Euro tumbled sharply last week as was the weakest major currency just
next to the SNB intervened Swiss Franc. While sovereign debt crisis had
been dragging along for some time, Euro have been receiving strong
support from ECB's hike this year and expectation of of further
tightening. Hence, EUR/USD stayed above 1.4 for most of the year and on
every occasion of selloff due to negative news about Greece, Portugal or
even Italy, the dips were relatively brief. However, ECB's turn into
neutral stance last week sort of removed such strong support for the
Euro. And this time, EUR/USD took out 1.4 psychological level with
relative ease. Similar situation was found in in EUR/GBP, which stayed
above 0.86 for most of the year but finally gave up last Friday.
ECB Trichet sounded quite dovish on the Eurozone economy in the post
meeting pressing conference. The central bank revised lower growth
forecasts and did not signal upside risks to inflation. The tone
appeared that the central bank is ready for a rate cut should the
economy deteriorate further.
Executive Board member Jurgen Stark's resignation on Friday also
surprised the markets. Stark was know to be in strong opposition to
purchases of peripheral bonds. And Stark's resignation prompted some
speculations to the markets that it's now easy for ECB to extend the
quantitative easing program and even cut rates.
The Eurozone debt crisis would not go away easily. There were talk on
Friday about a Greek default. Greece CDS hit all time high of 3238
basis points last week on concern that Greece cannot meet the terms for
bailout. The CDS is implying over 90% chance of default indeed. And,
further then that, there are also worries on that a Greek default will
lead to default in Italy, Spain and elsewhere. Greece rejected talk of a
default as "organized speculation," according to an e-mailed statement
from the finance ministry. Nonetheless, Germany is believed to be
preparing plans to shore up German banks in the worst case.
After release of lower than expected CPI data, SNB announced it's
setting a floor of 1.2 in EUR/CHF, with immediate effect. The bank
pledged to "enforce this minimum rate with the utmost determination and
is prepared to buy foreign currency in unlimited quantities. In
addition, the bank warned that EUR/CHF at 1.2 is still high for the
economy and is deflation risks requires, the SNB will take "further
measures". EUR/CHF jumped from around 1.1 to as high as 1.2190 after the
announcement and was trapped between 1.20 and 1.22 since then.
Recently, the Swiss Franc traded in diverged direction with Euro but the
peg has now aligned the two currencies together.
Dollar was broadly higher last week on safe haven flow. Stocks stayed
in range the week but are looking vulnerable to more another selloff
soon. After the peg swiss franc's role as safe haven currency will
recede. Yen did strengthened against most currencies except dollar but
markets will be cautious on intervention threat from BoJ. Dollar, US
Treasuries, UK Gilts and gold will be left as the choices in case of
more risk aversion. US President Obama unveiled his USD 447b proposal to
stimulate the US job markets last week but reactions was relatively
mild. Fed Chairman Bernanke's speech was largely the same as the one at
Jackson Hole. Fed is expected to announce new stimulus later this month
but there is no hints on what will be offered. It's believed that the
committe members are uncertain too and the two day FOMC meeting will
involve some heated debate.
US President Obama unveiled his proposal to stimulate the US job
markets last week. Obama's USD 447b job proposal mainly targets tax
cut and investments. While more details will be released on September
19, the measures include a tax-cut for small businesses if they hire new
workers or raise workers; a 4000 tax credit if a company hires anyone
who has spent more than 6 months looking for a job and extra tax credits
if they hire America's veterans; a 1-year payroll tax cut; extension of
unemployment insurance and assistance on refinancing homeowners'
mortgages. Obama called for an end to the 'political circus' which he
believed is the main reason for S&P's downgrade.
Speaking to the Economic Club of Minnesota in Minneapolis, Fed
Chairman Bernanke acknowledged that the pace of recovery has been 'much
less robust' than previously anticipated' with 'the weakness of the
housing sector' and 'continued financial volatility' being the two key
factors resulting in the situation. Moreover, a 'substantial fiscal
consolidation in the shorter term could add to the headwinds facing
economic growth and hiring'. As far as inflation is concerned, the
Chairman said the Fed saw 'little indication that the higher rate of
inflation experienced so far this year has become ingrained in the
economy'. Against this backdrop, the Fed is prepared to employ all
necessary tools to 'promote a stronger economic recovery in the context
of price stability'. The content of the speech was largely the same as
the one at Jackson Hole.
Moderation of headline CPI to +6.2% y/y in August from +6.5% in the
prior month signaled that inflation in China probably peaked in July.
Yet, price levels remained elevated and it would be premature to expect
China will abandon tightening or even shift to easing monetary
policy. Growth of industrial production and fixed asset investment and
retail sales decelerated further in August as a result of
government's tightening measures. Yet, the rate of expansion remained
resilient despite recent global economic turmoil. We expect to see
further slowdown in economic activities in coming months but do not
envisage any signs of hard landing.
Technical Highlights
The strong rally in dollar index and the break of 76.71 resistance in
dollar index last week carries important technical implications. Also,
note that dollar index closed above 55 weeks EMA. The overall
development indicates that 72.69 is at least a medium term bottom. More
importantly, the down trend from 88.7 might be finished with three wave
down to 72.69 too. Outlook in the index is turned bullish now and
further rise should be seen to 38.2% retracement of 88.70 to 72.69 at
78.80 in near term. Sustained break there will likely send the dollar
index through 81.31 resistance in medium term to 61.8% retracement at
82.58 and above. In any case, we'll now stay cautiously bullish as long
as 75.38 support holds.
While major stock indices stayed in range last week, German DAX seemed
to be leading the way again. Last week's dive to 5150 met some brief
support above 61.8% retracement of 3589 to 7600 at 5121 and recovered.
But there is clearly no strength in the recovery as the index weakened
again on Friday to close at 5189. The index is vulnerable to more
downside this week and we'd anticipate a test on 5000 psychological
level ahead.
DOW didn't break through 10604 support last week as we anticipated and
turned sideway instead. Nevertheless, overall bearish outlook remains
unchanged and it's just a matter of time when recent sharp decline from
12876 resumes. We'd expect more pressure on DOW this week and would
favor more downside to retest 10604 this week. Decisive break there
could bring accelerated selloff towards 50% retracement of 6469 to 12876
at 9672, which is close to 9614 medium term support.
The Week Ahead
G7 issued a relatively brief statement over the weekend, noting
"significant challenges to growth, fiscal deficits and sovereign debt"
which is "reflected in heightened tensions in global financial markets."
The group pledged to "strong and coordinated international response to
these challenges." Initial focus this week will be on reaction to this
rather dull statement. After that main focus will be on a number of UK
data as well as US inflation data. Of course, developments in the
Europe, in particular about Greece default, will be watched all the
time.
- Monday: BoJ Minutes, Japan tertiary industry index, Australia trade balance
- Tuesday: UK RICS house price balance, CPI, trade balance, DCLG house price; US import prices, Fed budget
- Wednesday: Swiss PPI; UK job report; Eurozone industrial production; US retail sales, PPI, business inventories; RBNZ rate decision
- Thursday: SNB rate decision; UK retail sales; Eurozone CPI; US CPI, jobless claims, empire state manufacturing, Philly Fed survey, industrial production
- Friday: Eurozone trade balance; US TIC capital flow, U of Michigan consumer sentiment
EUR/GBP Weekly Outlook
EUR/GBP drops sharply to as low as 0.8591 last week and the break of
0.8642 support confirms resumption of whole decline from 0.9083. Initial
bias remains on the downside this week and deeper fall should be seen
to 100% projection of 0.9083 to 0.8642 from 0.8884 at 0.8443 next. on
the upside, above 0.8648 minor resistance will turn bias neutral and
bring consolidations. But recovery should be limited by 0.8732 support
turned resistance and bring fall resumption.
In the bigger picture, price actions from 0.9799 (2008) should be
unfolding as a consolidation pattern in the long term up trend. The
first leg is completed with three waves down to 0.8067. Second leg
should also be finished at 0.9083. Fall fro 0.9083 is treated as the
third leg and should now target 0.8067 first and possibly further to
61.8% projection of 0.9799 to 0.8067 from 0.9083 at 0.8013 (which is
closes to 0.8 psychological level). Nevertheless, we'd expect strong
support from 0.7693/8186 support zone to contain downside to finish off
the consolidation. On the upside, break of 0.8884 resistance is needed
to invalidate this view or we'll stay bearish now.
In the long term picture, long term up trend from 2000 low of 0.5680
shouldn't be over yet and the choppy fall from 2008 high of 0.9799
should be a correction only. We'd expect such correction to be contained
by 0.7963/0.8186 support zone and bring up trend resumption. Rise from
0.5680 is still expected to extend beyond 0.9799 high eventually.
No comments:
Post a Comment