Focus to Shift from Carry Trade to Inflation Data
After edging higher initially, both the Japanese yen and Swiss franc cannot hold on to the additional gain and reversed sharply across the board throughout the rest of the week. Dollar rode on additional boost by NFP
revision on Friday and extended the rebound against both low yield currencies.
Euro and Sterling weakened mildly against dollar too but was comparatively
supported by crosses. Also, note that commodity currencies enjoyed a strong
rebound to as yen weakened, with Loonies and Kiwi strengthening mildly against dollar indeed. The Yen and Swissy were still the major focus. But such focus could be moving away with some key economic data to be released this week, including inflation data from US, UK and Eurozone.
Data from US was generally disappointing before Friday. Factory orders fell by -5.6% in Jan, the sharpest fall in 6 years. ISM services dropped more than expected from 59.0 to 54.3 in Jan. Pending home sales was dropped further to 108.7k while durable goods order was revised further lower to -8.7% fall in Jan.
Feb Non-farm payroll increased by 97k, slightly below expectation. However, Jan’s job growth was strongly revised upward from 111k to 146k. Unemployment dropped from 4.6% to 4.5%. Average earnings also increased more than expected by 0.4% comparing to consensus of 0.3%. Jan trade deficit, released on the same day, also improved more than expected to -$59.1b, back to below -$60b level. Dollar rebounded further against yen and swissy and edged higher against euro on these two solid data. However, since dollar was just steady against sterling, and even weakened against Aussie, Kiwi and Loonies, the strength in USD/JPY and USD/CHF should be more related to closing of yen and swissy long positions on profit taking, rather than dollar’s own strength.
ECB raised rate by 25bps to 3.75% as widely expected. The overall press conference was pretty much the same as before as Trichet emphasized upside risk to inflation in medium term and ECB will monitor very closely all developments and act in a firm and timely manner is warranted. Economic growth forecasts for 2007 and 2008 were revised higher to about 2.5% and 2.4% from about 2.2% and 2.3% but inflation this year is expected to moderate to around 1.8% from 2% before rising again in 2008. After all, ECB is still maintaining a tightening bias and further rate hike is still expected in Q2, probably in June.
However, in the press conference, Trichet changed the wording
of describing the rates as "accommodative" to on the "accommodative side". Also,
rates were described by Trichet as “moderate” rather than “low”. This prompted speculation that ECB’s interest rate is now near to “neutral” and the tightening cycle is now closer to an end. Euro was pressured against dollar and sterling since then. But Euro still rode on weakness in yen and swissy and rebounded strongly in respective crosses.
The Japanese yen had a volatile week moving in strong correlation with world stock markets. The yen surged sharply on Monday as stock continued to tumble but reversed since that as stock markets stabilized and rebounded.
BoE kept rate unchanged at 5.25% as widely expected and was basically a non-event. Data from UK were on the weaker side with Services PMI dropping more than expected to 57.4. Industrial production and manufacturing production also missed expectations.
BoC kept rate unchanged at 4.25% as widely expected. Loonies staged an impressive rebound on Friday after better than expected job report with
the unemployment rate falling from 6.2% to 6.1%. RBA kept rate unchanged at 6.25%. Aussie was supported by stronger than expected Q4 GDP that grew 1.0% qoq, 2.8% yoy versus expectation of 0.5% and 2.0%. RBNZ hiked rates by 25bps to 7.5% and was pressured after a less hawkish than expected statement. However, all three commodity currencies rebounded strongly towards the end as yen weakens across the board.
The Week Ahead
After dominating the forex markets for two weeks, we believe focus will be shifting away from carry trades and risk aversion this week as some important economic indicators are scheduled to release in major countries.
From the US- retail sales, PPI, CPI will be closely watched together with current account, import/export prices, Empire State index, TICs capital flow, Philly Fed index and industrial production featured. From Eurozone, main focus will be on Germany ZEW and final Feb Eurozone HICP. UK PPI and employment report will also be closely watched. Lots of data will be released from Japan including Q4 GDP revision, trade balance, export/import prices, domestic CGPI, consumer confidence, industrial production and tertiary industry index. SNB is expected to raise rate by 0.25% to 2.25%.
EUR/USD
After extending the correction from 1.3258 to 1.3070, EUR/USD was supported by mentioned cluster support of 1.3078 support (50% retracement of 1.2911 to 1.3258 at 1.3085) and attempted a rebound. However, such rebound from 1.3070 was limited by 61.8% retracement of 1.3258 to 1.3070 at 1.3186 and EUR/USD weakened towards the end of the week to as low as 1.3086. From a short term angle, as EUR/USD is still bounded in established range of 1.3070, 1.3258, we’re still left with two possible scenarios.
As discussed before, EUR/USD’s rise from 1.2865 has made a top at 1.3258 with bearish divergence condition in 4 hours MACD and RSI and after such rise is limited by 78.6% retracement of 1.3364 to 1.2865 at 1.3257. And as long as 1.3070/85 cluster support holds, subsequent price actions from 1.3258 could be developing into sideway consolidation only. However, a firm break above 1.3258 cluster resistance is needed to confirm that rise from 1.2865 has resumed for 1.3296 resistance. Otherwise, consolidation could still extend further.
On the downside, sustained break of 1.3070 cluster support will complete a short term head and shoulder top (ls: 1.3187, h: 1.3258, rs: 1.3185). Being a reliable reversal pattern, this will strongly suggest that the whole rise from 1.2865 has already completed. Deeper decline should be seen towards 100% projection of 1.3258 to 1.3070 from 1.3185 at 1.2997 and then 1.2939 support.
In the bigger picture, the corrective fall from 1.3364 has completed with three waves down to 1.2865. With EUR/USD staying within medium term rising channel (lower channel line at 1.2851 now), medium term up trend from 1.1639 is still in progress. Current rally is being treated as resumption of this up trend. Break of 1.3296 resistance will add more credence to this view and should push EUR/USD to a new high above 1.3364.
However, sustained break of mentioned 1.3070 support dampen this view and suggest that rebound from 1.2865 is indeed a correction to the fall from 1.3364 only. Further break of 1.2939 support will add more weight to this case and push the rising channel line back into focus again.
In the longer term picture, it’s still early to conclude whether medium term rally from 1.1639 represents resumption of multi-year up trend from 0.8223 or just part of a large scale consolidation that started at 1.3668. But, the three wave corrective nature of the rise from 1.1639 to 1.2978 suggest that this whole rally from 1.1639 will be corrective in nature, thus, favoring the latter case. And therefore, focus will be on reversal signal when EUR/USD enter into resistance zone of 1.3668 (04 high) and 100% projection of 1.1639 to 1.2978 from 1.2483 at 1.3822.
Read full report (EUR/USD, GBP/USD, USD/CHF, USD/JPY, EUR/JPY) here.
Shing-Ip Tsui is the founder and CEO of
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