Financial Advisor

Weekly Review and Outlook: Eurozone Dominated Headlines but Kiwi and Aussie Shone; Important Week ahead, Dollar Vulnerable

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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