Focus Back to US Data and FOMC

After breaking through important support from the
prior week, the Japanese yen remained under tremendous pressure as the carry trade remains one of the dominant themes.
Though, another low yield currency, Swiss Franc was boosted by renewed speculation that SNB will raise rates faster than markets expected. The biggest mover, though,
has got to be sterling which surged across the board, boosted by a hawkish BoE minutes. Euro shrugs off disappointing sentiments data and strengthened against dollar with the help of carry trade buying in EUR/JPY. Meanwhile, dollar was sent lower across the board, except versus yen, on increased concerns for more hedge fund and sub-prime blowups.

Housing data was the initial focus from the US last week. Building permits rebounded strongly by 3.0% to 1.50M annualized rate in May, beating expectation of 1.47M. Housing starts was a touch lower at 1.47M versus consensus of 1.48M. The data offered no clear indication on where the housing market is heading to but at least, it relieved some concerns on steeper slowdown after yesterday’s weaker than expected NAHB that decreased another two points to 28 in June. Philly Fed index was a strong upside surprise which rose sharply from 4.2% to 18.0 in Jun, beating expectation of 7.0. However, dollar continued to be under pressure towards the end of the week on concern that recent collapse of the Bear Stearns hedge funds will spillover.

Both German ZEW and Ifo sentiments indices were disappointing. ZEW indicator of economic sentiment dropped from 24 to 20.3 in June versus expectation of 29, remaining below historical average of 33.0. Ifo business climate index also decreased from 108.6 to 107.0 versus expectation of 108.4. All components of the survey deteriorated, including both the assessment of the current situation and future expectations. Nevertheless, the Euro was supported by strength in EUR/JPY carry trade buying and extended rebound against dollar.

The Japanese yen continued to be pressured on carry trade and fell to new record low against euro, fresh 4 1/2 low against dollar and 16 year low against Aussie. However according to MoF official Chikahisa Sumi who spoke during the weekend, the Japanese economy is now “cruising at above potential and from now on inflation pressures will pick up”. There could be renewed speculation that BoJ will resume it’s tightening sooner than market expects and that could provide some support to the yen initially this week.

Sterling soared sharply higher last week after MPC minutes revealed a much tighter than expected vote to keep rates unchanged at 5.5% in June. While market expected a 7-2 vote split, 4 members, including Governor King, voted in favor of an immediately hike. The other dissenters were John Gieve, Tim Besley, and Andrew Sentance, making it a 5-4 vote split. King was in the minority camp for the first time since August 2005, when the MPC cut the base rate to 4.5%. High house-price gains, strength of corporate investment, only a tentative slowing in private spending growth, rapid rises in money and credit, and finally the renewed strength in oil prices were the major reasons that the four saw no compelling reason to wait and voted for an immediate hike. The minutes reinforced speculations that BoE could raise rate again in July.

The Swiss Franc was given a lift initially after much stronger than expected Combined PPI which rose 0.9% mom, 2.8% yoy in May comparing to expectation of 0.4% mom, 2.4% yoy. The Swissy was further boosted after SNB raised 3 month libor rate by 9bps to 2.67%. Swiss government also upgraded growth forecasts from 2.0% to 2.5%< inflation forecast from 0.4% to 0.6%. Governor Jean-Pierre Roth said the outlook for the Swiss economy is favorable. These developments let to speculations that SNB could raise rates again ahead of its Sep meeting.

The Canadian dollar continue to stuck in consolidation after both core CPI and Retail sales came in below expectation.

The Week Ahead

Markets focus will be turning back to US data this week with existing home sales, new home sales, Conference Board consumer confidence, durable goods, PCE, chicago PMI and construction spending on the cards. FOMC meeting on Thursday will, as usual, be closely watched. Fed is expected to keep rates unchanged at 5.25% again this week. The FOMC committee made practically no change to the accompanying statement back in May. However, it would be interested to see if the Fed will tone down the concern on inflation after recent data indicated faster than expected moderation in core consumer price growth. Final print of Q1 GDP will also be released during the week.

Other focuses of the week will be on Swiss KOF indicator on Wed, in particular based on last Friday’s strength in the Swissy. Nationwide house price from UK on Thur. May CPI from Japan on Friday.


EUR/JPY’s upside extended further to as high as 166.94 last week and closed the week with much strength. From a short term angle, further rally is expected to be seen as long as 165.33 support holds. Next short term upside target will be 61.8% projection of 161.49 to 166.11 from 165.20 at 168.05. On the downside, below 165.33 will indicate that a short term top is formed, possibly with bearish divergence conditions in 4 hours MACD and RSI too. In such case, deeper pull back should be seen to 4 hours 55 EMA (now at 165.03) or below before staging another rally.

In the bigger picture, strong break of 61.8% projection of 137.16 to 159.63 from 150.75 at 164.64 was also a significant development that indicates the underlying bullishness of EUR/JPY is stronger than we originally thought. Though, interpretation of the rise from 130.60 remains unchanged. First wave up ended at 143.60, subsequent correction ended at 137.167. The third wave up ended at 159.63 while fourth wave correction has ended at 150.75. Rise from there represents the final advance in this structure. Hence next upside target will be 100% projection of 137.16 to 159.63 from 150.75 at 173.22. On the downside, it will take a break of 161.49 support to indicate rise from 150.75 has completed. Otherwise, further rally is still in favor even in case of pull back.

In the longer term picture, regardless of the internal structure, rally from 88.97 has now taken out key resistance level of 162.42 and 38.2% retracement of 285.56 (79 high) to 88.97 (00 low) at 164.07. Next important long term resistance will be at 188.22 and 50% retracement of 285.56 to 88.97 at 187.27.

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