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Q4 FX Outlook: USD Rally to Extend

Waiting for a US dollar rally this year has felt like Waiting for Godot at times as we anticipated one for a long time before the greenback finally rallied sharply in late August and early September after a long period of stagnation over the summer, despite a number of market developments that have normally proven positive for the currency in the past. Those included falling equity markets, rising signs of worry in other risk indicators and in global growth concerns, particularly in Asia and emerging markets.

In our Q3 FX outlook, we discussed the “ugly horse-race” among the G-10 currencies because we felt that few if any of the major or minor developed economies would offer compelling reasons to buy their currencies and that it would be a question of which currencies appeared the least hobbled by fundamentals. The basic outlines of such a development have come to pass, though the USD was very slow to begin rallying as economic data out of the U.S. was terrible as well. But, the relative slowing in other economies and thus a tightening in interest rate spreads was indeed a positive driver for the eventual USD rally. And because U.S. rates were already so low, the tightening has even occurred despite Federal Reserve Chairman Ben Bernanke’s promise to keep the monetary pedal to the metal on low rates until at least mid 2013 – and despite hints that QE3 in some shape or form is on the way. To take the most pronounced example of falling yield spreads, the highest yielding currency among the G-10, the Australian dollar (overnight rate at 4.75 percent as of mid-September) saw its 2-year government bond yields drop from 4.75 percent at the beginning of Q3 to about 3.50 percent by mid-September, a 125-bp drop as compared with a drop in US 2-year rates of a mere 25 bps or so in the same time frame.

We suspect a further tightening in yield spreads between the USD and other currencies will continue to unwind the carry advantage built up against the USD last year and at the beginning of 2011 as economies around the world, particularly in Europe and to some degree in Asia and in developing markets, stumble through a soft patch in growth or worse. At the same time, yet another round of government stimulus and Fed QE could see a few quarters of solid GDP performance as US politicians pull out all the stops to get the economy going and then jostle to take credit for it ahead of the presidential election next November. Efforts in this direction will be aided by the long period of dollar weakness, which has made the U.S. extremely competitive for sourcing production and services and attractive for investment.

Chart: US 2-year yields vs. average G-10 currency yield. In the chart above we have plotted the spread of the 2-year swap rates for the USD vs. an average of the 2-year swap rates for the remainder of the G10 currencies. We’ve then compared this with the USD’s performance vs. an evenly weighted basket of the remainder of the G10 currencies. It is clear that from a yield perspective, owning the USD is far less unattractive than it was just a few months ago. It is also clear from the chart above that the USD has been slow to respond to this development.

There are two further potential sources of USD strength – one is the likely return of the Homeland Investment Act (HIA), the original version of which allowed U.S. companies to repatriate profits tax free back in 2005. Q4 would appear to be the most likely timeframe to discuss and enact an HIA2, which would then go into effect in the New Year. Estimates of the amounts that might be repatriated this time around are far higher than the original HIA and could reach far over half a trillion dollars.

The other potential source of strength for the USD is that there is simply no alternative in a deleveraging world going where participants are unwinding their previous bets on “everything up versus the USD”. The lack of credibility of the Euro as the single currency faces an existential crisis now and in the coming few quarters will also continue to delay the demise of the USD’s status as the world’s reserve currency. Of course, these developments will not boost the U.S. currency forever and we wonder how long it will be until the long run accumulation of the twin U.S. deficits eventually returns to haunt the U.S. debt market and its currency.

Europe - crunch time
As we discuss in our introductory article to this publication, it is crunch time for the European Union, as the efforts of the European Central Bank and EU politicians have failed to outrun the galloping problems caused by the awkward framework of a single currency and 17 finance ministries and 17 sovereign bond markets. As we are leaving Q3, the situation is fast reaching the ultimate crossroads: either the EU makes a strong show of solidarity or a solution will quickly be forced upon it by the markets.
The Euro could see a relief rally if the EU manages to muddle through with the solidarity enforced by the market’s discipline, but a longer term solution to European debt woes would likely involve some form of QE by the ECB to keep bond markets orderly and dig European banks out of their liquidity pinch. And if the USD has been so punished for the Fed’s various rounds of QE, why shouldn’t a similarly dim view be taken of the Euro for also engaging in money printing? Of course, the immediate relief that sovereign debt investments won’t go immediately bad could offset some of the deleterious effects of a European version of QE (save for Greece, where a severe haircut or Greek exit is a question of time). And a more stable sovereign debt and financial services environment could see the Euro rewarded for its deep liquidity versus higher beta, more pro-cyclical currencies as global growth possibly hits a soft patch over the next couple of quarters.

The Scandies - safe havens?
There was a flurry of talk about the potential for NOK and SEK to become safe haven currencies in the wake of the Swiss National Bank’s frantic and so far successful efforts to put a floor in EURCHF at 1.20. Immediately in the wake of the SNB’s announcement in early September, the market drove both NOK and SEK sharply stronger, completely out of proportion to any other development that could have explained the situation besides the idea of safe haven seeking (or reversals based on positioning?). Afterwards, however, the strengthening in these currencies was erased. So are they potential safe havens or not? There are two important features a currency must have in order to be considered a safe haven in today’s environment – a superior sovereign balance sheet and deep liquidity. CHF used to be the best option until the franc’s incredible strength made the SNB and Swiss government “go nuclear” in their intervention. Sweden has a very solid balance sheet and Norway has an impeccable one, but both SEK and NOK fail the liquidity requirement for a true safe haven. Also, SEK is traditionally a pro-cyclical currency due to its economy’s dependence on export markets. NOK is similarly dependent on oil exports, though it tries to sterilise oil revenues with its pension fund. Of the two, NOK would appear a safer harbour than many of the rest of the G-10 currencies, but it would be surprising to see performance similar to the Swiss franc’s (where the oversized Swiss financial industry was an additional contributor to the franc’s aggravated rise).

The Antipodeans: still waiting for the fall
Last time around we asked whether the strength in the Aussie and Kiwi versus the rest of the market was a bit overdone. Both currencies have begun to trade a bit more sideways in Q3, including one particularly sharp sell-off as equities slid off a cliff in early August. The kiwi has been the stronger of the two due to a few months of perkier economic data and the belief that the Reserve Bank of New Zealand might unwind the emergency rate cut taken in the wake of the earthquake earlier this year. But both rather extremely overvalued – particularly the Aussie, given present market circumstances and our expected scenario for Q4. Because Australia has the highest policy rate among the G10 currencies, it also will likely have the highest beta to risk as the Reserve Bank of Australia has more potential for policy accommodation. The housing bubble appears to be in near full deflation phase now Down Under and could cause a considerable pinch in the Australian banking sector, suggesting that eventually even the RBA has to get in on the Maximum Intervention game in the quarters to come.

Chart: AUD and NZD against the rest of the G-10. Aussie and kiwi rose to new multi-year highs against the rest of the major currencies during 2011 and were remarkably resilient despite the heavy sell-off in risk and weakening emerging market currencies. Just before publishing time, however, they suffered a setback in the wake of the FOMC meeting, which may serve as a catalyst that pushes them lower to a fairer value, given the darkening clouds in the global economic outlook and their normal pro-cyclical correlation.

G-10: the bottom lines

USD: A lack of alternatives and Maximum Intervention gone global will make the USD continue to look less unattractive in Q4 and the currency has been so weak for so long that the U.S. economy could reap some of the benefit.
EUR: It is crunch time for the Eurozone, which will need to pull together or face a further – and this time more urgent – existential challenge. Will Germany step up to foot the bill for the periphery?
JPY: The government bond rally and declining interest rate spreads (the carry in the carry trade) are the only real supports, as the domestic Japanese economy is relatively moribund. If bond markets pivot some day, so will the JPY, until then, it could remain strong for a while yet.
GBP: Sterling shows us the degree to which the Euro’s woes are driven by its untenable political and central bank framework rather than by the absolute magnitude of its sovereign debt as the UK debt load and deficits are far worse. Yet, GBP has already been endlessly punished, and similar to the USD, could rally “by default” due to dimmer prospects elsewhere relative to previous expectations.
CHF: The Swiss franc has become the latest, most impressive victim of maximum intervention, which makes the world believe that no fiat currency can be a true safe haven forever. We assume that the determination of the SNB and Swiss Government will keep the CHF weaker.
AUD: Aussie did sell-off when risk appetite swooned in early August, but it is far too resilient given risk averse circumstances, prospects for slower growth in Asia, and on the risk of a disorderly unwinding of the domestic housing market. A heady adjustment lower could finally arrive in Q4 for the Aussie.
CAD: It will continue to trade as an “in-betweener” – a lower beta risk currency that may find resilience in its exposure to a less weak than feared U.S. economy. Still, the currency has only so much upside despite the solidity of the sovereign balance sheet and banks, as Canada features the world’s most overleveraged consumer.
NZD: Some of its strength has derived from economic activity from earthquake rebuilding and some of it from Chinese diversification interest (which throws huge weight around in the less liquid kiwi). The rally could falter in Q4 on weaker than expected Asian growth prospects and as the RBNZ stays pat.
SEK: Likely to remain a pro-cyclical currency – the country could face a slowdown that could be multiplied by a European demand slowdown. In addition, Sweden’s housing market is a raging bubble, though the signs of strain have yet to show much. Could they begin to do so in Q4?
NOK: Rate expectations have tumbled as with most other currencies where there is enough rate to cut. NOK may find a safe harbour bid to a degree due to the country’s unmatched sovereign balance sheet, so strength versus the most pro-cyclical currencies might come into play in Q4 and Q1.

Daily Report: Swiss Franc Remains Weak, USD/JPY Heavy

The greenback edged higher across the board except the Japanese currency as the yen rebounded versus most counterparts especially against the Swiss franc, CHF/JPY fell over 600 points yesterday. The franc tumbled everywhere yesterday after comments from SNB officials as they indicated the possibility of a temporary peg of euro and Swiss franc in order to curb the unstoppable rally in franc. EUR/CHF posted the biggest one-day decline in history and USD/CHF also rallied 400 points yesterday from 0.7237 to as high as 0.7689.

With EUR/CHF fell to historical low of 1.0075 earlier this week followed by series of comments from SNB officials suggesting drastic measures (including EUR/CHF peg and negative interest rates), it looks like the SNB is determined to keep the franc above parity against the euro. Having said that, some investors are skeptical towards the actual implementation of pegging euro and Swiss franc as SNB chairman indicated before the peg will need a change in constitutions. Some analysts also suggested that the SNB will have to accept certain level of decrease in the independence of the SNB if they actually apply the peg and with the debt crisis in eurozone, this may not be healthy for Swiss economy.

Although USD/JPY recovered from yesterday's low of 76.30 to an intra-day high of 77.02 earlier today, the pair then retreated as Nikkei 225 fell back to negative territory (now is down 36 points), Japanese retail and margin traders were seen selling AUDJPY and NZDJPY. Some said they are still worried the Bank of Japan may intervene with some exporters on holiday due to the new power saving scheme, therefore they bought yen against aussie and kiwi in wake of recent weakness in commodity currencies. AUD/USD also slipped over a 100 points from the start of today's trading partly due to risk aversion and Asian fund, European names and real money accounts were seen selling the pair and AUD/JPY. It seemed recent soft economic data from Australia, New Zealand and Canada are still hurting the 3 currencies as traders speculate the central banks will turn to cut rates in the near future. Traders still find the area above 77.00 level quite heavy as the pair quickly retreated from there twice yesterday, some sizeable offers (option-related) are still reported in the area of 77.00-77.30. Familiar comments or warnings from Finance Minister Noda became very much ineffective to the forex market, only real action could lift the pair away from its historical low of 76.25. Meanwhile Japan's cabinet has lowered its growth forecast from 1.5% to 0.5% for the current fiscal year, not much reaction from the market yet as this revision is more or less in line with early forecast by BOJ of 0.4% for 2011/12 fiscal year. Nonetheless, the government kept a relative optimistic forecast of 2.7-2.9% for the next fiscal year which is also very close to the projection of BOJ at 2.9%.

Choppy trading in euro continued since yesterday, after falling briefly below previous support at 1.4122, the single currency found good size option-related bids (around 700 million) right above the 1.4100 (working for 1.4100-1.4700 DNT) and rebounded quite sharply on the back of yesterday's rally in EUR/CHF on speculation of a temporary EUR/CHF peg. However, with the eurozone debt crisis still the focus, traders were unwilling to push euro further higher and investors prefer to wait for the release of eurozone June industrial production data at 09:00GMT.

On the data front, more important data will come in New York time with U.S. retail sales at 12:30GMT, followed by Aug University of Michigan confidence survey at 13:55GMT and June business inventories at 14:00GMT.

AUD/USD Daily Outlook

Daily Pivots: (S1) 1.0187; (P) 1.0273; (R1) 1.0436;

AUD/USD continues to engage in choppy consolidations above 0.9926 and more sideway trading could still be seen. Note that in case of another recovery, we'd expect upside to be limited by 1.0526 minor resistance. On the downside, break of 0.9926 will resume the fall from 1.1079 towards channel support (now at 0.9664) and below.

In the bigger picture, bearish divergence condition daily MACD suggests that rise from 0.8066 might be finished. And that's possible considering that AUD/USD has just missed a long term projection target at 1.1084. The break of 1.0390 support affirms this case and deeper decline would now be seen towards long term channel (now at 0.9664). But we will treat it as a correction only. And, as long as 0.9404 resistance turned support holds, the whole up trend from 2008 low of 0.6008 should still be in healthy status.

Weekly Review and Outlook Underlying Trends in Volatile Markets, Strength in CHF, AUD, NZD and JPY

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

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.

Daily Report: Dollar Rebounds on U.S. Debt-Ceiling Talk Progress

The greenback rebounded as U.S. President Obama signaled there is some progress in the debt-ceiling negotiations. Republican House leader Eric Cantor said the deficit reduction plan, so called Gang of Six proposal, was constructive but more work are still needed to be done. President Barack Obama also called the reveal of this proposal ‘good news', his endorsement of the deficit-cutting measures was interpreted as a step forward in raising the debt-limit so as to avoid default. His remarks led some dollar-buying activities especially against the low yielding currencies like yen and Swiss franc, USD/JPY rebounded from yesterday's low of 78.82 to an intra-day high of 79.32 before retreating again as IMF reported that Japan's economy is showing signs of recovering from March earthquake and tsunami which shook the country and could expand later this year especially in its manufacturing sector, they expect Japan to show a 2.9% growth from this year's 0.7% contraction. Meanwhile Bank of Japan deputy governor Yamaguchi said the central bank is closely watching forex moves and will take decisive actions as needed, Japan's MOF also commented that currency markets are showing one-sided moves and he is carefully monitoring market moves. At the moment, offers remain at 79.30 up to 79.50 with stops still seen above 79.65-70, on the downside, bids are tipped from 79.00 (option related) down to 78.80 and more buying interest is seen at 78.50-60 with big stops remain at 78.40.

Despite yesterday's rise in euro to as high as 1.4217 before retreating as Germany's Chancellor Merkel said Thursday meeting will not provide any big steps to solve all the debt problems in the near future, the pair slipped overnight to 1.4108 on dollar's broad-based rebound after president Obama said he welcomed the ‘Gang of Six' proposal. Traders are likely to stay on the side ahead of the special summit tomorrow, bids from Asian and Eastern European names are reported at 1.4100-10 and further out at 1.4070 and 1.4050 with mixture of bids and stops remain around 1.4000-10 whilst option related offers are located at 1.4180-00.

The British pound remained locked within narrow range as focus is on Europe and U.S., some traders are also awaiting the release of Bank of England MPC policy meeting minutes at 08:30GMT. The minutes are expected to show a voting result of 7-2 with both Martin Weale and Spencer Dale voted for an immediate rate hike whilst another committee member Adam Posen remains supportive for an expansion of the QEP, if any more members of the remaining 6 also favoring an increase in QE, this would become positive news of sterling. U.S. fund and sovereign names were seen buying cable yesterday and bids from same parties are noted at 1.6070-80, 1.6050 and 1.6000-10 with big stops remain below 1.6000. On the upside, offers are reported at 1.6150-60 and further out at 1.1.6190-1.6200.

The Swissy also rebounded overnight on President Obama's remarks, however, the pair ran into offers around 0.8278 and retreated, safe-haven demand for Swiss franc are still seen with offers tipped at 0.8280-0.8300 and further out at 0.8330 and 0.8350 with stop above whilst option-related bids are reported from 0.8200 down to 0.8170 with stops placed below 0.8150 and further out at 0.8100.

USD/CAD Daily Outlook

Daily Pivots: (S1) 0.9450; (P) 0.9526; (R1) 0.9569;

Intraday bias in USD/CAD remains neutral as fall from 0.9912 is in progress and should be targeting 0.9444 support next. Break will confirm medium term down trend resumption. In that case, next near term target is 61.8% projection of 1.0671 to 0.9444 from 0.9912 at 0.9154. On the upside, break of 0.9635 resistance will indicates short term bottoming and argue that consolidation from 0.9444 is going to extend further. But before that, we'll stay cautiously bearish in USD/CAD even in case of recovery.

In the bigger picture, medium term outlook in USD/CAD remains bearish and the down trend from 2009 high of 1.3063 is expected to continue lower. Nevertheless, even in that case, we'd again start to look for reversal signal as USD/CAD approaches 0.9056 key support (2007 low). On the upside, however, break of 0.9912 will be a signal that 0.9444 might be the medium term bottom already and should turn outlook bullish for a test on 1.0851 key resistance next.

Forex Weekly Outlook – July 18-22

US Housing data, Euro-Zone German ZEW Economic Sentiment and German Ifo Business Climate and US Unemployment claims are among the big market movers this week. Here is an outlook on the major events ahead.

Last week President Barack Obama pressured congressmen to resolve the impasse over the debt limit and fiscal policy by summoning Congressional leaders to the White House aiming to reach an agreement and present a full scale plan within the next few days. Will the US congress reach a resolution this week?

Apart from the usual events, the beginning of the week will see a reaction to the stress tests published on Friday. Some banks’ stocks might see a “Black Monday” and this may impact the euro.

Let’s Start

New Zealand CPI: Sunday, 22:45. CPI gained by 0.8% in the first quarter above the RBNZ’s comfort zone. While some of this will reflect the lagged effect of the Goods and Services Tax last October. Nevertheless the RBNZ does not expect rates to increase until the fourth quarter, even though GDP was great in New Zealand.
US TIC Long-Term Purchases: Monday, 13:00. TIC Long-Term Purchases increased in April to $30.6B better than the previous month but still very low due to the Greek bonds affair. A larger increase to $48.4B is predicted.
Euro-Zone German ZEW Economic Sentiment: Tuesday 9:00. The Greek crisis spoiled German sentiment in April falling from 3.1 to -9.0 when 3.0 drop was predicted by analysts. However the decrease characterizes the financial sector rather than the manufacturing industry gaining some positive readings. Further drop to -10.9 is expected now.
US Building Permits: Tuesday 12:30. Approved building permits increased in May added 0.5M from to the previous month reaching 0.61M above the 0.55M expected. This positive reading indicates increased activity in the market and may also increase home prices. The sale number of building permits is predicted now.
Canadian Rate decision: Tuesday, 13:00. The Bank of maintained its benchmark overnight rate at 1% in May 31 however announced in its last rate statement it would closely monitor inflationary pressures to decide upon a possible rate hike however no change is predicted this time.
US Existing Home Sales: Wednesday, 14:00. A decrease occurred in sales of existingU.S. homes dropping to a 4.81 million annual rate from 5.00 million in the previous month. 1.8 million Properties under foreclosure lower existing home prices and sluggishness is expected to continue for the time being. An increase to 4.95 million is forecasted.
US Unemployment Claims: Thursday, 12:30. Initial jobless claims dropped 22,000 to 405,000 last week, much better than the 413,000 anticipated and following 427,000 claims in the week before. The low reading is partially due to fewer layoffs than predicted on the auto industry. A small increase to 406,000 is predicted now.
US Philly Fed Manufacturing Index: Thursday, 14:00. Manufacturing activity in the U.S. Mid-Atlantic region decreased unexpectedly in June to the lowest level since July 2009 plunging to -7.7 from 3.9 points gain in the previous month and contrary to predictions of a rise to 6.8. A rise to 4.6 is forecasted.
Euro-Zone German Ifo Business Climate: Friday, 8:00. German business confidence unexpectedly grew in June to 114.5 from114.2 in May indicating a possible ending to the debt crisis clouds overshadowing the Euro-Zone in the past months. Analysts expected a drop to 113.4 howeverGermany’s domestic economy is thriving. A small decrease to 113.7 is forecasted.
Canadian inflation data: Friday, 12:30. Core consumer price inflation inCanada increased more than expected in May by 0.5% after gaining 0.2% in April. economists had expected core CPI to rise by 0.2% in May. The rise was led by higher petrol prices. CPI is expected to drop 0.2% and Core rates are expected to be flat this time.

Weekly Review and Outlook Euro Broadly Pressured after a Volatile Week, USD/JPY Heading Back to 80

It's been an extremely volatile week with lots of headlines flying around but three developments should be paid more attention to. Firstly, Euro was broadly weak in spite of ECB's rate hike and the signal of maintaining tightening bias. Even though the Greece situation was temporarily resolved, worries on contagion has indeed intensified. Secondly, the sharp reversal in US treasury yields took yen crosses broadly lower on and could be setting the stage for more upside in the Japanese yen ahead. Thirdly, even though the job data from US was deeply disappointing, selloff in risk was relatively brief and shallow. There is no confirmation of reversal in risk sentiments and dollar remains vulnerable to more selling ahead.

ECB raised the main refinancing rate by +25 bps to 1.5%, the highest level since March 2008. The interest rate corridor stayed unchanged at +/-75bps. While there were few changes in the language in the accompanying statement, the central bank noted the momentum of economic recovery has moderated. The ECB continued to describe the monetary stance as 'accommodative'. Concerning inflation, the ECB stated inflation rates will likely stay above +2% in coming months and it pledged to prevent faster inflation to give rise to 'second-round effects'. The central bank did not signal when the next rate hike will be. Yet, the comment that 'it is essential recent price developments do not give rise to broad based inflation pressures over the medium term' indicates further rate hike later this year cannot be ruled out.

In spite of rate expectation, Euro's upside was limited by intensifying concern on debt crisis contagion. Moody downgraded the credit rating of Portugal to Ba2, or junk, citing there is 'growing risk that Portugal will require a second round of official financing before it can return to the private market'. The downgrade was also affected by the rollover plan for Greek debts. Moody worried that involvement of private investors in a new bailout plan for Greece will later be set as a pre-condition in Portugal's rescue plan. That is 'very significant because not only does it affect current investors, but it is likely to discourage new private sector lending going forward, and therefore reduce the likelihood that a country like Portugal will be able to regain access to the capital markets at a sustainable cost'. The downgrade triggered worries about a 'downgrade contagion' to Ireland. CDS on Portuguese, Irish and Greek sovereign debts rose to record highs last week. Indeed , CDS on Portugal is suggesting more than 50% chance of default in five years.

Technically, EUR/USD is still staying inside a triangle pattern in converging range, suggesting indecisiveness in the market. However, The sharp fall in EUR/CHF last week is opening up the case for another record low below 1.18 in near term. The steep decline in EUR/GBP also suggests that the cross is vulnerable to more selloff back to 0.86 level. EUR/JPY reversed ahead of 117.88 resistance and the technical development indicates that fall from 123.31 is likely resuming in near term to below 113. EUR/AUD's break of 1.3228 support also suggests that recent down trend is resuming for 1.2926 record low. We'd believe that 1.4 in EUR/USD and 1100 in XAU/EUR are important levels for Euro to defend. While Euro is bearish against swissy, yen and aussie, and to a lesser extent sterling, the selloff might not accelerate as long as these two levels holds. However, break will trigger much steeper and broad based selloff in the common currency.

The benchmark 10 years US yield dropped sharply last week after disappointing US non-farm payroll report and just managed to hold 3.00%. Expectation on the non-farm payroll report was high the impressively strong ADP report. But, investors were hit back to reality after NFP showed merely 18k job growth in June and that's way off market expectation of 89k, not to mention that 150-200k adjusted expectation following the 157k ADP job growth. May's data was also revised down to 25k. April's figure was revised down slightly to 217k. May and June together were the worst two months total since last August and September. Unemployment rate also unexpectedly ticked higher to 9.2%. The poor job data reignited talks on the prospect of QE3. A former BoE policy maker, now a professor at Dartmouth college commented on the US situation and said "QE3 looks increasingly on the table. What are they going to do, let unemployment start rising again?"

Yen crosses were generally lower following US treasury yield on Friday. In particular, USD/JPY seemed to have finished the recovery pattern that started back in June and is possibly heading to below 80 again. Further weakness in USD/JPY, if accompanied by 10 year yield sustaining below 3%, will likely take other yen crosses lower ahead.

DOW looked like going to have a take on 12876 high after the ADP number on Thursday but the brake was pressured hard after the poor NFP number. Nevertheless, at this moment, we're not seeing a reversal in stock year and that is possibly just a brief retreat. Stocks are indeed supported by the QE3 speculations. And as long as 12539 in DOW and 1330 in S&P 500 hold, we're still expecting more upside in stocks in near term. Similarly, commodities are still near term bullish as long as the CRB index stays above 340 level. And such developments will continue to support Canadian, Aussie and Kiwi. Indeed, AUD/USD and USD/CAD were just staying in tight range in spite of the post NFP pull back. Kiwi even managed to close at new record high against the greenback. Strength in equities, commodities and weakness in treasury yield will limit dollar's rebound attempt.

Dollar index continued to stay in triangle pattern from 72.69 last week. More sideway trading would likely be seen in near term. But after all, we'll stay bearish as long as 76.36 resistance holds and expect an eventual downside breakout to extend the down trend from 88.70 to 70.70 historical low.

Bernanke's testimony at House Financial Services Committee on monetary policy and economy and FOMC minutes will be a main focus of the week. The minutes will likely provided details of the discussion on monetary policy normalization strategy. Bernanke will likely further provide details in the testimony. A main focus is on whether Bernanke would loosen up his guard on further quantitative easing in consideration of the poor job data in Q2. Another focus will remain on the development in Greece's second bailout package. It's reported that no progress was made on the details of private sector involvement in the second bailout after two weeks of negotiation among EU, ECB and IIF. EU finance ministers will also discuss the results of stress tests on 91 European banks that are due to be released on July 15 by the European Banking Authority.

Monday: Japan household confidence; Canada housing starts
Tuesday: BoJ rate decision; UK RICS house price balance, CPI, trade balance; US trade balance, FOMC minutes; Canada trade balance
Wednesday: China GDP; Swiss PPI; UK jobless claims; Eurozone industrial production; US import prices, Bernanke testimony
Thursday: New Zealand GDP; Eurozone CPI; US retail sales, PPI, jobless claims
Friday: BoJ Minutes; Eurozone trade balance; US CPI, Empire state manufacturing, industrial production, U of Michigan confidence;

USD/JPY Weekly Outlook

USD/JPY edged higher to 81.46 last week but subsequent reversal and break of 80.76 minor support suggests that choppy recovery from 79.69 has completed already. Initial bias remains on the downside this week and break of 80.25 minor support will affirm the case that fall from 82.21 is resuming. Further break of 79.56/69 support zone will also confirm resumption of whole fall from 85.51 and should target 61.8% projection of 85.51 to 79.56 from 82.22 at 78.54 next. On the upside, break of 81.46 is needed to invalidate hits view or we'll stay cautiously bearish.

In the bigger picture, note that USD/JPY's rebound from 76.41 low was held by medium term long term falling trend line as well as the 55 weeks EMA. Thus, down trend from 124.13 could still be in progress. Current fall from 85.51 might now extend through 75.98 for a new record low. In any case, break of 85.51 is needed to revive the case that USD/JPY's down trend has finished. Otherwise, we'll stay cautiously bearish in the pair.

In the long term picture, the minimum target of trend resumption, that is, a break of 79.75 low (1995 low) was met. While the rebound to 85.51 was strong, there is no indication of reversal of the multi-decade down trend yet. We'd look at the structure of the rise, as well as whether USD/JPY could take out 100 psychological level before giving favor to the trend reversal case. Otherwise, we'll treat current price actions as part of a long term consolidation pattern at best.

Dollar Jumps on Strong CPI Reading, Sterling Dives on Jobs

Dollar extends rebound in early US session after data showed inflation exceeded forecasts in May. Headline CPI accelerated to 3.6% yoy versus expectation of 3.4%, higher number since October 2008. Core CPI also beat expectation of rose 1.5% yoy, highest number since January 2010. However, Empire state manufacturing index unexpectedly turned negative to -7.8, the worst number since November, suggesting contraction. Dollar index managed to break above 75 level to resume recent rebound from 73.50 and is set to target 76.36 resistance next.

On the other hand, Sterling is soldoff today after disappointing job market data. Claimant count rose more than expected by 19.6k in May. Unemployment rate was unchanged at 7.7% in April. Also, wage growth slowed to 2% in three months through April, the lowest since the quarter through August. The data brought traders back to reality that BoE would stand pat for much longer than it was through three months ago.

Australian dollar was lifted by hawkish comments from RBA Governor Stevens. Stevens said that "further tightening of monetary policy is likely to be required at some point." He emphasized the importance of a huge trade and mining boom that would eventually boost incomes and investments over time. Demand from China and India in natural resources lifted Australia's term of trade to 85% above average of the last century and would add extra income worth of 15% of GDP. Stevens said that another comprehensive round of price data in late July and that would be a key for deciding when to raise rates again.

Other data released today saw Canadian manufacturing shipments dropped -1.3% mom in April. Eurozone industrial production rose 0.2% mom, 5.2% yoy in April. Swiss combined PPI dropped -0.2% mom, -0.4% yoy in May. Australian consumer sentiment dropped -2.6% in June while housing starts rose 3.1% in Q1.

Dollar index's break of 74.96 resistance confirms that rebound from 73.50 has resumed. Bias is back to the upside and further rise could now be seen towards 76.36 resistance first. Note bullish convergence condition in daily MACD. Break of 76.36 resistance will firstly confirm that whole rebound from 72.69 has resumed. Secondly, this will argue that dollar index has bottomed out in medium term and would pave the way to medium term retracement level at 78.80.

GBP/USD Outlook

Daily Pivots: (S1) 1.6336; (P) 1.6388; (R1) 1.6422;

GBP/USD's fall from 1.6441 accelerate to as low as 1.6226 so far today. The development indicates that choppy correction from 1.6546 is still in progress and would likely extend below 1.6212 support. However, we'd still treat price actions from 1.6546 as a correction only based on its structure and hence, would be looking for strong support above 1.6058 to contain downside and bring rebound. Above 1.6441 will flip bias back to the upside for 1.6546 and then 1.6746. However, break of 1.6058 will indicate resumption of fall from 1.6746 instead.
In the bigger picture, price actions from 1.3503 (2009 low) are treated as consolidation to long term down trend from 2007 high of 2.1161. Rise from 1.4230 is treated as the third leg of such consolidation and with 1.5935 support intact, such rise could still continue for 1.7043 resistance. But after all, strong resistance should be seen between 1.7043 and 50% retracement of 2.1161 to 1.3503 at 1.7332 to limit upside. On the downside, below 1.5935 support will indicate that rise from 1.4230 is completed and further break of 1.5343 will confirm this case and target 1.3503/4230 support zone.

If you're looking for a safe haven from the dollar, don't count on Canada

We spend a lot of time here at The Dollar Vigilante chastising Ben Bernanke and the Federal Reserve and preparing our subscribers for a collapse of the US dollar – something which has been paying off very handsomely, with gold and silver at record highs this year – but don't take that to mean that we prefer any other fiat currency. No fiat currency in the western world is any better than the US Dollar. In fact, in every case, they are worse.

The Federal Reserve is still, despite its secrecy, one of the most transparent central banks in the world. It also has, over the last century, despite inflating the dollar downward by 97%, been one of the least inflationary banks.

We often hear of people denounce the US dollar and correctly divine that it is headed to worthlessness, but, in the same breath, they say they own other fiat currencies like the Canadian dollar.

This is a case of ignorance of the workings of banks like the Bank of Canada – or virtually any other major central bank in the world, for that matter.

There are numerous reasons why the Canadian dollar will not survive a US dollar collapse:

The Canadian economy is very tied to the US economy.
The Canadian Government is intent on devaluing the Canadian dollar alongside the US.
The Bank of Canada has virtually no gold backing the Canadian dollar.
All that does back the Canadian dollar is the US dollar and other fiat currencies.
The Canadian dollar is not used globally.

The Canadian Economy is Very Tied to the US Economy

We need only show one graphic to make this point:

Read full article here

FX Update: EURUSD ready for 1.3700?

After consolidating for the balance of the week, will the USD finally will carry through on its rally bid? Key EURUSD resistance has so far held – what could drive the pair for a test of the 200-day MA?

Euro in hot water again
We’ve mentioned the creeping worsening in the Spanish/German yield spread in recent days, but today, a day after a relatively poorly received Spanish auction of long bonds, the 2-year spread jumped almost 20 bps wider today to trade close to 188 bps, the widest spread since February and a development that has opened a gash in most of the Euro crosses again. Nervousness about upcoming municipal elections in Spain this weekend may also be partly to blame for the Euro’s renewed slide, as the ruling socialist party’s support is likely to erode and there are large demonstrations planned to protest corruption. (See more on the protest issue in this NYT article) . The risk for Spain is that new incoming administrations open up the books in all of the cities and uncover extensive debt that has been so far hidden.

After pounding on the 55-day moving average resistance for the last few days, and even teasing above it a few times, the negative momentum for EURUSD suddenly reappeared in today’s session as the growing nervousness in the peripheral EuroZone bond spreads seems to be at fault. ECB expectations are falling in sympathy as well. But for EURUSD to work below recent support, we will need to see supportive development outside of the “pain from Spain”, like a fresh sell-off in commodities and equities as we’ve said before, the USD can only perform well as the flipside of misery/risk aversion.

Chart: EURGBP
After consolidating rather sharply back higher on the negative implications of the sit-on-their-hands BoE in the face of high inflation, EURGBP seems to be making a statement today as the negative developments for the Euro far outweighed the fading memories of poor GBP performance from earlier this week. A close at current levels or lower puts in a rather emphatic resistance level and resumes the focus on the big 0.8675 support area next week. Note that yesterday’s doji close was right on the 0.382 Fibonacci retracement for the big wave from the recent high above 0.90.

JPY and the usual suspects
Bounds were in a consolidating mood yesterday heading into the start of trading, then were further administered the boot by a stronger than expected US jobless claims number. But later in the day, the terrible Philly Fed reading supported the market anew and the long end managed to post a slightly lower yield on the day as a whole. The JPY – which just like the bond market to which it is so correlated yesterday gave everyone severe whiplash – bounced sharply off yesterday’s lows and will continue look for direction off the bond markets.

US treasuries are doing a nervous two-way dance ahead of the US open. The US 10-year benchmark is trading several bps off its recent 3.09% low in yield, a confrontation with the 3.0% level would likely see USDJPY testing the waters below 3.0% again, while 3.25% is the obvious cap after being tested twice over the last two weeks. European Bunds, for their part, are perched right at the lows since January just above 3.05%, which is also a kind of neckline. A plunge below 3.0% together with a firm shorter end of the curve is a focus for EURJPY.

The Bank of Japan voted unanimously last night to hold its current course with no changes, a nominally JPY-bullish development, since we so accustomed lately to hearing about layer on layer of new easing efforts.

Chart: EURJPY
We’ve showed the EURUSD chart a few times, as the price there has interacted with the 55-day moving average for the balance of the week. Today we have a look at the EURJPY chart, where we also find the 55-day moving average (red line) providing resistance, which also lies in an area that was a zone of interest on the previous consolidation lower back in April.

Weak data out of Canada
Today saw two negative data developments from Canada – a lower than expected headling CPI reading and a very weak March Retail Sales number relative to expectations, as the less Autos data actually came in slightly negative rather than robustly positive. USDCAD was teetering on the edge of final short term support over the last couple of sessions near the 55-day moving average, but the weak data today offered more emphatic support for the pair. If risk and crude remain off here, the pair may be set for that test of parity. If not, the weak data may not be enough to prevent the pair from packing it back toward 0.9500.

Looking ahead
Next week, we’ll have the US Congress back in session and continuing the budget debate. A glance at the solid comeback in the US bond market since yesterday’s lows suggests that this is not weighing particularly heavily on sentiment at the moment. Next week, it appears the treasury will forge ahead with plans to sell 2-,5-, and 7-year notes next week, creating more debt despite the “debt ceiling”.

Next week’s economic calendar’s highlights include the European preliminary manufacturing and services PMIs for May, Germany May IFO, US Apr. Durable Goods Orders, US jobless claims data and PCE inflation data on Friday. A very quiet week on the calendar, but don’t forget the local elections up in Spain over the weekend.

Let’s see how we close what has so far been a rather inconclusive week – we’ll update all of the latest action in a weekly wrap video later today.

Have a great weekend.

Economic Data Highlights

New Zealand Apr. Credit Card Spending rose +1.6% MoM and +6.0% YoY vs. +1.6% YoY in Mar.
Japan BoJ left rates unchanged at 0.10% as expected
Japan Mar. All Industry Activity Index fell -6.3% MoM vs. -6.1% expected
Germany Apr. Producer Prices rose +1.0% MoM and +6.4% YoY vs. +0.6%/+6.0% expected, respectively and vs. +6.2% YoY in Mar.
Japan Apr. Convenience Store Sales rose +1.6% YoY vs. +7.7% in Mar.
EuroZone Mar. Current Account out at -4.7B vs. -6.5B in Feb.
Canada Apr. Consumer Price Index out at +0.3% MoM and +3.3% YoY vs. +0.5%/+3.4% expected, respectively and vs. +3.3% YoY in Mar.
Canada Apr. Core CPI out at +0.2% MoM and +1.6% YoY, as expected and vs. +1.7% YoY in Mar.

Upcoming Economic Calendar Highlights (all time GMT)

EuroZone May Consumer Confidence (1400)
China May HSBC Flash China Manufacturing PMI (Mon 0230)
Japan Apr. Supermarket Sales (Mon 0500)

FX Update: EURUSD 1.37 or 1.45?

Week starts off in a sour mood, but momentum is lacking as markets remained poised on a fulcrum. The key EU finance minister summit kicks off today and concludes tomorrow – what will it mean for EURUSD?

The risk trade is making a feeble start for the week, as commodities are off again, equity markets in Asia and Europe are weak, and the pro-cyclical currencies have consolidated lower still. The worst beating within the G-10 has been administered to CAD and NZD, the former on another 1.50 taken out of the price of crude oil, the latter perhaps on technical developments in NZDUSD. EURUSD scraped to a new recent low below 1.4100, though it found no fresh momentum down there. Meanwhile, the JPY And CHF remain resilient as Euro Bunds continue to trade near their recent highs and as the yield is approaching a psychologically significant 3.0% after finding round rejection back in mid-April precisely at the 3.50% level

Weak Aussie data (again)
Overnight we saw a couple more weak Aussie economic data points to add to the growing collection, as the rate of home loans fell again after the sharp fall in February and on a steep drop in new car sales, which dropped sharply from the previous month and have stagnated since the peak in the spring of last year. The Australian dollar was relatively resilient in some of the crosses and has so far avoided a significant break lower even as it has tested the waters below 1.0540 in the last couple of sessions. This fate was not shared by the smaller kiwi, which plunged almost a percent after breaking through the rather well defined head and shoulders neckline around 0.7825. Other Australian data this week includes the May meeting minutes from the RBA set for release tonight and Consumer Confidence on Wednesday.

Noise on Greece
While developments are few and far between in the financial market measures of EuroZone stress today, the news wires were abuzz with plenty of noise on how the EU should tackle the Greek debt situation. The ECB’s Stark said that further aid for Greece should be conditional on Greece “making more consolidation efforts”. The German Die Welt newspaper said the IMF doubts whether Greece should be provided with any further credit. German politicians were in on the act as well, with Finance Minister saying that any extension of Greek debt maturities (one of the proposals that has been bandied about) would require the involvement of private investors, while the leader of the German SPD opposition party, Steinmeier, said the a debt restructuring shouldn’t be “excluded”. How interesting is it to see a party on the left clamoring for a debt restructuring. The political maps are realigning all over Europe.

Looking ahead
The EURUSD may eye the 1.40 area with nervousness until the results of the EU finance minister meetings early this week are known. There are hardly any new developments is risk spreads or interest rate spreads over the last couple of trading days, so the EURUSD pair will continue to eye the risk trade and commodity markets and then watch for the headline risk as the meeting’s outcome crosses the wires. It was thought that this meeting would come up with some kind of new announcement on Greece due to that country’s inability to meet deficit requirements spelled out under the previous rescue package. Now there is even more uncertainty surrounding the chances for new developments due to the bizarre situation of the IMF’s Strauss Kahn facing sexual assault charges in New York and his detention in the US as he faces charges.

EURUSD outlook: With the 55-day moving average at 1.4275 as resistance, the focus may remain on a test of the 200-day moving average (below 1.3700 at present) if the markets remain in risk off mode here and as long as the EU fails to come up with any game changing news (more a sentiment test of whether the market still believes in the extend and pretend model for EuroZone sovereign debt – as there is no real upside for bailouts eventually). If the risk bulls manage to gain the upper hand in commodities and equity markets and the EU dodges a couple of near term bullets, the EURUSD could have a go at the 1.45 shoulder area first, but it’s hard to see any rally finding sustenance further out.

The calendar this week is fairly quiet. In the US, watch out for the US HAHB housing market index out very shortly – this is the best leading indicator on US housing, though there seems to be general agreement that the US housing market is and will stay moribund for some time. Meanwhile, we have a weak Empire Manufacturing data point to chew on as the day gets under way (Though this coming off a very strong April reading).

Other US data this week includes the FOMC minutes Wednesday, Weekly Jobless Claims Thursday and the Philly Fed for May out Thursday as well. That latter survey will be watched closely after the huge pop higher in March followed by a dramatic swing lower in April.