Dollar to lose further ground?
Forex Weekly Review and Outlook
After an initial rebound, dollar fell sharply across the board last week after FOMC kept rate unchanged at 5.25% and delivered a less hawkish statement than dollar bulls expected.
Instead of stressing the concern on inflation as some traders anticipated, the statement said that Fed expects “inflation pressures seem likely to moderate over time” even though “the economy seems likely to expand at a moderate pace”. Sentiments has changed since then and expectation has shifted to Fed to keep rate changed till mid 2007. Durable goods orders and news homes sales data gave little support to the dollar with strong headline number but weak details. Decline in dollar accelerated on Friday after much weaker than expected GDP report that showed the US economy expanded in the slowest pace in more than 3 years in Q3.
Among the majors, Euro received further support from stronger than expected Germany Ifo and Gfk index as well as Oct inflation data. Meanwhile, Sterling remains firm with expectation of another hike from BoE in November. The more interesting development is in the Japanese yen. The Yen was pushed to new lows against Euro and Sterling after disappointing October core inflation. However, there were no sustained selling noted and the yen recovered towards the end of Friday. Indeed the strength against dollar was impressive and the Yen did close the week higher against Sterling in GBP/JPY. There seems to be increasing concern of intervention after Finance Ministry
officials’ comments during the week.
Australian dollar remains the best performer in commodities currencies on expectation of rate hike in Nov, which was supported by firm reading in producer prices and consumer prices inflation data released during the week. Meanwhile, New Zealand dollar was pressured after RBNZ kept rate unchanged at 7.25% and warned that inflation could be “unusually low” in Q4. Unlike others, NZD/USD fell 63 points last week despite broad based dollar weakness.
The Week Ahead
Looking ahead, there will be plenty of economic data from
the US, staring from September PCE, Q3 Employment cost, Chicago PMI, ISM manufacturing, factory orders, Non-farm payroll and ISM non-manufacturing. Generally speaking, economists are expecting the data to show moderating inflation and steady to mild rebound in growth. However, the same story could still happen when market ignore solid headline data but reacts to weak details in the economic reports. Risk of the dollar is still on the downside after FOMC has set the tone last week.
There are plenty of economic data from the Eurozone too, but focus will be on ECB rate decision and press conference. ECB is widely expected to keep rate unchanged at 3.25% but signal another hike in December. More importantly focus will be on whether Trichet will deliver any information on ECB’s view on the outlook in 2007. This will be fuel needed to boost EUR/USD to new high.
BoJ is widely expected to keep rate unchanged at 0.25% this week as inflationary pressure is still weak. Focus will actually be on the semi-annual outlook for economic activity and prices published at the same time that will provide more information on the chance of another hike in first half of 2007.
There are several interesting items on the agenda in Japan in the coming week which may give us a good indication of the BoJ’s monetary policy going forward. Tuesday morning brings the rate announcement of the decision from the bank’s monetary policy meeting. Interest rates will, of course, be left unchanged, as inflationary pressures are still weak and activity in the economy is not excessively high. More interesting is that the BoJ will at the same time be publishing its semi-annual outlook for economic activity and prices, including its take on future monetary policy.
We expect the members of the monetary policy committee to lower their expectations for growth and inflation in fiscal 2006 (which runs until the end of March 2007) a shade from the levels forecast in the last report in April. This change in inflation expectations is due partly to the downward revision of core inflation data following the change in the consumer weights in the end of August. The reason why the BoJ will be a touch more downbeat about growth than in April is that the strong performance of Japanese industry is not yet having any major knock-on effect on wage growth and private consumption. The BoJ will also be feeling more confident that the economy will not overshoot the bank’s expectations than it was in April.
GBP/USD
Last week’s strong rally in cable has pushed it through mentioned 1.8898 cluster resistance (61.8% retracement of 1.9142 to 1.8517 at 1.8903), confirming that the whole corrective fall from 1.9142 have completed at 1.8517 already. There are two important points to note.
Firstly, the corrective fall from 1.9142 has just met 100% projection of 1.9142 to 1.9602 from 1.9072 at 1.8532 and rebounded strongly from 1.8517. Secondly, such corrective fall was contained above 61.8% retracement of 1.8090 to 1.9142 at 1.8492. These are suggesting that the correction from 1.9142 could merely be a correction to the rise from 1.8090 rather than part of a larger scale consolidation to whole medium term up trend from 1.7047.
Also, as discussed before, we treated 1.9142 has potentially an important medium term top due to bearish divergence condition in daily MACD, RSI as well as weekly RSI. However, sustained rally this week will likely have daily MACD and RSI breaking its own down trend line, thus easing the risk that a medium term top is formed.
Hence, while we’re short term bullish on cable, we’ll pay special attention to 1.9142 high and firm break above this level will indicate both rally from 1.8090 and medium term up trend from 1.7047 has resumed. Next upside target will be 2004 high at 1.9554, with 100% projection of 1.8090 to 1.9142 from 1.8517 at 1.9569.
From a short term point of view, initial bias this week will stay on the upside as long as cable stays above 1.8924 minor support. Further rally is expected to follow towards 1.9090 resistance first. Below 1.8924 will turn outlook consolidative first but as long as downside is contained by 1.8869 support, rally should still resume sooner rather than later. Below 1.8869 will suggest lengthier consolidation will take place first before another rally. Meanwhile, it will take a break below 1.8672 support (to be adjusted later) to reconsider short term bearishness.
Read full report (EUR/USD, GBP/USD, USD/CHF, USD/JPY) here.
Shing-Ip Tsui is the founder and CEO of
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