A couple of important developments were seen in the forex markets last week, including broad based rally in dollar, rebound in yen as well as the sharp deterioration in sentiments towards the Australian dollar. Dollar was supported by further decline in commodity prices as well as the view that economic slowdown in other major economies of the world could be deeper than markets originally expected. Technically speaking, the fall in EUR/USD and AUD/USD took out some important near term support levels, indicating that both pairs have already topped out at least in near term. The development aligned the generally dollar bullish outlook with other dollar majors including USD/CHF, USD/JPY and USD/CAD. The case of more medium term rebound in the greenback has become more solid.
The Japanese yen rebounded broadly last week, with support from massive reduction in carry trades in commodity yen crosses including AUD/JPY and NZD/JPY. Note that all of USD/JPY, EUR/JPY and GBP/JPY gave up more gains ahead of key medium term resistance levels, 108.58 in USD/JPY, 170 in EUR/JPY and 216.14 in GBP/JPY. While a short term top is in place in EUR/JPY, USD/JPY and GBP/JPY, there is no indicate of reversal in these crosses yet. The development in the coming weeks, in particular in commodity yen crosses, will be important to determine whether these yen crosses have topped out in medium term.
Sentiments towards the Australian dollar continued to deteriorate last week. Aussie took Kiwi's place as the biggest mover last week with AUD/JPY and AUD/USD falling around 3%. The surprised drop in retail sales and weakness in manufacturing data prompted speculations that RBA has overdone it's tightening to fight inflation and prior rate hikes are starting to drag down the economy, in much quicker way then RBA thought. According to Credit Suisse Group index based on interest-rate swaps, traders are betting that RBA will lower interest rates by 75bps in the next 12 months. Technical development in AUD/USD and AUD/JPY were also important. AUD/USD has taken out a medium term trend line support and completed a medium term rising wedge formation. AUD/JPY has taken out 100.21 key structural support and dipped briefly below 100 level with daily MACD now turned negative. Both are pointing to the case that at least a medium term top is in place. The Aussie is expected to remain under pressure.
Central bank meetings will take center stage this week. While the all of Fed, ECB, BoE and RBA are expected to be on hold, it's the message that these central banks deliver that's important, in particular in this period of a possible major turn around in the markets. Markets will continue to scrutinize every word from the Fed on the hints on when Fed will remove prior policy easing to fight inflation. ECB Trichet will be carefully listened to on comments on the slowdown in the economy in Eurozone. Meanwhile, RBA will be watched for any evidence that RBA would think it overshoot it's policy tightening cycle.
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On the data front, US Q2 GDP missed expectation and grew at 1.9% annualized rate. GDP price index rose much less than expected at 1.1%. Personal consumption grew 1.5% while PCE core was also below expecting, growing 2.1%. Q1 GDP growth was revised down from 1.0% to 0.9% and more importantly, Q4 growth was revised downward to -0.2% contraction, first negative reading since Sep 2001.
Non-farm payroll report showed -51k contraction in Jul, better than expectation of -75k. Prior month's NFP number was also revised up from -62k to -51k. Though, note that this was still the seven consecutive number of negative reading in NFP. Also, unemployment rate climbed more than expected from 5.5% to 5.7%, hitting a 4 year high. Jobless claims surged sharply to 448k. Conference Board Consumer Confidence unexpectedly improved to 51.9 in Jul
ISM manufacturing index dropped less than expected from 50.2 to 50.0 in Jul. Chicago PMI was back above 50 at 50.8 in Jul, beating expectation of 49.0.
S&P/CaseShiller Composite-20 showed -15.8% yoy drop in May, down from prior -15.3% but was above expectation of -16.0%. Construction spending dropped more than expected by -0.4% in Jun.
Data showed sharp deterioration in Eurozone sentiments. Business climate dropped sharply to -0.21 in Jul. Economic sentiment dropped to 89.5. Consumer confidence deteriorated to -20. All are below markets' consensus expectation. Unemployment rate climbed from 7.2% to 7.3% in Jun. Eurozone Manufacturing PMI was revised slightly lower to 47.5. in Jul. Eurozone Jul HICP flash showed inflation climbed to 16 years high of 4.1% yoy. Germany retail sales showed -1.4% mom, -3.9% yoy fall in Jun, much worse than expectation of -0.5% mom, -0.8% yoy. Gfk consumer confidence dropped to five year low of 2.1
UK CBI's industrial trades survey showed that 61% of respondents to the Distributive Trades Survey reported that sales in first half of July were lower than a year ago. Only 25% said sales had increased. That left the balance to -36%, which is the weakest record since the study started 25 years ago. Gfk consumer confidence dropping to record low of -39 in Jul. UK manufacturing PMI fell to nearly 10 years low of 44.3 in Jul, below expectation of 45.5. Nationwide house priced dropped more than expected by -1.7% mom, -8.1% yoy in Jul. Mortgage approvals dropped to 36k in May, which was also the lest level since at least 1999.
Swiss KOF leading indicators came in below expectation at 0.9 in Jul. CPI came in stronger than expected at 3.1% yoy in Jul.
Japanese unemployment rate unexpectedly climbed from 4.0% to 4.1% in Jun. Household spending dropped -1.8% yoy in Jun, better than expectation of -2.8%. Retail sales dropped -0.5% mom, -0.2% yoy. Industrial production dropped -2.0% mom, -0.2% yoy in Jun. Manufacturing PMI improved from 46.5 in Jul, housing started dropped -16.7% yoy in Jun with construction orders dropped -11.7%.
Australia trade balance unexpectedly showed 411M surplus in Jul. Retail sales missed expectation and dropped -1.0% mom in Jul.
Canadian GDP unexpectedly contracted by -0.1% mom in May. PPI climbed 1.3% mom in Jul vs consensus of 1.0%.
New Zealand trade deficit widened less than expected to -233M in Jun.
Suggested Readings:
The Week Ahead
Rebounding dollar, weakness in Australian dollar and possible topping in yen crosses will remain the main focus in the markets this week. In particular, markets will pay close attention to the four major central banks meetings, Fed, ECB, BoE and RBA. All are expected to be on hold.
FOMC statement will be important in determining when Fed will start removing prior policy easing to fight inflation. Odds of a Fed hike by year end has dropped to around 60% recently but such expectation could change if Fed sounds more confident on growth and alerted on inflation.
Trichet's post ECB conference will also be catch all attention. The picture is Euro is a bit tricky with inflation hitting a 16 year high but sharply deteriorating sentiments and growth prospect. Opinions are divided on what the next move from ECB will be with mild speculation of the possibility of a hike. That's keeping Euro relatively firmer among the major currencies. However, should Trichet sound firstly, more concerned on slowdown in the Eurozone economy, or, secondly, firm on keeping interest rates unchanged at the current level, the common currency could follow other majors and be sold off against dollar and yen.
Risk of the Aussie is clearly on the downside ahead of RBA meeting. And if RBA sounds concerned on slowdown in the economy, or, like what RBNZ did, signal the possibility of a rate cut, there will likely be another round of massive selloff.
In addition to the central bank meetings, a number of important economic data from around the world will be released this week.
From US, main focus will be on Jun Personal income and spending reports, ISM services. Factory orders, pending home sales,wholesales inventories and Q1 productivity will also be released.
Eurozone PMI services is expected to dive deeper into contraction region. Retail sales, PPI, germany factory orders will be featured.
UK PMI services is expected to deteriorate further in Jul in contraction region. Industrial and manufacturing production, nationwide consumer confidence, will be released.
Australian house price index is expected to show a decline of -1.3% qoq in Q2. Job report is expected to show unemployment rate climbing to 4.3$ in Jul. Both could add more pressure to the Aussie.
New Zealand job report and Canadian employment report will also catch much attention.
Suggested Readings:
AUD/USD Weekly Outlook
AUD/USD's decline from 0.9849 extended sharply further to as low as 0.9285 last week While AUD/USD is deeply oversold, there is no indication of an intraday low yet. Intraday bias remains on the downside initially this week as long as 0.9381 minor resistance holds and further fall could be seen to 38.2% retracement of 0.7675 to 0.9849 at 0.9019. Above 0.9381 will indicate that an intraday low is in place and bring recovery towards 0.9477 resistance. But upside should be limited by 0.9596 resistance and bring fall resumption.
In the bigger picture, important development last week as AUD/USD took out medium term trend line support and 0.9327 support successively. As mentioned before, AUD/USD has possibly completed a diagonal triangle pattern that started at 0.7675, with 0.9849 as a false break. This is supported by bearish divergence conditions in daily MACD and RSI. While some support might be seen initially at 0.9019 fibo support, deeper medium term decline is now expected to 0.7675 and 0.8870 support zone, with 0.8008 key medium term support in between. On the upside, above 0.9596 is needed to indicate fall from 0.9849 has completed. Otherwise, short term risk remains on the downside even in case of recovery.
In the longer term picture, it's still early to conclude that long term up trend from 0.4773 (01 low) has completed after failing to reach 100% projection of 0.4773 to 0.8008 from 0.6773 at 1.0008 which overlaps with parity. However, bearish divergence condition in monthly RSI is serving as an indication that and important top is in place. Focus on the next few months will be on the current decline from 0.9849 will drag monthly MACD below signal line and cause bearish divergence there.
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