| Market Overview | Written by ActionForex.com | Sep 21 08 11:25 GMT | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Weekly Review and Outlook
All financial markets around the world were rocked by the financial tsunami last week which started with Lehman Brother announcing bankruptcy and Merrill lynch selling to Bank of America. Panic in the markets reached a climax after AIG's bailout failed to restore confidence. Dow once had the sharpest fall since 2001 and dived to 11459 level. Yield on three-months US T-bills dropped to near 0% as investors flocked to the safest short-term assets. Dollar yen tumbled to as low as 103.54. Gold, on the other hand, soared to as high as 926 on safe haven buying. Crude oil dropped to near to $90 level. However, markets' sentiment had a drastic turn following coordinated actions from world's major central banks to almost quadruple the fund injected to the financial markets from $67b to $247b. Risk appetite came back with the sharpest two days rally in stocks since 1987 following US government's bank $700b bank rescue bank and rule to limit short selling in financial stocks. Yen crosses were sharply higher as carry trades returned and the greenback was generally lower across the board. Crude oil, on the other hand, bounced back to above 100 on hope of improved economic outlook. So, after all the events, how's the forex markets different from a week ago? Firstly, dollar index's high of 80.38 made on Sep 11 is confirmed to be a short term top. More pull back is now expected to be seen probably to 75.84 level. That is, the greenback should be generally weak in short term. Such weakness should be apparent against higher yield currencies and commodity currencies, in particular against Aussie, Kiwi, Sterling and also against Euro and probably Canadian dollar too. Secondly, rebound in yen crosses is expected to extend further after making a short term bottom last week. Further upside are expected to be seen, in particular in AUD/JPY, NZD/JPY and GBP/JPY. USD/JPY and USD/CHF will like remains mixed as weakness on both sides counter each other. Thirdly, Gold's strong rebound indicates that medium term correction from 1033 level should have already completed and more upside is expected in gold in short term. This is consistent with the short term dollar bearish view as well as the carry trade return view. But after all, there is no change in the medium term dollar and yen bullish view yet and markets are expected to resume prior dollar and yen up trend after the current corrections complete. Though, the key factors to pay attention will likely be the development in both the stock markets and oil. DOW's rebound, though strong, is still limited by 11867 key near term resistance. Meanwhile, crude oil is also limited below 111/122 resistance zone. Markets will likely resume to it's prior state once rebound in DOW and oil completes. But Dow's break of 11867 and oil's break of 122 will serve as important evidence that markets' sentiment has turned and will dampen the dollar and yen medium term bullish view.
Fed left the federal funds rates unchanged at 2.00%. The more important point to note is that this decision was done by the first unanimous vote in nearly a year. Fisher, who dissented by preferring a hike last time, also voted for no change. in the accompanying statement, Fed acknowledged that "strains in financial markets have increased significantly and labor markets have weakened further." Several factors, including tight credit conditions, ongoing housing contraction and slowing in export growth will "weigh on economic growth" over the "next few quarters". But the fed is still confident that the "substantial easing" and "measures to foster market liquidity" will promote moderate economic growth. Regarding inflation, Fed expects inflation to moderate later this year and next even though outlook remains highly "uncertain". US headline CPI unexpectedly dropped -0.1% mom in Aug. Yoy rate moderated more than expected from 5.6% to 5.4%. Though, core CPI climbed 0.2% mom with yoy rate up from 2.5% to 2.6%. TIC capital flow dropped sharply from 53.4b to 6.1b in Jul. Current account deficit widened to -183.1b in Q2. Jobless claims climbed to 455k. Empire state manufacturing index dropped sharply to -7.4 in Sep. Philly Fed survey surprised on the upside by turning positive to 3.8 in Sep. Industrial production dropped more than expected by -1.1% mom in Aug. Leading indicators dropped more than expected by -0.5% in Aug. NAHB housing markets index recovered more than expected to 18 in Sep. Building permits in US dropped much more than expected by -8.9% to 0.85m in Aug, housing starts dropped -6.2% to 0.89m. Eurozone Q2 labor costs rose 2.7%, below consensus of 2.5%. Final HICP is confirmed to be 3.8% yoy in Aug. Improvement in Germany and Eurozone ZEW economic sentiment were much stronger than expected from -55.5 to -41.1 and -55.7 to -4.09 in Sep respectively. Trade deficit widened to -2.3b in Jul. BoE minutes surprised the markets by revealing a two way split of votes, with ultradove Blanchflower voted for a 50bps cut and no one voted for a hike. In his letter to Chancellor Darling, BoE Governor King explained why the bank fails to bring down inflation and noted that "muted economic growth is necessary to dampen pressures on price and wages". He expects CPI to "peak soon at around 5%". Inflation data from UK showed CPI climbed more than expected to record high of 4.7% yoy in Aug. Though, RPI and RPI-X moderated from 5.00% to 4.8% and from 5.4% to 5.2% yoy respectively. In Aug, claimant count climbed further to 2.8%, jumped sharply to 32.5K versus expectation of 22.3k. Unemployment rate in Jul also rose to 5.5% versus consensus of 5.4%. CBI industrial trend survey came in much worse than expected at -26. Retail sales was surprisingly strong, rising 1.2% mom in Aug comparing to expectation of -0.5%. Yoy rate jumped to 3.3%. Swiss trade surplus narrowed less than expected to 1.43b. SNB left three-month Libor unchanged at 2.25-3.25%, mid point at 2.75% as widely expected. Swiss combined PPI moderated from 4.9% to 4.0% yoy in Aug. Swiss retail sales jumped 6.2%. ZEW improved from -79.6 to -44.4 in Sep. BoJ left rates unchanged at 0.5% as widely expected. In the accompanying statement, BoJ noted that energy prices and weak experts is keeping the economy sluggish but growth will return to a moderate path once commodity price stabilize and global economies improve. Inflation will remain high for months before moderating. Canadian leading indicators rose 0.3% in Aug. Wholesale sales rose 2.3% mom in Jul. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The Week Ahead
Economic data will like remain in the back seat this week and intermarket relationship will continue to be dominant in driving movements in the FX markets. As mentioned above one of the key factors to look at is whether DOW will break 11867 level which will raise the odds that correction from last year's high of 14198 has made a medium term bottom. In such case, even stronger rebound will be seen in yen crosses which in turn will give dollar some more pressure. Gold already took the lead last week and confirming the completion of correction from1033 and further strength will also pressure the greenback too. Also, focus will be on whether crude oil will take out 111/122 key short term resistance zone. These developments will have important implications on whether dollar's and yen's medium term rebound has totally finished.
From US existing home sales and new home sales, durable goods orders , Q2 GDP final will be released. Germany Ifo, Gfk and Sep Eurozone PMIs will be main focus in Eurozone. It will be a big week in Canada with retail sales and CPI featured. Other important economic data include Japan AUg CPI and New Zealand Q2 GDP.
GBP/JPY Weekly Outlook
GBP/JPY's strong rebound from 184.47 and break of 193.77 resistance indicates that a short term bottom is finally formed with bullish convergence condition in 4 hours MACD and RSI. Further corrective rebound is expected this week, towards 202.50/206.51 resistance zone. Nevertheless, upside should be limited there and bring down trend resumption. On the downside, below 189.72 will indicate that rebound from 184.47 has completed and should bring retest of this low.
In the bigger picture, whole down trend from 251.09 has resumed after corrective rebound from 192.60 was limited at 215.87 by 55 weeks EMA. Such decline is expected to extend further to 61.8% projection of 251.09 to 192.60 from 215.87 at 179.72 (close to 180 psychological support) first. While some rebound should be seen in near term, medium term outlook will remain bearish as long as 215.87 resistance holds.
In the longer term picture, whole up trend from 148.19 have ended at 251.09 already. At the moment, the favored case is that price actions from 129.32 (95 low) has completed a three wave consolidation up to 251.09. Hence, the downtrend from 251.09 is in favor to extend further at least to long term rising trend line support (now at 175.94). Based on the structure of the current fall from 251.09, it's likely that such decline will extend further to test 148.19 low.
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