We had a lot of noises in the markets recently. The US debt ceiling
debate remained a major focus as the drama dragged on before the August 2
deadline. Moody's warned earlier in the month of a possible US
downgrade. But the rating agency said in a statement on Friday that the
triple A rating would likely be kept if the government could continue to
pay bond-holders even if a deal can't be reached by the deadline. The
Greece situation seems to be solved by markets' focus turned to Spain
now as Moody's warned of a Spain downgrade. IMF also said in a report
that outlook in Spain is "difficult" with risks "elevated" and the
country is still in "danger zone". These noises triggered much
volatilities in the markets but under these volatilities, there are
trends.
And, the trends that really worth noting are, firstly Dollar, Euro
and Sterling are staying in range against each other for the moment.
Dollar is a bit weaker against the other two. Sterling also seems to be
building momentum against euro. But, they're kept in range as each
region has its own problems. Growth in US and UK was dismal. US real
GDP grew at 1.3% annualized pace in Q2, substantially below market
expectation of 1.7%. Prior quarters figure was also revised down from
1.9% to a very poor 0.4%. UK Q2 GDP grew a mere 0.2% qoq. Outlook in
both US and UK reflect fragility in economic recovery and would likely
prompt Fed and BoE to add stimulus if situation worsens. Eurozone CPI
unexpectedly moderated to 2.5% yoy in July, reducing the need for ECB to
continue tightening while the region is still in the middle of the
never-ending peripheral debt crisis. The trends between the three
currencies are indeed, not too clear.
Secondly, Swiss France and Gold are both strong on safe haven demand.
Swiss franc extended the long term up trend and made new record high
against Dollar, Euro, and Sterling last week. Gold also jumped to record
high against Dollar at 1637. Investors are still in deep concern on the
debt problems across the Atlantic. Swiss Franc and gold would likely
remain strong in near term ahead.
Thirdly, with all the talk about US downgrade, long term treasuries
were still strong. Considering sluggish growth, risk aversion as well as
possible reversal in stocks, US treasuries remained one of the
preferred place for funds. Yield on 10 year and 30 year bonds both hit
fresh low for the year last week. The strength in US bonds, weakness in
yields, helped drive USD/JPY lower last week, taking EUR/JPY and GBP/JPY
with it. The medium term down trend in yields are confirmed and we'd
possibly see 10 year yield heading back to lower side of the range near
to 2.35% while 30 year yield would possibly head towards 3.50% level
Such development will likely support the Japanese yen further.
Fourthly, Aussie and Kiwi are both strong in spite of risk aversion
in the equity markets, both supported by resilience in their economy,
strength in the Asia Pacific region as well as commodity prices. The
stronger than expected Q2 CPI reading in Australia killed unjustified
talk of rate cut from RBA. Instead, markets are back to consensus that
the bank would indeed be forced to raise rate again by the end of the
year and such expectations boosted Aussie to new record high against
dollar. In the post meeting statement, RBNZ delivered clearly the
attention to remove the post-earthquake 50 bps insurance cut as
'current global financial risks recede and the economy continues to
recover'. It's very likely that the rate hike will place in as soon as
September.While also a commodity currency, trend in Canadian dollar is not clear,
in particular as weak data cooled speculation of BoC hike in near term.
So in short, we're not too enthusiastic on trades in EUR/USD, GBP/USD
and EUR/GBP. Instead, we'd be more interested in going long Swiss Franc
and Yen on days of risk-off, and long on Aussie and Kiwi on days of
risk-on.
Technical Highlights
GBP/CHF's long term down rend resumed last week and dived to new
record low of 1.2880. Current fall should continue in near term and
target 161.8% projection of 1.5691 to 1.4168 from 1.5183 at 1.2719 next.
In the larger picture, we'll stay bearish as long as July's high of
1.3697 holds and expect the down trend to continue to 61.8% projection
of 2.4965 to 1.5112 from 1.8113 at 1.2024 in medium term, which is close
to 1.2 psychological level.
NZD/USD's up trend accelerated further last week and made new record
high at 0.8797 so far. We're staying bullish in the pair and expect the
up trend to extend to 100% projection of 0.4890 to 0.7632 from 0.6560 at
0.9302 in medium term. Key short term support is last week's low of
0.8611 while the medium term key support level is 0.7975.
Canadian dollar is clearly the weaker one among commodity currencies.
AUD/CAD's strong rally last week suggests that pull back from 1.0555
has already finished at 1.0124. Current rise should extend through
1.0555 high in near term to target 61.8% projection of 0.9605 to 1.0555
from 1.0124 at 1.0711.
In the larger picture, we'll stay bullish in AUD/CAD as long as
1.0124 holds and expect further rise to 100% projection of 0.7168 to
0.9913 from 0.8589 at 1.1333.
The sharp fall in 10 year yield on Friday took out 2.847 support to
close at new yearly low of 2.805. The fall might indeed be
reaccelerating based on current structure. 2.688 Fibonacci projection
will be a key level to watch in near term and a decisive break there
will indeed suggest further downside acceleration ahead for a test on
lower side of the medium term range near to 2.334.
Dollar index attempted for a recovery last week but was limited by
near term trend line turned resistance. No change in the outlook that
consolidation pattern from 72.69 has finished at 76.71. We'll stay
bearish in the index as long as 55 days EMA (now at 74.83) holds and
expect an eventual break of 72.69 support to extend the down trend from
88.70. Nevertheless, note again that the outlook in EUR/USD is not
cleared yet. And, a break of 55 days EMA in the dollar index will also
mix up its outlook too.
The Week Ahead
US debt ceiling outcome will be one of the major focuses on early
part of the week. Four central banks will meet this week, RBA, ECB, BoE
and BoJ and all are expected to stand pat. The main market moving one
would be RBA and the statement could send Aussie further higher if it
delivers a hawkish tone. Meanwhile a number of economic data would be
released during the week.
As noted before, firstly Euro, Sterling and Dollar are so far kept in
range against each other and the development among these crosses will
very much depends on the PMIs and US job data. Also, these data would be
important to determine the level of risk aversions and thus determine
whether Swiss Franc or Aussie/Kiwi are the preferred currency to go long
against dollar, euro and sterling. There are also a number of important
data to determine how far the Aussie could go, including Australia
retail sales, housing, trade balance and more importantly, China
manufacturing PMI. New Zealand dollar bulls will look into New Zealand
job data too. Meanwhile, also note that Canadian job data is also
featured which could trigger some volatility in CAD crosses even though
we don't expect it to change the larger trend.
- Monday: China Manufacturing PMI; Eurozone manufacturing PMI, unemployment rate; UK manufacturing PMI; US ISM manufacturing
- Tuesday: RBA rate decision, Australia building approvals, house price index; Swiss retail sales, SVME PMI; UK construction PMI; Eurozone PPI; US personal income and spending
- Wednesday: Australia retail sales, trade balance; Eurozone services PMI final, retail sales; UK services PMI; US ISM non-manufacturing, factory orders; New Zealand employment
- Thursday: BoE rate decision; ECB rate decision; US jobless claims
- Friday: RBA monetary policy statement; BoJ rate decision; Swiss CPI; UK PPI; Canadian employment, building permits, Ivey PMI; US non-farm payroll
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