Weekly Outlook: Focus to Shift from Carry Trade to Inflation Data
Action Insight | Written by ActionForex.com | Mar 10 07 16:28 GMT |
Forex Weekly Review and Outlook Focus to Shift from Carry Trade to Inflation Data
After edging higher initially, both the Japanese yen and Swiss franc cannot hold on to the additional gain and reversed sharply across the board throughout the rest of the week. Dollar rode on additional boost by NFP revision on Friday and extended the rebound against both low yield currencies. Euro and Sterling weakened mildly against dollar too but was comparatively supported by crosses. Also, note that commodity currencies enjoyed a strong rebound to as yen weakened, with Loonies and Kiwi strengthened mildly against dollar indeed. The Yen and Swissy were still the major focus. But such focus could be moving away with some key economic data to be released this week, including inflation data from US, UK and Eurozone.
Prev Week’s High Prev Week’s Low Prev Week’s Close Last Week’s High Last Week’s Low Last Week’s Close Change (pips) Change (%)
EURUSD 1.3257 1.3140 1.3191 1.3211 1.3071 1.3117 -74 -0.56%
GBPUSD 1.9672 1.9410 1.9430 1.9447 1.9182 1.9317 -113 -0.58%
USDCHF 1.2331 1.2141 1.2163 1.2354 1.2106 1.2341 178 1.46%
USDJPY 121.06 116.40 116.77 118.35 115.14 118.29 152 1.30%
USDCAD 1.1775 1.1573 1.1773 1.1825 1.1702 1.1722 -51 -0.43%
AUDUSD 0.7945 0.7811 0.7817 0.7823 0.7678 0.7798 -19 -0.24%
NZDUSD 0.7120 0.6851 0.6871 0.6912 0.6719 0.6904 33 0.48%
EURJPY 159.56 153.58 154.05 155.20 150.73 155.18 113 0.73%
EURGBP 0.6787 0.6699 0.6785 0.6841 0.6776 0.6789 4 0.06%
EURCHF 1.6239 1.6027 1.6048 1.6192 1.5930 1.6192 144 0.90%
GBPJPY 237.83 226.53 226.92 228.70 221.05 228.54 162 0.71%
GBPCHF 2.4216 2.3629 2.3638 2.3875 2.3288 2.3847 209 0.88%
AUDJPY 95.86 91.18 91.26 92.40 88.48 92.26 100 1.10%
NZDJPY 85.78 80.08 80.21 81.73 77.41 81.67 146 1.82%
Data from US was generally disappointing before Friday. Factory orders fell by -5.6% in Jan, the sharpest fall in 6 years. ISM services dropped more than expected from 59.0 to 54.3 in Jan. Pending home sales was dropped further to 108.7k while durable goods order was revised further lower to -8.7% fall in Jan.
Feb Non-farm payroll increase 97k, slightly below expectation. However, Jan’s job growth was strongly revised upward from 111k to 146k. Unemployment dropped from 4.6% to 4.5%. Average earnings also increased more than expected by 0.4% comparing to consensus of 0.3%. Jan trade deficit, released on the same day, also improved more than expected to -$59.1b, back to below -$60b level. Dollar rebounded further against yen and swissy and edged higher against euro on these two solid data. However, since dollar was just steady against sterling, and even weakened against Aussie, Kiwi and Loonies, the strength in USD/JPY and USD/CHF should be more related to closing of yen and swissy long positions on profit taking, rather than dollar’s own strength.
ECB raised rate by 25bps to 3.75% as widely expected. The overall press conference was pretty much the same as before as Trichet emphasized upside risk to inflation in medium term and ECB will monitor very closely all developments and act in a firm and timely manner is warranted. Economic growth forecasts for 2007 and 2008 were revised higher to about 2.5% and 2.4% from about 2.2% and 2.3% but inflation this year is expected to moderate to around 1.8% from 2% before rising again in 2008. After all, ECB is still maintaining a tightening bias and further rate hike is still expected in Q2, probably in June.
However, in the press conference, Trichet changed the wording of describing the rates as “accommodative” to on the “accommodative side”. Also, rates was described by Trichet as “moderate” rather than “low”. This prompted speculation that ECB’s interest rate is now near to “neutral” and the tightening cycle is now closer to an end. Euro was pressured against dollar and sterling since then. But Euro still rode on weakness in yen and swissy and rebounded strongly in respective crosses.
The Japanese yen had a volatile week moving in strong correlation with worlds stock markets. The yen surged sharply on Monday as stock continued to tumble but reversed since that as stock markets stabilized and rebounded.
BoE kept rate unchanged at 5.25% as widely expected and was basically a non-event. Data from UK were on the weaker side with Services PMI dropped more than expected to 57.4. Industrial production and manufacturing production also missed expectation.
BoC kept rate unchanged at 4.25% as widely expected. Loonies staged an impressive rebound on Friday after better than expected job report with unemployment rate falling from 6.2% to 6.1%. RBA kept rate unchanged at 6.25%. Aussie was supported by stronger than expected Q4 GDP that grew 1.0% qoq, 2.8% yoy versus expectation of 0.5% and 2.0%. RBNZ hike rates by 25bps to 7.5% and was pressured after a less hawkish than expected statement. However, all three commodity currencies rebounded strongly towards the end as yen weakens across the board.
Suggested Readings:
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_weekly_reports/fx_briefing%3a_turmoil_subsides_2007030918480/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_fundamental_analysis_reports/is_the_carry_trade_liquidation_over?_2007030618313/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_weekly_reports/fx_crossroads%3a_carry_trade_unwinds_-_a_history_lesson_2007030718346/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_fundamental_analysis_reports/currency_currents_-_carry-trade_players_say%3a_%27don%27t_worry_be_happy%27_but_we_know_better_2007030918456/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_fundamental_analysis_reports/employment%3a_three_distinct_views_of_the_economy_2007030918495/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_fundamental_analysis_reports/economic_indicators%3a_trade_deficit_narrowed_in_january_2007030918493/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_fundamental_analysis_reports/ecb_suggests_it_is_not_finished_yet%2c_but_peak_in_rates_may_be_coming_closer_2007030918449/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_fundamental_analysis_reports/rbnz_ocr_review%3a_more_to_come?_2007030718370/ The Week Ahead
After dominating the forex markets for two weeks, we believe focus will be shifting away from carry trades and risk aversion this week as some important economic indicators are scheduled to release in major countries.
From US, retail sales, PPI, CPI will be closely watched together with current account, import/export prices, Empire State index, TICs capital flow, Philly Fed index and industrial production featured. From Eurozone, main focus will be on Germany ZEW and final Feb Eurozone HICP. UK PPI and employment report will also be closely watched. Lots of data will be released from Japan including Q4 GDP revision, trade balance, export/import prices, domestic CGPI, consumer confidence, industrial production and tertiary industry index. SNB is expected to raise rate by 0.25% to 2.25%.
Suggested Readings:
- http://www.actionforex.com/forex_analysis_and_forecasts/economic_calendar/summary_3%1011_-_3%1016_2007030918498/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_weekly_reports/weekly_economic_and_financial_commentary_2007030918497/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_weekly_reports/weekly_focus%3a_and_if_the_turmoil_continues%2c_what_then?_2007030918490/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_weekly_reports/economic_outlook%3a_recession_is_not_the_main_scenario_2007030918464/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_technical_analysis_reports/%24_index%2c_chance_to_resell?_2007030918482/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_weekly_reports/eurgbp_-_correcting_lower_then_much_higher_2007030918492/ EUR/USD
After extending the correction from 1.3258 to 1.3070, EUR/USD was supported by mentioned cluster support of 1.3078 support (50% retracement of 1.2911 to 1.3258 at 1.3085) and attempted a rebound. However, such rebound from 1.3070 was limited by 61.8% retracement of 1.3258 to 1.3070 at 1.3186 and EUR/USD weakened towards the end of the week to as low as 1.3086. From a short term angle, as EUR/USD is still bounded in established range of 1.3070, 1.3258, we’re still left with two possible scenarios.
As discussed before, EUR/USD’s rise from 1.2865 has made a top at 1.3258 with bearish divergence condition in 4 hours MACD and RSI and after such rise is limited by 78.6% retracement of 1.3364 to 1.2865 at 1.3257. And as long as 1.3070/85 cluster support holds, subsequent price actions from 1.3258 could be developing into sideway consolidation only. However, a firm break above 1.3258 cluster resistance is needed to confirm that rise from 1.2865 has resumed for 1.3296 resistance. Otherwise, consolidation could still extend further.
On the downside, sustained break of 1.3070 cluster support will complete a short term head and shoulder top (ls: 1.3187, h: 1.3258, rs: 1.3185). Being a reliable reversal pattern, this will strongly suggest that the whole rise from 1.2865 has already completed. Deeper decline should be seen towards 100% projection of 1.3258 to 1.3070 from 1.3185 at 1.2997 and then 1.2939 support.
In the bigger picture, the corrective fall from 1.3364 has completed with three waves down to 1.2865. With EUR/USD staying within medium term rising channel (lower channel line at 1.2851 now), medium term up trend from 1.1639 is still in progress. Current rally is being treated as resumption of this up trend. Break of 1.3296 resistance will add more credence to this view and should push EUR/USD to a new high above 1.3364.
However, sustained break of mentioned 1.3070 support dampen this view and suggest that rebound from 1.2865 is indeed a correction to the fall from 1.3364 only. Further break of 1.2939 support will add more weight to this case and push the rising channel line back into focus again.
In the longer term picture, it’s still early to conclude whether medium term rally from 1.1639 represents resumption of multi-year up trend from 0.8223 or just part of a large scale consolidation that started at 1.3668. But, the three wave corrective nature of the rise from 1.1639 to 1.2978 suggest that this whole rally from 1.1639 will be corrective in nature, thus, favoring the latter case. And therefore, focus will be on reversal signal when EUR/USD enter into resistance zone of 1.3668 (04 high) and 100% projection of 1.1639 to 1.2978 from 1.2483 at 1.3822.
GBP/USD
Cable extended weakness to as low as 1.9183 initially last week but failed to stay firmly below mentioned 1.9237/61 cluster support (23.6% retracement of 1.7047 to 1.9913 at 1.9237). Cable then turned into sideway consolidation in tight range for the rest of the week. Despite dollar’s late strength, cable was supported by strength in crosses.
Outlook in cable remains basically unchanged. The rise from 1.8517 has already made a top at 1.9913. and subsequent fall from there remains in force. Short term outlook remains bearish as long as cable current recovery from 1.9183 is limited by 1.9412 resistance. Below 1.9183 will encourage further decline to 100% projection of 1.9913 to 1.9400 from 1.9672 at 1.9159. However, break of 1.9412 will warn that the whole correction from 1.9913 has completed and will put 1.9672 resistance into focus.
In the bigger picture, bearish divergence conditions are being displayed in weekly RSI, daily MACD and RSI already, suggesting that the whole up trend from 1.7047 might have completed before reaching mentioned 2.0106 cluster resistance (1992 high, 100% projection of 17047 to 1.9024 from 1.8090 at 2.0067). Focus is still on support zone between 23.6% retracement of 1.7047 to 1.9913 at 1.9237 and 100% projection of 1.9913 to 1.9400 from 1.9672 at 1.9159. Decisive break of this support zone will add much weight to the case that whole medium term up trend from 1.7047 has already completed and much deeper decline should be seen towards next cluster support at 1.8834 (38.2% retracement of 1.7047 to 1.9913 at 1.8818) first.
However, strong rebound from 1.9159/9237 support zone or break of 1.9672 resistance will indicate that the corrective fall from 1.9913 is merely correction to the rise from 1.8517 only and cable could make another high above 1.9913 and attempt to meeting 2.0106 cluster resistance before having a medium term reversal.
In the longer term picture, the break above 1.9554 resistance (04 high) is favoring the case that long term up trend from 1.3680 has resumed after correction from 1.9554 was supported by 55 months EMA. However the structure of the medium term rise from 1.7047 is not clearly supporting this yet. And, we’re still skeptical on it. The structure of the fall after finishing the current up trend from 1.7047 should reveal more information.
USD/CHF
USD/CHF’s initial fall last week was contained at 1.2108, supported by 1.2111 support level and continued head higher since then. Friday’s sharp rally has taken out short term falling trend line (1.2550 to 1.2436, now at 1.2276). And more importantly, such rebound should have completed a short term head and shoulder bottom formation (ls: 1.2142, h: 1.2108, rs: 1.2157). Plus, breaking of previous week’s high has also completed a single week reversal. Such development, confirmed that the fall from 1.2571 has completed at 1.2108 and hence further strength should be seen in short term. However, medium term outlook is turned mixed.
From a short term angle, further rally is now expected to be seen towards next cluster resistance of 1.2393/94 (61.8% retracement of 1.2571 to 1.2108 at 1.2394 and 161.8% projection of 1.2108 to 1.2254 from 1.2157 at 1.2393). Meanwhile, a break below 1.2255 support is needed to indicate rise from 1.2108 has completed and bring deeper decline. Otherwise, further rise is still in favor.
In the bigger picture, sustained break of 1.2393/94 cluster resistance will indicate that rally from 1.2108 should be of impulsive nature and thus favor the case that it should represent resumption of whole rise from 1.1878 after correction from 1.2571 has completed at 1.2108. In such case, focus will be back to medium term falling trend line (1.3283 to 1.2760, now at 1.2468) and 1.2571 high. Firm break of these levels will encourage firm rally towards 1.2768 cluster resistance (61.8% of 1.3283 to 1.1878 at 1.2746).
However, one must note that weekly MACD is still negative and USD/CHF is still being kept below mentioned medium term falling trend line and 55 weeks EMA (now at 1.2437). Hence, further medium term weakness could still be seen. In particular, sharp bounce off from mentioned 1.2393/94 cluster resistance or break of 1.2255 support will argue that whole rebound from 1.2108 has completed and put focus back to this low first.
USD/JPY
USD/JPY’s sharp fall from 121.61 extended further to 115.13 last week initially but downside was contained there. Subsequent rebound has accelerated towards the end of the week and USD/JPY has risen to as high as 118.37 to close the week strongly. From a short term angle, break of 117.80 resistance confirm a short term low is already made at 115.13 and hence further rebound should be seen towards 61.8% retracement of 122.17 to 155.13 at 119.48 as long as USD/JPY stays above 117.18 support.
In the bigger picture, our view remains unchanged even though the current rebound is stronger than we expected. Previous break of medium term rising channel support (108.99, 114.41, 117.87) indicates the whole up trend from 108.99 has completed at 122.17. Weekly MACD’s stay below signal line is still supporting this. The corrective nature of the rise from 108.99 swings favors back to the case that such medium term rally is merely part of a large scale consolidation that started at 121.38, with first leg completed at 108.99 and second leg completed at 122.17. The fall from 121.17 should then the third leg of such consolidation and deeper decline should at least be seen to below 114.02/41 support zone (61.8% retracement of 108.99 to 122.17 at 114.02) first with much possibility of further fall to retest 108.99 low.
Hence, we’ll pay close attention to short term reversal signal as USD/JPY approaches 119.48 fibo resistance. But still, clear reversal pattern needs to be formed or a break below 116.88 resistance turned support is needed to indicate the completion of rebound from 115.13 first. Otherwise, further rise cannot be ruled out.
On the upside, decisive break of 119.48 fibo resistance will argue that the price actions from 122.17 is developing into large range consolidation instead. A retest of 122.17 high could be seen in such case. But still, firm break above this resistance is needed to confirm medium term rally from 108.99 has resumed. Otherwise, medium term outlook will be neutral at best.
EUR/JPY
EUR/JPY’s fall from 159.63 extended further to 150.75 initially but was supported by mentioned 38.2% retracement of 137.16 to 159.63 at 151.05) and lower channel line (143.60 to 159.63, 137.16, now at 150.89) as expected. Subsequent rebound has brought EUR/JPY to as high as 155.19, touching mentioned 155.19 cluster resistance (50% retracement of 159.63 to 150.75 at 155.19).
Initial bias this week remains on the upside and further rally is still in favor. Firm break of 155.19 cluster resistance (50% retracement of 159.63 to 150.75 at 155.19) will confirm the whole fall from 159.63 has completed and should bring stronger rise to retest 159.53 high. Touching of 154.13 minor support will turn intraday outlook consolidative. But further rise is still in favor as long as downside of such consolidation is contained above 152.23 support.
In the bigger picture, we’re treating the whole year long rise from 130.60 as resumption of the long term up trend with first wave ended at 143.60, subsequent correction ended at 137.167. The third wave up could have ended at 159.63 already after meeting 161.8% projection of 130.60 to 143.60 from 137.16 at 158.19. Fall from 159.63 should represent the fourth wave correction and has already met it’s target. Strong rebound from the channel line is so far consistent with this view. After 155.19 is taken out, retest of 159.63 high should be seen and EUR/JPY should make a new high before finally forming a medium term top.
However, below 152.23 will indicate the rebound from 150.35 has likely complete and put the channel support back into focus. Sustained break of the channel will dampen this view and suggest that much deeper decline is underway towards 147.71 support first.