  Mon, Oct 20 2008, 08:11 GMT