Weekly Review and Outlook: Dollar Sold off on GSE Worries, Euro the New Safe Haven?

Market Overview | Written by ActionForex.com | Jul 12 08 14:10 GMT |

It was a rather quiet weak until volatility in the financial markets soared on Friday on concern losses at mortgage lenders Fannie Mae and Freddie Mac may deepen and eventually have them nationalized. Markets are dissatisfied with Treasury Paulson's said the government is supporting the two largest buyers of U.S. home loans in "their current form," hinting that there will be no bailout. Dow was once down as much as 251 points while dollar was sold off across the board, hitting new 25 years low against Aussie. The Japanese and Swiss Franc were also sharply higher on risk aversion. Though, the stock markets and dollar recovered some ground after news that Fed Bernanke will allow the two Government Sponsored Enterprise (GSE) to access the discount window.

In additional, the greenback was additionally pressured by persistent strength in oil prices that made another record high above $147 a barrel on speculation that Israel may attack Iran. Dollar was sharply lower across the board. Meanwhile firstly, note the broad based strength in Euro even against the Japanese yen and Swissy Franc. There could be an outflow of capital from US GSEs and such trend could continue towards the new safe haven Euro. Secondly, note the persistent strength in Aussie which was supported by solid fundamentals as well as strength in commodity prices. Thirdly, Canadian dollar also shrugged off a weak employment report and strengthened in general.

The coming week is extremely busy and based on current sentiments, high volatility is anticipated.

Currency Heat Map Weekly View

	USD	EUR	JPY	GBP	CHF	CAD	AUD
USD
EUR
JPY
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The economic calendar of US was rather light last week. Pending home sales dropped more than expected by -4.7% mom in May. Wholesale inventories rose 0.8%. Jobless claims dropped sharply to 346k. Trade deficit in Jun narrower than expected at -59.8b. Import price index rose 2.0% mom, while export price index rose 1.0% mom in May. U of Michigan consumer sentiments unexpectedly improved to 56.6 in Jul. Bernanke offered nothing new in his testimony. Bernanke urged consolidated supervision of investment banks. On the other hand, Treasury Paulson said financial firms must be allowed to fail.

ECB Trichet said in his testimony before European Parliament that "The annual HICP inflation rate is likely to remain well above the level consistent with price stability for some times, moderating only gradually in 2009," and "risks to price stability remain clearly on the upside and have intensified over recent months." Eurozone Q1 GDP was unexpectedly revised down from 0.7% qoq, 2.1% yoy. Lots of data were released from Germany. Industrial production fell sharply by -2.4% mom in May, with yoy growth slowed to 0.8%, much worse than expectation of 0.4% mom, 3.2% yoy. Trade surplus was at 14.6B in May, lower than expectation of 16.5B on sharper than expected drop in exports by -3.2% mom. Import rose 0.7% mom. Wholesale price index climbed 0.9% mom, 8.9% in June, inline with consensus

BoE left interest rates unchanged at 5.00% as widely expected. No statement was issued and focus will turn to minutes to be released on Jul 23. Halifax house prices dropped more than expected by -2.0% mom, -6.1% in Jul. DCLG house price released earlier slowed from 4.9 to 3.7% yoy growth, but was above expectation of 3.3%. Nationwide consumer confidence tumbled further from 69 to 63 in Jun, missing consensus of 65. Industrial production dropped sharply by -0.8% mom, -1.6% in May. Manufacturing production dropped -0.5% mom, -0.8% yoy in May. Both are first negative annualized growth since last Sep. Trade deficit was wider thane expected in May at -0.7494b.

Swiss unemployment rate dropped slightly to 2.3% in June.

Japanese economic watch DI dropped to 29.5 in Jun, above expectation of 31. Machine orders rose 10.4% mom, 5.1% yoy in May. Domestic CGPI accelerated more than expected from 4.7% yoy to 5.6% yoy in Jun, hitting a 27 year high, driven by surging commodity prices. Trade surplus shrank from 634.7b to 529.4b. Industrial production rose 2.8% mom, 1.1% yoy. capacity utilization rose 2.2% in May. Consumer confidence dropped less than expected to 32.9 in Jun.

It was a busy week in Canada. Employment report disappointed, showing the job markets shrank by -5k in Jun versus expectation of 10k growth. Unemployment rate also unexpectedly climbed from 6.1% to 6.2%. Housing starts dropped from upwardly revised 227.7K to 217.8k, slightly above consensus of 217k. Building permits in Canada showed second months of growth by 1.1% in May. Housing price index was flat in May. Trade surplus came in wider than expected at 5.54b in May.

Aussie was firmly supported after stronger than expected job report. Unemployment rate dropped from 4.3% to 4.2% in Jun. Also, the job market rebounded and showed 29.8k expansion, above consensus of 10k and cancelled out May's unexpected contraction of -25.6k. The job data, which expanded for 19 out of the past 20 months, and last week's strong gain in retail sales, were both showing the underlying robustness in the Aussie economy, particularly so in a climate of significant global uncertainty. The National Australia Bank's index of overall business conditions shed 7 points in June to 0, the worst reading since late 2001. Business confidence dropped further from -4 to -9. Westpac consumer confidence dropped -6.7% in Jul.

The Week Ahead

It's an extremely busy week in the US with highlights on Bernanke's Semiannual Monetary Policy Testimony and FOMC meeting minutes and forecasts. Retail sales is expected to maintain momentum by growing 0.5% mom in June, with ex-auto sales climbing 1.0%. Inflation data will be another focus in early part of the week with PPI featured on Tuesday. CPI will follow on Wednesday, and is expected to show acceleration to 4.5% yoy, with ore CPI unchanged at 2.3% yoy. Empire state index and Philly Fed index are both expected to improve mildly in July. More housing data will be released, including NAHB housing market index and new residential construction which are expected to show further deterioration in the housing markets.

From Eurozone, main focus is on Germany ZEW which is expected to deteriorate further to -55 in Jul. Jun HICP final is expected to be at 4.0% yoy.

Inflation is a main focus in UK, in particular, headline CPI is expected to be unchanged at 3.6% yoy in Jun. PPI will also be featured. Other important focus in UK include Jun employment report.

BoJ is expected to leave rates unchanged at 0.5%. BoC is expected to be on hold at 3.00%. From Australian, main focus will be on RBA minuets to be released on Tuesday. New Zealand Q2 CPI, May retail sales.

EUR/JPY Weekly Outlook

EUR/JPY breaks out of consolidation last week and resumed rise from 151.71 to new record high of 169.62. Initial bias remains on the upside as long as 168.12 minor support holds and further rally should be seen to test 170 psychological resistance first. Break will bring rally to next near term target of 100% projection of 151.71 to 164.97 from 158.60 at 171.86 first. On the downside, below 168.12 will turn intraday outlook neutral.

In the bigger picture, EUR/JPY's break of 168.93 key medium term resistance indicates multi month consolidation that started at 168.93 should have completed. Further rally should now be seen to 61.8% projection of 130.60 to 168.93 from 151.71 at 175.40 first. However, On the downside, however, note that bearish divergence conditions remains in daily MACD, arguing that upside momentum is still not convincing. Break of 166.08 support will argue that EUR/JPY has failed 170 psychological resistance and made a short term top. Deeper decline could the been seen towards 158.60 support or lower.

In the longer term picture, EUR/JPY's long term up trend from 88.97 (00 low) is still in progress and should be targeting next important cluster resistance at 188.22 (50% retracement of 285.56 (79 high) to 88.97 (00 low) at 187.26). Medium term outlook will remain neutral at worst as long as 149.27 medium term support holds.