Eurozone debt crisis dominated headlines last week and the highly
anticipated EU summit delivered new measures to fund Greece and
stabilize the situation. The results gave the common currency a strong
boost towards the end of the week but Euro is so far limited below near
term resistance level against dollar, yen and swissy and thus, there is
no confirmation of a return to confidence. Improved risk sentiments,
though, helped commodity currencies rally across the board together with
strength in equities. New Zealand dollar and Australian dollar were
both strong while Canadian dollar pared much of the earlier gains on
weak inflation data. The greenback was broadly lower except versus swiss
franc and dollar index's breach of 74 level suggested more downside to
come ahead.
The EU summit ended with new measures to fund Greece and stabilize
the sovereign crisis in the Eurozone as a whole. he leaders also agreed
on an ambitious reform of the EFSF, making it more flexible and
effective. However, markets were somewhat disappointed with the lack of
details on reform of the EFSF. The new bailout package for Greece by
EU/IMF will total EUR 109B. Involvement in private sector will be on a
'voluntary basis' and the total contribution will be around EUR 50B
(the net contribution of EUR 37B and EUR 12.6B from a debt buy back
program). The document stressed that the private sector involvement
arrangement is an 'exceptional and unique solution' for Greece only.
Interest rates are lowered to 3.5%. Maturity of the loan, as well as
other loans from the EFSF in the future, will be extended 'from the
current 7.5 years to a minimum of 15 years and up to 30 years with a
grace period of 10 years'. Rate reduction and maturity extension should
also benefit Portugal and Ireland on their current debts, too. Greece is
required to accelerate implementation of fiscal consolidation measures
including privatization of Government assets worth of EUR 50B. The
leaders also reached a common position to enhance the importance of
ESFS, giving it the ability to buy Eurozone debts in secondary markets.
This, however, can only be done upon approval of the ECB and under
'mutual agreement' of the EFSF/ESM member countries. The fund can also
give countries 'precautionary' credit lines and recapitalize financial
institutions through loans.
In the US, hopes that the White House and the Republicans would reach
an agreement soon faded after the news that Obama met with Democratic
leaders from the House and Senate at the White House for about two hours
as some of them rejected the plan proposed by the 'Gang of Six' on July
19, aiming to cut spending by 3.75 trillion over 10 years. House
Speaker John Boehner said after Friday market close that he will instead
talk with Senate leaders on a way to avoid a U.S. default. Meanwhile,
S&P issued a new warning that it would downgrade US' credit rating
if a deal failed to be reached by August 2. The rating agency said
there's at least 50% chance that it would cut the country's AAA rating
for the first time.
BOC left interest rate unchanged at 1% in July. GDP growth forecast
was revised to +2.8% for 2011, down from +2.9% projected in April, while
estimates for 2012 and 2013 stayed unchanged at +2.6% and +2.1%
respectively. Policymakers saw higher inflationary pressures with core
inflation slightly firmer than expected, due to 'temporary factors' and
'more persistent strength in the prices of some services'. Core CPI is
expected to 'remain around 2%' through 2013 while total CPI should
return to the 2% by the middle of 2012. Concerning monetary policy
outlook, the BOC concluded that 'to the extent that the expansion
continues and the current material excess supply in the economy is
gradually absorbed, some of the considerable monetary policy stimulus
currently in place will be withdrawn'. The reference this month, with
the term 'eventually' being taken away, sent the market a signal that a
rate hike may come earlier than previously anticipated. Canadian dollar
surged after the statement but later pared much of the gains on Friday
as CPI dropped more than expected to 3.1% yoy in June. while core CPI
also unexpectedly moderated to 1.3% yoy.
Australian dollar and New Zealand dollar were the two biggest winners
last week and fear on European debt crisis eased and risk appetites
came back. The Aussie lagged behind other commodity currencies in July
on talk that RBA might cut rates in the next twelve months. But the
idea, as proposed by Westpac, didn't gain many followers and the Aussie
jumped as Gold reached new record high above 1600, as well as on
strength in global equities. New Zealand dollar was even stronger as Q2
CPI accelerated more than expected to 5.3% yoy, highest number since
1990. Along with the better than expected GDP figure released a week
ago, markets are now expecting RBNZ to start tightening again in Q4.
Technical Highlights
Dollar index's break of 74.13 support suggests that rise from 73.35
has finished at 76.71. Also, the consolidation pattern from 72.69 might
be completed with three waves up to 76.71 too. Bias is cautiously
bearish this week for a test on 73.50 support. Break there will affirm
the case the the down trend in dollar index from 88.70 is resuming for
another low below 72.69. Ideally, that should be accompanied by a break
of 1.4577 in EUR/USD.
NZD/USD is one of the strongest pair in July so far and made another
record high of 0.8674 last week. There is no sign of topping yet and the
pair is indeed accelerating. We're staying bullish and expect further
rally ahead. From a medium term angle, NZD/USD should be targeting 100%
projection of 0.4890 to 0.7632 from 0.6560 at 0.9302 next.
The Week Ahead
Talk on US debt ceiling will be a main focus this week. An agreement
must be made to raise the current $14.3T borrowing limit by August to
avert a default. Meanwhile, a number of key economic data will be
released this week. From US and UK, Q2 GDP preliminary reading will be
the major focus. Canadian dollar will also need a strong GDP number
affirm the expectation of BoC hike in H2 and fuel another rally.
Meanwhile, Q2 inflation data from Australia will also be crucial on
whether RBA's next move would be a hike or as some said, a cut. RBNZ is
expected to leave rates unchanged at 2.50% this week but may start to
hint on tightening in H2 and thus, give the New Zealand dollar further
boost.
Meanwhile, a key focus of the week will also be on whether US stocks
could extend recent rally. So far, DOW is still limited below May's high
of 12876 but it's looking increasingly likely that rise from 11862 is
resuming the medium term up trend. We'd expect any retreat to be
contained above last week's low of 12296 and DOW should break through
13000 level, maybe after agreement on US debt ceiling and deficit
reduction, or after Q2 GDP data. Such development, if happens, will give
much pressure on the dollar.
AUD/USD Weekly Outlook
AUD/USD broke out of near term range last week and rose to as high as
1.0874. Rise from 1.0390 has resumed and should be target a test on
1.1011 resistance this week. Overall outlook remain unchanged. we're
still favoring the case that correction pattern from 1.1011 is finished
with three waves down to 1.0390 already and rise from there is
tentatively treated as up trend resumption. Break of 1.1011 will confirm
and target 61.8% projection 0.9703 to 1.1011 at 1.0390 at 1.1198 next.
On the downside, below 1.0774 minor support will turn bias neutral and
bring consolidations first. But downside should be contained well above
1.0524 support and bring another rise.
In the bigger picture, rise from 0.8066 is part of the up trend from
2008 low of 0.6008 and is still in healthy status. Such up trend should
target 100% projection of 0.6008 to 0.9404 from 0.8066 at 1.1462 on
resumption. On the downside, Break of 1.0182 resistance turned support
is needed to be the first signal of medium term reversal. Or we'll stay
bullish in AUD/USD.
In the longer term picture, long term up trend from 0.4773 (01 low)
is still in progress and would possibly target 100% projection of
0.4773 to 0.9849 from 0.6008 at 1.1084. AUD/USD is staring to show loss
of upside momentum with weekly MACD crossed below signal line and there
is possibility of bearish divergence condition too. Nevertheless we'd
still prefer to see at least sustained trading below 55 weeks EMA (now
at 1.0055) before considering long term reversal.
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