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Weekly Forex Market Commentary

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On Wednesday, odds are split whether the FOMC meeting will result in another rate cut

Wed, Oct 29 2008, 06:27 GMT
by Cornelius Luca

GFT (Global Forex Trading)

Past Week's Data and Events

The excesses of this unfinished decade are being rectified aggressively, and the pendulum is swinging hard from high-flying over-leveraged free for all trading to the other pole. The VIX has soared to record highs while rumors fuel panic. The high volatility permeated the FX markets as well, but not the panic of a bleak future that affects stocks. As the US financial system is shrinking, the need for dollars remains high, and this demand reversed a long-term downtrend for the US currency. Our economy might be in a shambles and the carry-trade dead, but the dollar, ironically, should remain strong. Enjoy it, with extreme care!

United States
The measures suggested or taken by Messrs. Bernanke, Paulson and Bush to inject life into the economy have yet to show any result – including a calmer market. President Bush is consider a second stimulus measure following the stimulus measure in February and the rescue plan passed 2 1/2 weeks ago, as those two are not doing much and the credit market remains frozen. There is little trust to lend money, the housing prices’ return to reality continues, and there is risk some pension funds and hedge funds will suffocate under the pressure of meeting margin calls on commodity positions turned sour. And let’s not forget the woes of the comatose US car makers.

We are probably see lower borrowing costs in the G7 possibly as early as this week, bit there is little hope we can avoid a sharp recession. The question is: with no leading investment banks left and few banks of investing significance, how will we exit (eventually) from these times of financial horror? I don’t know, but I hope that will happen with help from the real economy. Until then we have to cross swords with whatever comes our way, such as rumors of a possible default by Russia or of collapse of big Japanese, US or European institutional investors.

Mind my parting words: Do not confuse this recession with those you have already experienced in life time or even with the one that you read about in books – the Great Depression. This recession was closer to the one in 1873. This recession was triggered by unparalleled greed, excessive leverage, lack of expertise, fraud and intolerable disregard to checks and balances. This recession will have significant social impact for years and probably decades, and the financial world that we have known will be relegated to the history books. A new page is turning, but when it comes to FX, let’s hope it will not include the following: French President Nicolas Sarkozy recently said that the monetary system should be re-thought within fixed exchange rates. A Bretton-Woods II accord sounds farfetched at this time; but, should the irrational behavior continue, this thought might grasp some traction.

The dollar surged versus both the European and the commodity currencies last week, while panicky deleveraging of carry trades obliterated the dollar/yen.

In the background there was data that was bad even when it looked good, and it only confirmed the trembling foundation of the economy.

The Conference Board's index of Leading Economic Indicators unexpectedly rose by 0.3 percent in September, its first increase in five months. However, that’s only playing the stats; the August report showed a 0.9 percent decline that was revised from -0.5 percent. This means, the September reading is really -0.1 percent…

Purchases of existing homes jumped 5.5 percent to a 5.18 million annual pace in September, according to the National Association of Realtors. Sales rose 1.4 percent compared with a year earlier, the first yearly increase since November 2005. Foreclosures pushed the median price down 9 percent and desperation selling pushed sales higher.

The weekly claims for benefits rose by 15,000 to 478,000 and the previous week’s number was vaulted by 2,000, so the current number doesn’t look all that bad. Oh, well, that’s the norm, not the exception.

The Eurozone
The euro/dollar collapsed to a two-year low last week. Its three-month trip from 1.60 to 1.25 has been fascinating. As it stands now, any rally should provide better levels to sell. Europe will suffer more and longer than the US, and its socialist system will be burdened excessively by its own recession.

Germany PPI rose 0.3 percent in September and 8.3 percent on the year from -0.6 percent in August and 8.1 percent. Rising inflation while the economy is decelerating cannot be good.

And the economy is really hitting the skids.

The Eurozone PMI Manufacturing sank to 41.3 in October from 45.0 in September, and PMI Services fell to 46.9 from 48.4. On an individual basis, Germany’s PMI Manufacturing fell to 43.3 from 47.4 and PMI Services to 49.7 from 50.2, while France’s PMI Manufacturing fell to 40.8 from 43.0 and PMI Services to 48.8 from 50.1.

The Eurozone current account worsened to -7.9 billion euros in August from -1.1 billion euros in July.

The Eurozone industrial new orders contracted 1.2 percent in August from 1.0 percent in July and by 6.6 percent on the year from +1.6 percent.

Understandably, the French business confidence indicator fell to 88 in October from 92 in August. However, the consumer spending rose 0.6 percent after falling 0.3 percent in the month before.

Not surprisingly, Italy’s Business Confidence fell to 77.7 in October from 82.7 in September, while its Consumer Confidence only slipped to 102.2 from 102.8.

Elsewhere, Italy’s retail sales contracted 0.5 percent in August after expanding 0.6 percent in July, and fell 1.3 percent on the year.

Japan
The yen is a counter cyclical currency and bad economic times will make it flourish. It’s already surged to a decade high amid unforgiving deleveraging of carry trades and yen crosses.

The trade balance showed a surplus of 95.1 billion yen in September after contracting 327.6 billion yen the month before. The report was neutral on the dolar/yen.

The UK
With the UK experiencing a worse (in relative terms) housing crisis than us and with its economy close to ours, the pound has only one way to go – and that’s not toward that ridiculous 2.0000 mark.

The Bank of England’s Monetary Policy Committee minutes showed an unanimous vote for a coordinated 50 bps cut in its official rate two weeks ago following on plans to recapitalize the banking system. The release followed Bank Governor King’s warning that the UK is entering a recession with its banking system in its most fragile state since before the first world war.

Retail sales contracted 0.4 percent in September after rising by an unrealistic 1.1 percent in August. Expect further declines in the months to come, as people’s confidence in their monetary power will decline. Still, sales expanded 1.8 percent on the year, even though were a far cry from +3.3 percent in August.

The Rightmove House Prices rose 1.0 percent in October and fell 4.9 percent on the year after falling -1.0 percent in September and -3.3 percent on an annual basis.

The CBI industrial trends quarterly survey showed a decline to –60 from -40 in the second quarter. This reading surpasses the low of -47 reached in the fourth quarter 1990.

The pound took another big hit early Friday on news that the GDP shrank 0.5 percent in the third quarter, the first contraction in 16 years, confirming that the UK economy is deep into recession after being flat in the second quarter. Surely you need two consecutive negative quarters to confirm recession, but that shouldn’t be a problem. On the year, GDP slowed to 0.3 percent from 1.5 percent.

The Index of Services fell 0.3 percent in August from flat in July.

Canada
The Canadian dollar is a commodity currency and Canada is sending about 85% of its exports to the US. With the commodity prices plunging, including the falsely safety provider gold, and the US economy contracting, is there a doubt which way the loonie will go?

Dollar/Canada made an explosive rally to an over 3-year high on Tuesday despite the fact that the Bank of Canada cut its main interest rate by only 25 bps to 2.25 percent, the lowest since October 2004. The BoC inferred it will cut again to help its economy. The pair surged further on Wednesday and Friday.

Retail sales fell 0.3 percent in August, the first decline in six months, led by gasoline prices and new cars sales, after a 0.1 percent gain the month before. Excluding the automotive sector, retail sales fell 0.3 percent.

Switzerland
The dollar/Swiss franc rally last week as all the European currencies sank.

Australia
The Australian dollar broke from a comfortable but unsustainable triangle to collapse in line with the commodities. And if this was not a triangle, put a pennant, forget about fastening your seatbelts and make sure you grab our parachute!

Australian PPI rose 2 percent in the third quarter by almost twice as much as economists forecast as costs for energy, water and construction climbed after rising 1 percent in the second quarter. It was the biggest increase since the series began in 1998. The index climbed 5.6 percent from a year earlier.

This Week's Data and Events

United States
The US economic agenda will open on Monday with the release of the New Home Sales report for September. It’s hard to expect anything positive here.

The Conference Board’s Consumer Confidence report for October is due on Tuesday. I’d have to say we don’t feel all that confident.

On Wednesday, odds are split whether the FOMC meeting will result in another rate cut.

Also on Wednesday, be on the look out for the volatile Durable Goods Orders report for September.

Thursday will see the revision of the second quarter GDP.

The Personal Income/Spending reports for September, the Chicago PMI report for October, the University of Michigan survey for November and the PCE deflator report for September are all due on Friday.

The Eurozone
The Eurozone economic calendar will start on Monday with the release Germany’s IFO Business Climate report for October. This is a widely watched report and should show deterioration.

Germany’s GfK Consumer Confidence report for November and France’s Consumer confidence report for October are due on Tuesday.

Thursday will see the release of the German Retail sales report for September and of the Unemployment Rate report for October.

Also on Thursday there will be a wealth of regional data for October: Retail PMI, Business Climate Indicator, Consumer Confidence, Economic Sentiment Indicator and Industrial Confidence October.

The Eurozone Unemployment Rate for September is due on Friday.

Japan
The Japanese economic agenda will start on Tuesday with the release of the Industrial Production report for September.

On Thursday, look for the Unemployment Rate and Household Living Expenditure reports for September, the National CPI report for September, and the Tokyo CPI report for October.

On Friday, the BoJ should leave intact its target rate.

The Housing Starts report for September is due on Friday as well.

The UK
The UK economic calendar will start on Tuesday with the CBI reported balance for October.

The Nationwide house prices report for October is due on Thursday.

Friday will see the release of the GfK consumer confidence report for October.

Canada
Canada’s economic agenda is very light this week. It only encompasses the monthly GDP report for August, which is due on Friday.

Overview

Euro/dollar
Last week's range: 1.2498 – 1.3529 (Down)
Previous range: 1.3349 – 1. 3767 (Mixed)

Euro/dollar fell for the fourth consecutive week and reached a two-year low. My model went short and the medium-term bias remains bearish.

Immediate support is between 1.2490 and 1.2500. The next level is 1.2375. Below 1.2245, support comes at 1.2185. Distant support is at 1.1855.

Above 1.2730, resistance is seen at 1.2935. Only a break above 1.3260 would signal a sustained recovery of euro/dollar. Distant resistance is pegged at 1.3885.

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

Dollar/yen
Last week's range: 90.94 – 102.41 (Down)
Previous range: 99.27 – 103.06 (Mixed)

Dollar/yen collapsed to a ten-year low. My model went short last Tuesday (see my Daily report). The medium-term outlook remains bearish even after the pair already reached the target of a head-and-shoulders formation.

Good support is at 92.25. The next level is Friday’s low of 90.94. Further support levels are 88.40 and 84.97.

Immediate resistance is at 94.40. The next level is 95.75. Above 98.13, resistance looms at 100.50. Distant resistance is at 103.00.

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

Sterling/dollar
Last week's range: 1.5269 – 1.7517 (Down)
Previous range: 1.6926 – 1.7630 (Mixed)

Sterling/dollar sank to a six-year low and my model went short.  It recovered most of its losses made on Friday, but the downside remains favored in the medium term.

Immediate support is at 1.5590. The next level is at 1.5269. Below 1.5106, distant support is seen at 1.4555.

Initial resistance is at 1.6040. Above 1.6285, distant resistance is now seen at 1.6800.

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

Dollar/Swiss franc
Last week's range: 1.1327 – 1.1748 (Up)
Previous range: 1.1240 – 1.1490 (Mixed)

Dollar/Swiss climbed to a one-year high and my model went promptly long last Monday. Again, the risk remains on the upside.

Good resistance is pegged at 1.1767. Above 1.1865, the next level comes at 1.2065. Distant resistance is at 1.2240.

Immediate support is at 1.1585. The next level is 1.1500. Below 1.1390, support is seen at 1.1130. Distant support is now pegged at 1.0800.

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

Dollar/Canada
Last week's range: 1.1746 – 1.2842 (Up)
Previous range: 1.1307 – 1.1996 (Up)

Dollar/Canada surged to a four-year high last week and my model remains long. The outlook remains bullish, but a pause is due.

Above 1.2842, resistance comes at 1.2970. The next level is 1.3135. Above 1.3330, distant resistance is perched at 1.3465.

Below 1.2625, support is seen at 1.2435. This is followed by 1.2200. Distant support now comes at 1.1785.

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

Euro/yen
Last week's range: 113.84 – 138.55 (Down)
Previous range: 133.39 – 141.72 (Mixed)

Euro/yen remains weak after plunging to a 6 ½-year low in an unprecedented fashion. The medium-term outlook remains bearish, and my model went promptly short last Tuesday. The short term outlook is bearish.

Immediate support is now seen at 116.75. The next level is 113.84 from Friday’s low. Below 110.50, the next level is 106.40. Distant support is now seen at 99.16.

Initial resistance is at 122.20. Above 127.30 there is another cap at 129.70. The next level is 135.05. Distant resistance is now seen at 141.63.

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

Euro/sterling
Last week's range: 0.7694 – 0.8195 (Up)
Previous range: 0.7735 - 0.7965 (Down)

Euro/sterling closed only slightly higher after retreating in a dramatic fashion from a 12-year high. The initial outlook is slightly bullish, but the cross is in the advanced stages of an expanding triangle.

Above 0.8005, resistance now comes at 0.8069. Strong resistance follows at 0.8195. Further resistance is now seen is at 0.8220.

Initial support is at 0.7905. The next level is 0.7855. This is followed by 0.7800. Distant levels are at 0.7755 and 0.7694.

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

Published on  Wed, Oct 29 2008, 12:00 GMT