Forex Weekly Review and Outlook 7-14-07

Dollar Tumbles Broadly, Important Tests Awaited

Dollar tumbled across the board last week by making new record lows against Euro and multi year lows against most majors on renewed concerns on subprime mortgage markets. However the dollar stabilized a bit towards the end of the week as traders hold their bets ahead of a number of important economic data and events in the US this week, including the highly anticipated semi-annual testimony of Bernanke and consumer inflation data. Dollar is sitting at key support against European majors as the week ended and another sharp decline could be seen if dollar fails these test. Also, inflation data from UK, Canada and New Zealand will likely trigger much volatility in the markets.

Meanwhile, even though the Japanese yen hit another record low against Euro and multi year lows against other currencies, it did end the week nearly flat in EURJPY and GBPJPY, after being supported by risk aversion and lifted by news that Iran asks Japan's oil refiners to pay for Iranian crude oil in yen instead of dollar.

Economic calendar was light in the US last week and focus was indeed on the new developments of subprime mortgage markets problem. Dollar was sent sharply lower after S&P downgraded the outlook on 12b of subprime-related debts while Moody's cut ratings of another 5.2b of subprime-related debt. That renewed concern over a prolonged down turn in the housing market that will continue to drag down the US economy as well ass turning investors away from dollar-denominated assets. Even though there was a report to the end of the week that S&P miscalculated the value of the subprime mortgage bonds it placed for review. The confidence on the green back was hurt.

Economic data from US was not giving much help to the green back as trade deficit widened to -60b in May. Retail sales surprising dropped for the largest amount in 2 years by -0.9% in Jun versus expectation of 0.1% rise. Ex-auto sales also unexpectedly dropped -0.4% versus consensus of 0.2% rise. Though, much better than expected University of Michigan consumer sentiments, which rose to 92.4 versus expectation of 86.0, provided a breather to the greenback as the week ended.

Data from Eurozone saw German trade surplus widened to 17.5b but both imports and exported dropped during the month of May. Industrial production rose 1.9% mom, 4.6% yoy versus expectation of 2.0%, 4.5%. Eurozone Q1 GDP was also revised slightly higher from 0.6% and 3.0% yoy to 0.7% qoq, 3.1% yoy. Euro continued to be supported by hawkish comments from ECB officials and expectation of another rate hike in the near term.

The Japanese yen had a very volatile week last week. Yen was sent sharply higher on risk version as the US subprime market news hit the market. However, the Japanese currency was then pressured again and hit fresh lows against high yield currencies after BoJ left rate unchanged. The decision was done by a 8-1 vote with one board member, Mizuno, dissented only. And that dampened expectations of a rate hike in Aug. The yen was then lifted again on news that Iran asked Japan's oil refiners to pay for Iranian crude oil in the Japanese currency instead of dollars, which is believed to create demand for the yen in the currency markets.

While sterling rose strongly against dollar, it ended the week actually slightly lower against Euro and Swissy. Mixed PPI report which saw PPI output slowed to 2.4% yoy and PPI input accelerated to 2.1% yoy didn't provide any significant impact on the Sterling. The UK trade deficit narrowed to 6.3 billion pounds in May, a 19-month low, but the April deficit was revised sharply higher to 6.9 billion pounds.

BoC raised rates by 25bps to 4.50% as widely expected, making the first move in over a year. However, the Canadian dollar was sold off as the accompanying statement was believed to be less hawkish than expected. Growth is expected to be slower than prior estimates in Apr while both headline and core inflation are expected to return to 2% by early 09. To achieve that, some "modest further increase" may be needed. Markets were pricing in another 50-75 bps hike, but the statement suggested that 25bps is probably enough. Though the lonnie regathered some strength by riding on dollar's weakness as well as a better than expected trade balance report to end the week slightly higher against dollar, and near to 30 year high.

Aussie remained firm and surged to new high of 0.8690 against dollar even though economic data were disappointing. Unemployment rate edged higher from 32 year record low of 4.2% to 4.3%. Nevertheless, job markets remain tight which should eventually translate into wage inflations and then consumer inflations. The job report didn't change the view that RBA will hike again, probably in early 08.

Story of the Kiwi was a lot different. The New Zealand dollar was pressured early in the week after a report a report from Moody's which said that housing market in the New Zealand may slow and raised concern on whether RBNZ will raise rates again this year. The Kiwi regained some ground after stronger than expected retail sales which rose 1.2% versus consensus of 0.5% but was still limited by prior week's high of 0.7879 against dollar.

The Week Ahead

This will be an important week for the greenback with a lot of important economic data and events scheduled. Also, considering that dollar is now pressing important support against european majors and just had the largest fall in a broad sense this year, failing the tests this week will likely trigger another sharp decline.

Bernanke's semi-annual testimony on Wed and Thur will catch most eyes. There are some topics that will be paid attention to, including the problem of sub-prime mortgage markets and its effect on the US economy, the current moderation in core inflation, the possibility of Fed's shift of focus from core inflation to headline inflation, and ultimately, of course, any hints on whether Fed will have a rate cut any time soon. FOMC minutes to be released on Thur will also be scrutinized but will likely be overshadowed by Bernank'e testimony.

On the data front, Jun PPI and CPI will be released and focus will be on whether core CPI will moderate further lower from 2.2%, or stay unchanged as market expects. Another round of housing data will be released during the week including NAHB housing market index, building permits and housing starts. Regional fed surveys from NY State and Philadelphia will be featured. TIC capital will be released too.

Another major focus of the week will be on consumer inflation data from UK where CPI is expected to moderate further from 2.5% yoy to 2.3% yoy. Employment report and retail sales will also be featured. Q2 GDP will be released too. Of course, the MPC minutes of the Jul meeting will be closely watched. There are still divided opinion on how much more rate hike from BoE would be seen in the current cycle. And this will likely be the week that opinions converges.

From Eurozone, Germany ZEW economic sentiment will be the main feature. The ZEW index disappointed markets in Jun and retreated from 24.0 to 20.3. In Jul it's expected to gain slightly to 21.0. Other data includes HICP final, which is expected to be at 1.9% yoy, may trade balance. From Japan, BoJ minutes of Jun will be released with tertiary industry index, all industry index. Swiss ZEW and combined PPI will be featured too.

Inflation data from New Zealand and Canada will be highly anticipated too. Q2 CPI from New Zealand will be the first data of the week and is expected to moderate from 2.5% to 1.8%. The Kiwi has been pressured last week on speculation that RBNZ actually doesn't need to be as aggressive as markets thought. And the Kiwi will need some upside surprise from the CPI to regain its momentum. On the other hand, Canadian CPI is expected to moderate from 2.7% yoy to 2.6%, with core CPI staying at 2.2% yoy. Though further tightening is still expected from BoC, the opinion on the number is divided after last week's less hawkish than expected statement.

EUR/USD

EUR/USD's rally from 1.3262 continued and accelerated last week to as high as 1.3813 last week, before losing momentum as it approached mentioned key medium term resistance of 100% projection of 1.1639 to 1.2978 from 1.2483 at 1.3822. As discussed during the week, the current development is dampening the original view that rise from 1.3262 is the last advance in a five wave structure that started at 1.2483. Firstly, the current momentum of the rise from 1.3262 is seen stronger than the prior rally from 1.2865 to 1.3681. Secondly, the falling trend line in both daily MACD and RSI were broken, negating the bearish divergence conditions. In other words, the underlying bullishness in EUR/USD could be much stronger than we originally thought.

Focus remains on 1.3822 resistance. Sustained trading above this level will add much weight to the case that whole medium term rally from 1.1639 is indeed resumption of multi-year up trend from 0.8223 (00 low). That is further rise should be seen in medium term towards 95 high of 1.4523 with much chance to extend further to 61.8% projection of 0.8223 to 1.3668 from 1.1639 at 1.5004.

On the downside, failure to take out 1.3822 decisively, followed by a break of 1.3262 support, will retain the original case. That is, medium term rally from 1.1639 has likely completed after being limited by 1.3822 resistance as expected. Deeper decline should then be seen to 1.2978 cluster support first (38.2% retracement of 1.1639 to 1.3813 at 1.2983) and then next cluster support at 1.2483 (61.8% retracement of 1.1639 to 1.3813 at 1.2469). Also, since in such case, rise from 1.1639 is likely merely part of a larger scale consolidation that started at 1.3668 there will be much chance of extending the fall to retest 1.1639 low before completing the consolidation.

From a short term angle, mild bearish divergence condition is seen in the 4 hours MACD and RSI, indicating that a short term top could be around the corner. But after all, there is no confirmation of a top yet. Further rally is still in favor as long as 1.3729 support holds. On the downside, below 1.3729 will suggest that a short term top could be in place already. Deeper decline should then be seen towards 4 hours 55 EMA (now at 1.3673 first).

GBP/USD

Cable's rally from 1.9621 accelerated last week to as high as 2.0363 before losing momentum as it approached mentioned trend line resistance (now at at 2.0369). Short term upside momentum is seen diminishing as displayed in bearish divergence condition in 4 hours MACD and some consolidation could be seen. However, further rise is still in favor as long as 2.0243 cluster support (38.2% retracement of 2.0056 to 2.0363 at 2.0246) holds. Decisive break of the trend line resistance will encourage further rally towards next upside target of 100% projection of 1.9183 to 2.0132 from 1.9621 at 2.0570.

On the downside, below 2.0243 will put short term rising trend line (now at 2.0176) into focus and break of this trend line support will indicate that whole rise from 1.9621 has completed. Deeper correction should then be seen towards 2.0056 support.

In the bigger picture, the sustained break of 2.0207 projection target confirms underlying upside momentum is still strong. Also, it added much credence to the case that whole up trend from 1.7047 is resumption of multi-year up trend from 1.3680. In such case, further rally should then be seen to 61.8% projection of 1.3680 (01 low) to 1.9554 (05 high) from 1.7047 (05 low) at 2.0677 first.

Having said that, even in case of a short term correction, downside should be contained above 1.9783 cluster support (78.6% retracement of 1.9621 to 2.0363 at 1.9780) and bring medium term rally resumption.

USD/CHF

USD/CHF's fall from 1.2467 resumed last week and accelerated to as low as 1.1984, breaking marginally below mentioned 1.1993 cluster support (61.8% projection of 1.2467 to 1.2089 from 1.2232 at 1.1998) before stabilizing. From a short term angle, further decline is still expected to follow as long as 1.2055 minor resistance holds. Sustained trading below 1.1993 support will encourage further fall towards next downside target of 1.1878 (06 low). Meanwhile, above 1.2055 will indicate that a short term bottom is likely formed and bring strong rebound to 4 hours 55 EMA (now at 1.2112).

In the bigger picture, USD/CHF has likely completed a medium term triangle consolidation already, which started at 1.1919 with five waves to 1.2467. Firm break of 1.1993 will confirm this case. 1.1878 (06 low) will be the initial target. And since, in such case, fall from 1.2467 is viewed as resumption of medium term down trend from 1.3283, further weakness should be seen to 100% projection of 1.3283 to 1.1919 from 1.2768 at 1.1404, with much chance to extend to retest 1.1288 (04 low).

On the upside, break of 1.2232 resistance will mess up the short term picture a little bit. In such case, chance is swung to the case that the triangle consolidation indeed started at 1.1878. In other words, the overall outlook didn't change and just that another rally should be seen before completion. Hence, even in such case, upside should be limited below 1.2467 high and bring another medium term decline.

In the longer term picture, based on the above interpretations, outlook will remain bearish as long as USD/CHF stays below 1.2467 resistance. Down trend from 1.3283 should extend further to retest 1.1288 (04 low) after finishing the current medium term consolidation. However, a strong break of 1.2467 will dampen this view and turn the long term outlook mixed again.

USD/JPY

USD/JPY had a very volatile week last week, first dipping to as low as 120.96, then rebounding to as high as 122.60. Corrective fall from 124.13 could have completed at with 3 waves down to 120.96, after being support above mentioned 120.76 cluster support (38.2% retracement of 115.13 to 124.13 at 120.70). However, the lack of follow though strength after rebound from 120.96 fails to break through 4 hours 55 EMA is turning short term out look a bit mixed.

Nevertheless, further rise is still in favor as long as 121.82 support holds. Break of 122.60 will encourage retest of 123.66 key near term structural resistance. Decisive break of 123.66 will indicate that rally from 115.13 has likely resumed. However, below 121.82 will turn outlook mixed and indicate that correction from 124.13 could indeed be still in progress. Another fall could be seen to 120.76 cluster support or lower.

In the bigger picture, rise from 115.13 has made a top at 124.13 and turned into consolidation since then. But still, rally from 108.99, which is treated as resumption of whole up trend from 101.66, is still in progress. Even in case of a deeper correction, downside is expected to be contained by 118.35/57 cluster support zone (38.2% retracement of 108.99 to 124.13 at 118.35 and 61.8% retracement of 115.13 to 124.13 at 118.57) and bring rally resumption. Next medium term upside target will be resistance zone of 100% projection of 101.65 to 121.38 from 108.99 at 128.72 and 100% projection of 108.99 to 122.17 from 115.13 at 128.31. However, break of 118.35/57 cluster support argue that rise from 108.99 has possibly completed and put 115.13 low into focus.

In the longer term picture, note that USD/JPY is staying comfortably above the long term falling trend line (147.68 to 135.20). Multi-year consolidation pattern that started from 147.60 should have already completed. But, whether current rise from 101.65 represents the resumption of whole up trend from 79.75 remains to be seen. Note that above mentioned medium term projection target of 100% projection of 108.99 to 122.17 from 115.13 at 128.31 and 100% projection of 101.65 to 121.38 from 108.99 at 128.72 are in proximity to 78.6% of 135.20 to 101.65 at 127.95. This cluster resistance zone will be important to determine the long term trend.



EUR/JPY

EUR/JPY had a volatile week last week, first dipping to as low as 166.49 and then extending recent rally to new record high of 168.93. From a short term angle, further rally is expected to follow as long as 167.82 support holds. Break of the near term trend line resistance (now at 169.0810 will encourage further rise to next upside target of 100% projection of 161.49 to 166.94 from 164.23 at 169.68. However, below 167.82 support will argue that a short term top might be formed on bearish divergence condition in 4 hours MACD and RSI and bring deeper correction towards 166.49 support.

In the bigger picture, whole medium term rally from 130.60 is still in progress and the interpretation remains unchanged. First wave up ended at 143.60, subsequent correction ended at 137.167. The third wave up ended at 159.63 while fourth wave correction has ended at 150.75. Rise from there represents the final advance in this structure. With 61.8% projection of 137.16 to 159.63 from 150.75 at 164.64 taken out decisively, next medium term upside target will be 100% projection of 137.16 to 159.63 from 150.75 at 173.22. However, break of the short term rising trend line support (now at 164.77) will dampen this view and indicate that the rise from 150.75 has possibly completed earlier then we thought.

In the longer term picture, regardless of the internal structure, rally from 88.97 has now taken out key resistance level of 162.42 and 38.2% retracement of 285.56 (79 high) to 88.97 (00 low) at 164.07. Next important long term resistance will be at 188.22 (90 high) and 50% retracement of 285.56 to 88.97 at 187.27.

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