Risk sentiments had a drastic turnaround last week as Greece has secured the fifth tranche of bailout fund from EU at EUR 12b to avoid and immediate default. The strong rebound in US equities was impressive with DOW and S&P up 5.4% and 5.6% respectively during the week, both posting largest weekly gains since July 2009. Canadian dollar, Australian dollar and New Zealand were the strongest currencies last week in the risk seeking environment and were support by rebound in commodities in general. Meanwhile, safe haven assets suffered. Swiss Franc had a sharp and broad based reversal after making record highs against most major currencies in June. Gold, on the other hand, also tumbled through 1500 level against dollar and was extremely weak against Euro. Euro was the strongest among European majors while dollar was weak except versus yen and swissy.
EU finance minister are expected to approve to release the fifth tranche of the bailout fund to Greece after the country passed the new EUR 78b austerity package through parliament last week. The EU 12b fund of the EUR 110b bailout made last year should help Greece rollover debts maturing in July and August and thus avoid an immediate default. In addition, that should help Greece take one step closer to getting the second bailout, which could worth as much as EUR 85b. Austrian Finance Ministry said that the second bailout for Greece would have Eurozone nations and private investors contributing 70%. IMF would cover 70%. German and French officials are believed to be targeting around EUR 30b from private investors. Finance ministers are trying to wrap up the new aid plan at a July 11 meeting in Brussels. And together with the EUR 110b fund from he original bailout a year ago, the total package will be up to EUR 195b. The focus from now till July 11 would be on how Eurozone officials could come up with the EUR 30b private investors involvements.
Attention ahead would possibly starting to shift away from Greece as the second bailout look set to be concluded on July 11. Focus will turn back to growth and monetary policy. ECB officials remained hawkish last week and reaffirmed markets expectation of another rate hike this week. However, whether Euro could breakout from recent triangle consolidation against dollar would very much depends on markets expectation on further policy path. Currently, markets are only pricing in around 70% chance of another rate hike this year even though inflation stood at 2.7% yoy in June.
Sterling was a victim in drastic change in rate expectations in recent weeks. markets are now pricing a rate hike from BoE next May and that's a big change that in February, markets bet on a hike this May. Recent economic data provided no support to and earlier hike and indeed, comments from BoE officials suggest that some members are back considering more quantitative easing. So the pound would likely remain weak in near term.
Canadian dollar, on the other hand was boosted by strong inflation data, with CPI jumped to 3.7% yoy, well above expectation and far above BoC's 2% target. It's indeed the strongest level in more than eight years. While BoC Governor Carney still sounded worry on the fragility of the economic recovery, there are increasing speculation that the bank would be forced to act before the end of the year should inflation pressure persists. There are speculations that BoC would have a 25bps hike by September and another 25bps hike by the end of the year even though a rate hike is not fully priced in money markets until 2012.
Dollar was pressured by the strength in euro, stocks as well as crude oil last week even though gold's weakness and strength in treasury yields provided some support to limit downside. Dollar index's break of 74.48 support suggests that rebound from 73.50 has completed and near term outlook is now mildly bearish for a test on 73.50 support and then 72.69 low.
Meanwhile, also note that dollar index remains held by long term falling trend line resistance from 88.70 (2010 high) and thus, there is no indication of reversal yet. Such down trend is still expected to continue for another below 72.69 towards 70.70 all time low.
Euro's strength against gold was very impressive last week and XAU/EUR's fall from 1088.1 accelerated to as low as 1021 last week. Current fall is set to extend further lower to 1000 psychological level next and then 55 weeks EMA at 991. Bearish divergence condition in weekly MACD and RSI do suggest that the trend in XAU/EUR is reversing and the focus will now be on whether XAU/EUR could break through 55 weeks EMA decisively with the current fall.
CAD/CHF was the biggest mover last week and more upside is highly likely in near term. While 0.8408 is a short term bottom, there is no clear evidence of trend reversal yet and focus will be on 0.9009 support turned resistance. Sustained break there will bolster the case that whole down trend from 2010 high of 1.1152 has completed and should pave the wave to 0.9333/9885 resistance zone. However, bounces of from 0.9009 will indicate that rebound from 0.8408 is merely a correction and the current down trend is still in progress for another low.
AUD/JPY is another pair the worths noting. The strong rebound last week argues that triangle consolidation from 90.00 might be finished at 84.05 already. Further rise is expected initially this week and break of 87.58 resistance will affirm this case. That is rise from 84.05 would then be resuming rally from 74.48 as well as medium term up trend from 55.53. In such case, AUD/JPY should target 61.8% projection of 74.48 to 90.00 from 84.05 at 93.64 next.
The Week Ahead
Three central banks will announce rate decision this week. BoE will keep things unchanged and would be a non-event. RBA's tone might not change much before getting a hand on Q2 inflation data and so might not move the markets much. ECB is widely expected to hike 25bps and everybody will try to get hints from Trichet on the probability of keeping the one 25bps per quarter cycle. Economic data, on the other hand, would likely drive much volatility in the markets. From US, we'll have ISM services and the usually market moving non-farm payroll. UK PMI construction and services will be watched by sterling bears for reasons to extend the selloff. Meanwhile, a number of important economic data would be released from Canada, Australia and throughout the week and should be closely watched.
- Monday: Australian retail sales, building approvals; Swiss retail sales; Eurozone Sentix investor confidence, PPI; UK PMI construction; Canada PPI
- Tuesday: Australian trade balance, RBA rate decision; UK services PMI; Eurozone retail sales; US factory orders
- Wednesday: Canada building permits; US ISM non-manufacturing; New Zealand GDP
- Thursday: Australian employment; UK industrial and manufacturing production, BoE rate decision; ECB rate decision and press conference; US ADP employment, jobless claims; Canada Ivey PMI
- Friday: Swiss unemployment; UK PPI; Canada employment; US non-farm payroll
EUR/CHF Weekly Outlook
EUR/CHF's strong rebound to 1.2332 last week suggests that fall from 1.3233 has finished at 1.1807 and a short term bottom is formed. Initial bias remains on the upside this week for further rise to 61.8% retracement of 1.3233 to 1.1807 at 1.2688. On the downside, below 1.2185 minor support will turn bias neutral and bring consolidations. But downside should be contained by 4 hours 55 EMA (now at 1.2070) and bring another rise. We'd expect consolidations from 1.1807 to continue for a while.
In the bigger picture, whole down trend from 1.6827 (2007 high) is still in progress and in any case, medium term outlook will remain bearish as long as 1.3233 reistance holds. The current down trend should target 138.2% projection of 1.8234 to 1.4391 from 1.6827 at 1.1516. Nevertheless, touching of 1.3233 resistance will indicate that a medium term bottom is formed and stronger rebound should be seen to correct the fall from 1.6827.
In the long term picture, fall from 1.6827 should be resuming whole down trend from 1993 high of 1.8234. The is some sign of re-acceleration as seen in weekly MACD and break of 138.2% projection of 1.8234 to 1.4391 from 1.6827 at 1.1516 will target 161.8% projection at 1.0609.
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