| Market Overview | Written by ActionForex.com | Oct 18 08 22:41 GMT | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The forex markets stabilized last week after world leaders' pledges were followed by solid action plans. The fear of breakdown of the financial markets receded. However, such fear was replaced by the worry of deepening recession in the world economy, in particular after a string of poor economic data were released from the US. Rebound in the stock markets was strong but brief. Dollar and yen retreated but were both supported above key near term levels. The forex markets turned into a consolidation phase and will probably stay there for a while but there is no change in the medium term bullish outlook in dollar and yen yet. As pointed out during the week, the forex markets is closely correlated to the stock markets recently and will continue to remain so. DOW's rebound might be strong but the scale of the prior fall should be taken into perspective when considering the strength of the rebound. Last week's high in DOW was 9,794 and it was still limited below 50% retracement of the near term sharp decline from of 11,867 to 7,884 at 9,876. The current volatile price actions indicate that DOW merely developing into some sideway consolidation pattern, probably a triangle and thus, the down trend is not finished. Similar development will likely be seen in the forex markets too with dollar and yen pairs continuing to consolidate in near term. The rally in dollar and yen will likely resume as DOW breaks out. Looking ahead, two central banks, BoC and RBNZ are expected to cut rates again this week. Bernanke's testimony and BoE minutes will be closely watched as usual. Inflation data from Australia, New Zealand and Canada will be released but will probably have little impact to the markets. Focus will likely be on growth data including PMIs from Eurozone as well as retail sales and Q3 GDP in UK which would probably further solidify the case that the downturn in the global economy is accelerating. But again, the development in the stock markets will have the largest impact in the forex markets as the correlation continues.
Before last week started, European leaders announced a rescue plan that includes state guarantees on bank debts until the end of 2009 with maturities up to five years. The governments are allowed to recapitalize financial institutions by buying bank stakes with preference shares or other instruments. ECB also pledged to look at enlarging access to the system of guarantees to include commercial paper even though it doesn't have the legal power to do so yet. Germany later passed the bank rescue package which includes up to 400b euros in bank guarantees, 5% provision of losses and recapitalization funds up to 80b euros. France will create an entity to assist banks and guarantee limit will be up to 320b euros. Austria implemented a 100b euros rescue plan which provides support to the banking system mainly via guarantees while the government is also allowed to buy shares in Austrian banks. US government follows similar moves in Europe and said it will spend $250b into financial institutions. About half will be used to buy preferred shares of nine of the largest banks including Citigroup, Goldman Sachs, Wells Fargo, JPMorgan Chase, Bank of America, Merrill Lynch, Morgan Stanley, State Street Corp and Bank of New York Mellon group. Another $125b will be used to recapitalize probably thousands of other financial institutions in the country. FDIC will begin guaranteeing most new debts and offer insurance on non-interest bearing accounts used by small business for payrolls. Fed also announced to buy commercial paper on Oct 27. In addition, Fed said that ECB, BoE and SNB will conduct dollar auctions at maturities of 7, 28, 84 days at a fixed interest rate to offer financial institutions unlimited funds in response to demand on dollar loans. UK Government will invest 37B pounds in banks, including RBS, HBOS and Lloyds TSB, to boost their so called Tier One capital ratio to more than 9%. BoE also announced to implement three major reforms to improved market operations. Standing Facilities will be replaced by Operational Standing Facilities starting Oct 20 to "absorb technical problems and imbalances" in money market operations. There will be a discount window facility established that would allow banks to borrow from the government to improve liquidity to commercial banks. A permanent long-term refi open market operations against a wider range of collateral classes will be introduced. SNB extended a maximum of $54b in loans to take over illiquid assets fro UBS so that Switzerland will be able to "weather the economic difficulties" as a result of global economic slowdown. Australian government said it will guarantee all deposit with financial institutions for the next three years and all "term wholesale funding" by Australian banks operating in international credit markets. New Zealand government said it will guarantee retail deposits in New Zealand-registered banks, building societies, credit unions and deposit taking finance companies. BoJ held an unscheduled meeting and decided to leave benchmark interest rate unchanged at 0.5%. Several initiatives were announced to stabilize the Japanese financial markets. The first measure aims at improving liquidity in JGB Repo market as the bank announced it will add floating-rate JGBs, inflation-indexed JGBs and 30yr government bonds to the repo operation. Also, BoJ will lower minimum fee rates applied to the Security Lending Facility from 1% to 0.5% and extend the period of relaxation. Thirdly, the bank will increase the frequency and size of Commercial Paper Repo operations which was previously done on a quarterly basis. Economic data from the US were generally poor. Indeed, Bernanke warned that the turmoil in the financial markets poses a "significant threat" to growth. Recovery is not imminent and will take time. He said that "stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away." Fed's Beige Book confirmed that there is a widespread slowdown in the US economy. All districts reported tighter credit. Several districts noted that lenders had become highly cautious and conservative. Most districts reported declines in consumer spending as consumers turn focus to necessities. Assessment on labor markets remained pessimistic. Manufacturing is still declining in most districts. Headline retail sales dropped much more than expected by -1.2% mom in Sep versus consensus of -0.7%. Ex-auto sales dropped -0.6%, doubled consensus of -0.3%. Empire state manufacturing index deteriorated much more than expected to -24.6. Philly Fed index dropped sharply to -37.5 in Oct. Industrial production dropped sharply by -2.8% mom in Sep, largest fall since 1974, while capacity utilization dropped more than expected to 76.4%. Headline PPI moderated to 8.7% yoy while core PPI climbed to 4.0% yoy. CPI was unexpectedly flat in Sep with yoy rate moderated more than expected to 4.9%. Core CPI was unchanged at 2.5% yoy as expected. TIC capital flow dropped to 14b. Jobless claims dropped to 461k. NAHB home builder confidence index three points to an all time low of 14 last month. Housing starts dropped by -6.3% to 26 years low of 0.82m annualized rate in Sep. Building permits dropped by -8.3% to 27 years low of 0.786m annualized rate. Preliminary reading of U of Michigan consumer sentiments tumbled sharply to 57.5 in Sep. Eurozone inflationary pressures are easing. Data showed HICP in Sep confirmed to have moderated to 3.6% yoy. Germany ZEW economic sentiment deteriorated to -63 in Oct. Eurozone ZEW economic sentiment also deteriorated to -62.7. UK PPI input slowed to 24.5% yoy versus expectation of 19.8%. PPI output slowed to 8.5% yoy comparing to expectation of 8.8%. Core PPI slowed to 5.4% yoy versus consensus of 6.0%. CPI accelerated faster than expected to 5.2% yoy in Sep, with core CPI climbed to 2.2% yoy. DCLG house prices dropped more than expected by -3.4% yoy. RICS house prices balance dropped from -82% to -84%. BRC retail sales showed -1.5% fall in Sep. Jobless claims rose for the eighth consecutive month and pushed claimant count to 2.9% in Sep. Unemployment rate also rose more than expected to 5.7% in Aug. Swiss retail sales was flat yoy in Aug. ZEW economic expectation deteriorated sharply to record low of -91.1 in Oct. Combined PPI dropped more than expected by -0.5% mom in Sep, yoy rate moderated to 3.7% versus expectation of 3.9%. Japanese domestic CGPI dropped -0.4% mom in Se with yoy rate down from 7.2% to 6.8%. Consumer confidence unexpectedly improved to 31.8 in Sep. Trade deficit came in larger than expected at -236b yen. Industrial production dropped -3.5% mom, -6.9% yoy in Aug. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The Week Ahead
Bank of Canada and Reserve Bank of New Zealand are both expected to cut interest rates again this week. BoC is expected to cut 50bps to 2.0% while RBNZ is expected to cut 1% to 6.5%. BoE minutes will be featured and should show unanimous vote for the coordinated global 50bps cut earlier this month. Bernanke's will testify at House Budget Committee on Economy on Monday.
The economic calendar in US is pretty light next week. Economic data include leading indicators, house price index and existing home sales. From Eurozone, main focus is on manufacturing and services PMI. UK Q3 GDP and Sep retail sales will be released. Australian PPI and CPI, New Zealand CPI and Canadian retail sales, CPI will also be released.
Note that firstly, inflation are now a lesser threat that recession in the world economy, in particular after commodity prices tumbled in the past few months. Hence, the CPI data will have much less impact to the markets. Secondly, further down side is still expected in the global stock markets which will, in turn, trigger rally in dollar and yen. Though, it could either be European led or US led. And hence, close attention will be paid to growth data from Eurozone and UK which could trigger much volatility in the stock markets as well as the forex markets.
AUD/USD Weekly Outlook
AUD/USD was bounded in consolidation between 0.6330 and 0.7237 last week and such choppy consolidation might continue further. Above 0.7076 will argue that rebound from 0.6330 is extending further to 0.7237 and above. However, upside is expected to be limited below 0.7674/83 cluster resistance (61.8% retracement of 0.8519 to 0.6330 at 0.7683, 38.2% retracement of 0.9849 to 0.6330 at 0.7674) and bring down trend resumption. On the downside, below 0.6495 will bring retest of 0.6330 low and break will confirm that recent down trend has resumed for next long term fibonacci support at 76.4% retracement of 0.4773 to 0.9849 at 0.5971.
In the bigger picture, the strength of the fall from 0.9849 strongly suggests that it's developing into an impulsive fall in at least the same degree as the up trend from 0.4773 to 0.9849. The current interpretation is that first wave of such fall has completed at 0.7802. Second wave correction has completed at 0.8519 and fall from there should represents the third wave decline. In other words, AUD/USD is probably in the middle of such decline only. Any interim correction should be limited below 0.7802 support turned resistance and bring down trend resumption.
In the longer term picture, a long term top is in place at 0.9849 with bearish divergence condition in monthly MACD and RSI. Considering the corrective three wave structure of the multi year up trend from 0.4773 to 0.9849 and the impulsive nature of the fall from 0.9849, the long term down trend could be resuming. Having said that, while some interim medium term consolidation could be seen, the fall from 0.9849 is in favor to extend to retest 0.4773 low at least.
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