Risk selloff intensified initially last week in response to S&P's
downgrade of US rating and the hollow statement G7 regarding the
current market turmoil. Though, sentiments "stabilized" as the week went
on, after Fed pledged to keep rates low until mid-2013. The attempt to
extend the spotlight of European debt crisis to France was unsuccessful
and that's followed by banning of shorting financial stocks in France,
Italy, Spain and Belgium. Also, Spanish and Italian yields dropped
sharply after ECB buying. Major world equity indices recovered strongly
from intra-week lows. However, we believe that the market sentiments
were just "stabilized" rather than reversed. The European debt crisis
won't go way that easily. And global economies, including US, UK and
Eurozone are poised to slow down on austerity measures, dragging down
other parts of the world. So, risk assets will remain vulnerable to
further selloff even though more consolidations would likely be seen
before Bernanke's Jackson Hole Speech on August 26.
The Fed delivered a much more dovish policy statement in August as
the path of recovery has been 'considerably slower than expected'. As a
prelude to additional easing, the central bank pledged for the first
time that interest rates will stay at exceptionally low levels at least
until mid-2013 and reinvestment of maturing proceeds will be
maintained. Wall Street rebounded after the report as investors looked
forward for additional stimulus in coming meetings. Meanwhile, markets will be eagerly waiting for Bernanke's speech in the
Jackson Hole meeting. Bernanke announced QE2 at Jackson Hole last year
and there are rumors that he will also announcement something that moves
market this year. That might include additional bond purchases of over
$1T, targeting at long term securities like 10 year and 30 year bonds to
push funds back to risk assets. In addition, Fed might remove the
interest payments given to excess bank reserves at the central bank.
We'll wait and see what Bernanke finally delivers.
In the currency markets, the biggest shock was the reversal in Swiss
Franc's strength after SNB official talked about temporary peg to Euro.
SNB Vice Chairman Thomas Jordan was quoted saying "any temporary
measures to influence the exchange rate are permissible under our
mandate as long as these are consistent with long-term price
stability," and that could include a temporary peg to Euro. SNB's move
of cutting rates, adding liquidity to the markets are so far very
ineffective. Meanwhile, SNB officials should be aware of the fact that
outright intervention in the markets in 2009/10 caused substantial
losses with little impact and almost triggered Chairman Philipp
Hildebrand to step down. While we should still have a long distance
from pegging Swiss Franc with Euro, the SNB might have strong
determination to defend EUR/CHF from breaching parity. A wide range of
tools could still be used and as Jordan hinted, that might include
creating negative interest rate environment for non-resident Swiss
Franc deposits. There is also call for tax on foreign deposits.
While the Swiss franc pulled back sharply, the Japanese yen was the
strongest currency last week on safe haven flows. Though, we saw some
hesitation to push the Japanese yen further lower towards the end of the
week, partly due to recovery in stocks. Japan's Finance Minister
Yoshihiko Noda declined to comment on the effectiveness of the
unilateral intervention on August 4. But he warned that Japan would
consider various options to curb yen's strength if excessive yen rises
persist.
The BOE lowered its economic forecasts amid global economic turmoil.
In the latest quarterly inflation report, policymakers stated that
the biggest risk came from sovereign crisis in the Eurozone. Risks to
growth are skewed to the downside as slowdown in growth may turn out
to be more persistent than previously expected. The BOE retained the
view that inflation will return to a little below target in the
medium-term. The BOE left the Bank rate unchanged at 0.5% and the
asset purchase program at 200B pound at the meeting last week. Yet, it
reiterated the flexibility to add or remove stimulus measures when
conditions warrant.
Technical Highlights
S&P 500 dived to as low as 1101.54 last week before drawing
support from 38.2% retracement of 666.79 to 1370.58 at 1101.73 and
recovered. A short term bottom is in place. However, note firstly that
price actions from 1101.54 are so far corrective which suggests it's
merely consolidations. Also, please be reminded that S&P 500
completed a medium term head and shoulder reversal pattern earlier (ls:
1344.07, h: 1370.58, rs: 1339.62). The trend line from 666.79 was also
firmly broken. So, we'd believe that whole up trend from 666.79 was
over. Hence, upside of the current consolidation should be limited by
neck line resistance at around 1260 level and bring fall resumption.
S&P 500 should eventually break through 1101.54 towards 1010.91 key
support and below.
Dollar index continued to engage in range trading around 55 days EMA
last week. Near term outlook remains neutral. The dollar index might
continue stay in range of 74/77 for a while but the current development
is still favoring more downside. Break of 74.18 will likely send the
index through 72.69 towards 70.70 record low.
GBP/CHF basically followed other swiss crosses, diving to new record low
of 1.1464 initially then rebounded strongly. A short term bottom is in
place after brief break of long term target of 161.8% projection of
2.4965 to 1.5112 from 1.8113 at 1.2024. More rise would likely be seen
initially this week. But at this point, we'd expect strong resistance
from 1.3038 cluster resistance (38.2% retracement of 1.5691 to 1.1464 at
1.3079) to limit upside. We'd expect some sideway consolidation above
1.1464 before the long term down trend finally resumes to parity.
Australian dollar has been extremely weak in the past two weeks, just as
other commodity currencies. EUR/AUD's rebound from 1.2927 extended to
as high as 1.4261 but failed 1.4341 resistance and retreated. AUD/USD is
at a junction as it's just hold above a medium term retracement level.
And Aussie's fate would very much depends on whether AUD/USD would have
another deep fall and on whether EUR/AUD would take out 1.4341
resistance. Decisive break of 1.4341 will complete a double bottom
reversal pattern (1.2926, 1.2927) and would signal completion of the
down trend from 2.1127 and medium term reversal. But before that, we'll
stay neutral in cross first.
The Week Ahead
Risk sentiments should remain stable this week and stocks, as well as
commodity currencies might extend recovery. But upside potential should
be relatively limited and markets would like like stay in range for a
while. Dollar, Euro and Sterling would likely stay in range against each
other, going nowhere though the pound is vulnerable to some weakness
considering the even risks. Swiss France and Japanese yen might try to
regain some strength towards the end of the week.
- Monday: Japan GDP; US Empire State Manufacturing, TIC capital flow, NAHB housing market index
- Tuesday: RBA minutes; German GDP, Eurozone GDP; UK CPI; US new residential construction, industrial production; New Zealand PPI
- Wednesday: UK employment, BoE minutes; Eurozone CPI; UK PPI
- Thursday: Japan trade balance; UK retail sales; US CPI, jobless claims, existing home sales, Philly Fed survey
- Friday: German PPI; UK public sector net borrowing; Canada CPI
USD/CHF Weekly Outlook
USD/CHF dived to new record low of 0.7065 last week but staged a
strong rebound since then as the Swiss Franc pulled back sharply after
SNB comments. At short term bottomed is formed at 0.7065 and we'd expect
more consolidations above this level for a while. Further rebound is
expected initially this week to 0.7801 resistance and above. Though,
we'd expect upside to be limited below 0.8081 resistance and bring
another fall to extend the consolidations. Below 0.7548 minor support
will flip bias back to the downside for retesting 0.7065 first.
In the bigger picture, while the rebound from 0.7065 was strong,
there is no indication of trend reversal yet. We'll stay bearish as long
as 0.8275 support turned resistance holds. Current down trend from
1.1730 is still expected to extend through 0.7 psychological level.
Though, that would come after some more consolidations above 0.7065
first. Meanwhile, sustained trading above 0.8275 will indicate that such
fall from 1.1740 has finished and open up the possibility of rebound
back to 0.9634 support turned resistance.
In the longer term picture, long term down trend from 2000 high of
1.8305 is still in progress. There are various interpretation of the
price actions. But after all, USD/CHF should be resuming the set of
impulsive fall from 1.8305 to 1.1288. The current down trend might now
be targeting next projection level of 100% projection of 1.8305 to
1.1288 from 1.3283 at 0.6266.
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