Risk markets attempted a recovery last week on some positive news as
Germany and Finland approved expansion of the EFSF while Troika returned
to Greece finally. However, strength of the recovery was far from
impressive and lost momentum towards the end of the week. While major US
and European stock indices managed to hold well above recent low, the
CRB commodity index made a new low on Friday and closed below 300 level
for first in almost a year. Dollar index's retreat was rather shallow
and was contained at 77.30 while Friday's rally put the index back
pressing recent high of 78.86. This could also be reflected in major
dollar pairs which lost momentum. Commodity currencies also turned weak
with Canadian dollar and New Zealand dollar making new record low
against US dollar.
Markets are facing a number of even risks this week and it's great
opportunity for traders to watch the reactions, and thus, get a sense on
the underlying sentiments. China manufacturing PMI was released on
Saturday and has surprisingly rose to 51.2 in September. More
importantly, this marked the second consecutive months of increase,
though little. There have been much worries on hard landing in China.
While PMI only showed little improvements in the outlook, at least, it's
not deteriorating and indicates that economic development is
stabilizing.
EU finance ministers are not likely to approve the disbursements of
next EUR 8b tranche of Greece bailout this week. However troika, the
EU/IMF/ECB inspection team will complete an evaluation as early as on
Monday and thus give the signal on whether Greece has done their
austerity jobs satisfactorily. Also, as the Bundestag has now passed the
bill for expanding the EFSF, there would possibly be some news on how
the fund would be enlarged to a size that's capable to contain Italy and
Spain eventually.
While the surprised surge in inflation dented hope for a rate cut
from ECB, the bank would nonetheless announce new stimulus measures in
Trichet's last meeting as President this week. The unconventional
measures to be adopted would include resumption of the one-year
refinancing operations and restart of covered-bonds purchase. These
should be positive to the markets.
While these events might trigger some recovery in risk markets, we'd
anticipate that the impact would be short-lived. We're staying bearish
in risks and bullish in dollar. The technical developments suggest that
dollar is ready for another round of rally this week while stocks would
likely revisit recent lows. Market sentiment would once again be proved
to remain bearish if the above mentioned events fail to provided
sustainable boost to risk markets. And, extension in decline in the CRB,
if accompanied by a break of 10600 level in dow, and a sustained break
of 79 in dollar index, should confirm the trend of risk selling in the
first half of Q4.
The week ahead
In addition to the above events, Fed will also start the operation
twist program on October. Fed will purchase a total of $44b of
longer-mautrity treasuries and sell that same amount of short term
debts. Four central banks will meet including RBA, ECB, BoE and BoJ. In
addition, there will be key economic data release including Japanese
Tankan, UK PMIs, US ISM indices and Non-farm payroll, Canadian job
report. So, be prepared for a busy and volatile week.
- Monday: Japanese quarterly Tankan; Swiss retail sales, SVME PMI;
Eurozone PMI manufacturing final; UK PMI manufacturing; US ISM
manufacturing
- Tuesday: Australian building approvals, trade balance, RBA rate
decision; UK construction PMI; Bernanke speech, US factory orders
- Wednesday: Australian retail sales; Eurozone PMI services final,
retail sales; UK services PMI, GDP final; US ADP job, ISM services
- Thursday: BoE rate decision; ECB rate decisions; Canada building permits, Ivey PMI; US jobless claims
- Friday: BoJ rate decision; Swiss unemployment; UK PPI; Canada employment; US non-farm payrolls
Technical Highlights
Dollar index's strong rally on Friday suggests that recent rise from
72.69 is ready to resume. Initial focus is on 78.86 resistance today and
break there will confirm this bullish case and should send the index
through 80 psychological level to 50% retracement of 88.70 to 72.69 at
80.69 next. Break of last week's low of 77.30 will delay this case and
bring more consolidations but we'll stay bullish as long as 76.06
support holds.
The CRB commodity index extended recent down trend to close at
298.15. Near term outlook will remain bearish as long as last week's
high of 312.26 holds and further fall should be seen to 50% retracement
of 200.15 to 370.70 at 285.43. The main focus would indeed be on whether
the current decline would accelerate again. That's crucial in
determining whether CRB could draw support inside 247.25/293.75 zone and
rebound.
S&P 500 stayed in recently established range last week but felt
strong pressure well ahead of 55 weeks EMA at 1230.3. While the 38.2%
retracement support at 1101.7 might provide some more support in near
term, it shouldn't last long. Friday's fall puts initial focus this week
on 1101.54 recent low. Break there will resume whole decline from
1370.58 and should send the index through 1010.91 support within
October. In any case, we'll stay bearish as long as 1258 head and
shoulder resistance holds.
EUR/USD Weekly Outlook
EUR/USD turned into brief recovery last week but such recovery was
likely finished at 1.3689 already. Initial bias is mildly on the
downside this week for 1.3362 first. Break will confirm resumption of
recent decline and should target 161.8% projection of 1.4939 to 1.3969
from 1.4548 at 1.2979, which is close to 1.3 psychological level. On
the upside, above 1.3689 will delay the bearish case and bring more
consolidations. But recovery is, nonetheless, expected to be limited
below 1.3936 resistance and bring another fall eventually.
In the bigger picture, current development indicates that medium term
rise from 1.1875 has completed with three waves up to 1.4939 already.
That also suggests that it's merely part of the consolidation pattern
that started back in 2008 at 1.6039. Further decline would now be seen
to 1.2873 support first and break will target 1.1875 and below. On the
upside, above 1.4548, resistance is needed to confirm completion of the
fall from 1.4939 or we'll stay bearish in EUR/USD.
In the long term picture, EUR/USD turned into a long term
consolidation pattern since reaching 1.6039 in 2008. Such consolidation
is still in progress and we'd expect range trading to continue for some
time between 1.1639 and 1.6039.
EUR/JPY Weekly Outlook
EUR/JPY formed a temporary bottom at 101.93 last week and recovered
to 104.95. Such recovery is treated as consolidation in recent decline
only. Hence, while another rise cannot be ruled out yet, even in that
case, we'd expect upside to be limited by 106.98 resistance (50%
retracement of 111.93 to 10.93 at 106.93) and bring fall resumption.
Below 103.00 minor support will flip bias back to the downside. Further
break of 101.93 should target 100 psychological level next.
In the bigger picture, whole down trend from 2008 high of 169.96 is
still in progress and is building up downside momentum again. Sustained
trading below 100 psychological level should pave the way to 100%
projection of 139.21 to 105.42 from 123.31 at 89.52, which is close to
88.96 all time low. On the upside, break of 111.93 resistance is needed
to be the first signal of medium term reversal. Otherwise, we'll stay
bearish.
In the long term picture, up trend from 88.96 (00 low) has completed
at 169.96 and made a long term top there. Based on the five wave
structure of the rise from 88.96 to 169.96, we're favoring that fall
from 169.96 is corrective in nature. Hence, look for reversal signal
ahead of 88.96 low.
USD/CHF Weekly Outlook
USD/CHF's consolidation form 0.9182 continued last week but drew some
support from 4 hours 55 EMA and recovered. The development suggests
that retreat from 0.9182 might be cover already and initial bias is back
on the upside this week. Break of 0.9182 will confirm resumption of the
whole rise from 0.7065 and should target 161.8% projection of 0.7065 to
0.8246 from 0.7710 at 0.9621 next. On the downside, below 0.8917 minor
support will delay the bullish case and bring more consolidations first.
But we'll stay bullish as long as 0.8647 support holds and extend
another rise eventually.
In the bigger picture, medium term down trend from 1.1730 is already
completed at 1.7065. But there is no indication of long term reversal
yet. Rebound from 0.7065 is treated as part of a medium term
consolidation pattern. Such rebound would possibly extend to
0.9916/1.1730 resistance zone. But strong resistance should be seen
there and bring reversal. On the downside, break of 0.7710 is needed to
indicate completion of the rebound from 0.7065. Otherwise, we'll stay
near term bullish in the pair for the moment.
In the longer term picture, long term down trend from 2000 high of
1.8305 is still in progress and there is no indication of a reversal
yet. Such down trend would still extend to 100% projection of 1.8305 to
1.1288 from 1.3283 at 0.6266 after finishing the consolidation from
0.7065.
GBP/USD Weekly Outlook
GBP/USD's recovery from 1.5327 extended to 1.5715 last week and lost
momentum since then. Such recovery might be finished already and initial
bias is cautiously on the downside this week for retesting 1.5327
first. Break will confirm resumption of recent fall from 1.6746 and
should target 161.8% projection of 1.6746 to 1.5780 from 1.6618 at
1.5055 next. On the upside, above 1.5715 will delay the bearish case and
bring another recovery. But upside should be limited by 38.2%
retracement of 1.6618 to 1.5327 at 1.5820 and bring fall resumption
eventually.
In the bigger picture, rise from 1.4229, which is treated as the
third leg of consolidation from 1.3503 (2008 low) should be finished at
1.6746 after GBP/USD completed a head and shoulder top reversal pattern
(ls: 1.6298, h: 1.6746, rs: 1.6618). Fall from 1.6746 could be the
fourth leg of the consolidation pattern from 1.3503 (2008 low) or
resuming long term down trend from 2.1161 (2007 high). In either case,
retest of 1.4229 resistance should be seen. Break of 1.4229 will bolster
the down trend resumption case and would possibly push GBP/USD through
1.3503 low. On the upside, break of 1.6618 resistance is needed to
invalidate this view. Or we'll now stay cautiously bearish in GBP/USD.
In the longer term picture, the corrective nature of the
multi-decade advance from 1.0463 (85 low) to 2.1161 as well as the
impulsive nature of the fall from there suggests that GBP/USD is now in
an early stage of a long term down trend. Another low below 1.3503 is
anticipated after consolidation from 1.3503 is confirmed to be
completed.
USD/JPY Weekly Outlook
USD/JPY sideway trading from 75.94 continued last week and outlook
remains unchanged. Stronger recovery might be seen initially this week
but upside is expected to be limited by near term falling trend line
(now at 77.71) and bring fall resumption eventually. Below 76.11 will
turn bias back to the downside and break of 75.94 low will confirm
resumption of whole fall from 85.51 and would target 70 psychological
level.
In the bigger picture, USD/JPY is still staying well inside the
falling channel that started back in 2007 at 124.13. There is no
indication of trend reversal yet even though medium term downside
momentum is diminishing with bullish convergence condition in weekly
MACD. Such down trend is still in favor to continue to 70 psychological
level. In any case, break of 80.23 resistance is first needed to
indicate completion of fall from 85.51. Secondly, break of 85.51 is
needed to be the first signal of medium term reversal. Otherwise, we'll
stay cautiously bearish in the pair.
In the long term picture, current decline suggests that the long term
down trend in USD/JPY is still in progress. Such down trend is expected
to extend further into uncharted territory with 70 psychological level
as next target. In any case, we'd at least need to see sustained break
of 85.51 before considering trend reversal.
EUR/CHF Weekly Outlook
EUR/CHF struggled around 1.22 level for most of last week but finally
gave up and dipped to close at 1.2155. More sideway trading would be
seen in near term with bias mildly on the downside to send the cross
back below 1.21 level. Nevertheless, note that SNB has made it clear
about their intention to keep a floor at 1.2 and any decline attempt
should be contained by this level. On the upside, even in case of
another rise, strong resistance should be seen in 1.2399/3243 resistance
zone to limit upside unless there is a drastic turn in risk sentiments.
In the long term picture, so now after SNB intervention, the long
term down trend in EUR/CHF is put into a halt at 1.0061. But there is no
scope of a trend reversal yet before a break of 1.3243 resistance.
EUR/CHF should stay in range for sometime.
USD/CAD Weekly Outlook
After brief retreat, USD/CAD rally resumed last week and jumped to as
high as 1.0502 so far. Initial bias remains on the upside this week and
further rise should be seen to 161.8% projection of 0.9406 to 1.0009
from 0.9725 at 1.0701 next. On the downside, below 1.0372 minor support
will turn bias neutral and bring consolidations. But retreat should be
contained above 1.0142 support and bring rally resumption.
In the bigger picture, sustained trading above 55 weeks EMA affirms
the case that whole down trend from 2009 high of 1.3063 has finished at
0.9406 on bullish convergence condition in weekly. Current rally from
0.9406 should now target 1.0851 resistance (38.2% retracement of 1.3063
to 0.9406 at 1.0803). Break there will extend the rebound to 61.8%
retracement 1.1666 and above. On the downside, break of 1.0009 support
is needed indicate completion of the rally from 0.9406. Otherwise, we'll
stay bullish in USD/CAD.
In the longer term picture, there is no clear indication that the
long term down trend from 2002 high of 1.6196 has reversed even though
bullish convergence condition was seen in monthly MACD. The fall from
1.3063 to 0.9406 looks corrective and could either be part of a sideway
pattern from 0.9056, or a corrective to rise from there. The long term
outlook, i.e., the possibility of taking out 1.3063 high, will depend on
whether rise from 0.9406 would eventually develop into a strong
impulsive wave. We'll wait and see.
EUR/GBP Weekly Outlook
After brief consolidations, EUR/GBP dived to as low as 0.8578 towards
the end of the week. The development affirmed the case that rebound
from 0.8529 is already finished at 0.8795 after failing to sustain above
55 days EMA. Fall fro 0.9083 should be ready to resume. Initial bias
remains on the downside this week for 0.8529 first. Break will target
100% projection of 0.8884 to 0.8529 from 0.8795 at 0.8440 next. On the
upside, above 0.8651 minor resistance will delay the bearish case and
turn bias neutral for more consolidations first.
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 from 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.
