Forex Weekly Review and Outlook- Central Banks to Dominate
It looked like dollar could finally stage a strong rebound last week but the rally was capped by downside surprise in Non-Farm Payroll. The greenback ended up staying in previous week’s range against Euro and Sterling. Japanese yen remained weak in the Golden Week in Japan with another record low scored against Euro. Commodity currencies were mixed as Aussie and Kiwi continued to be pressured by rate expectations while Canadian dollar’s impressive rally extended further on solid GDP. Central bank meetings will dominate the calendar this week with FOMC, ECB, and BoE on the card.
Dollar’s attempt for a reversal was dampened by conflicting data last week. Friday’s Non Farm Payroll showed only 88k job growth in Apr, missing missing expectation of 100k and being the lowest since Nov 04. Prior month’s data were revised lower with Mar down from 180k to 177k. More importantly, Feb’s job growth was also revised down from 113k to 90k. With the downward revision, we now have 2 months of sub-100k NFP this year which is clearly a sign of weakness in the job markets. Unemployment rate rose back from 4.4% to 4.5%. Average earnings slow to 0.2% mom, 3.7% increase, echoing the sharp fall in Q1 Unit Labor Costs growth from 6.2% to 0.6%, suggest moderating wage pressure.
Regarding inflation, Mar Core PCE was flat mom and dragged the yoy rate further down from 2.4% to 2.1%, much closer to Fed’s comfort zone of 1-2% now. Though, top line inflations high with PCE accelerating to 2.4% yoy. After all, the inflation part of the report is inline with the CPI report earlier which showed further moderation in inflation and should ease some of the concerns of Fed’s members. Meanwhile, the unexpected slowing of personal spending from 0.7% to 0.3% casts some doubts on the underlying strength of US consumer.
However, the ISM indices were telling another story and indeed, boosted the dollar higher briefly during the week. The headline ISM Manufacturing Index rose strongly from 50.9 to 54.7 in Apr, beating consensus of 50.9, and is the highest reading since Sep 05. Employment index rose strongly from 48.7 to 53.1, highest since Sep 06. Price Paid Index continued its upside momentum and surged to 73.0, highest since Jul 06. ISM Services rose more than expected to 56 in Apr, well above consensus of 53 and is the strongest reading since Jan this year. The price paid component edged further higher to 63.5, which is highest level since last Aug. The Employment component also came in slightly higher at 51.9. Both indices suggest that manufacturing and services industries are probably regaining momentum for expansion which were also supported by strength in the employment components. Meanwhile, pipeline inflation were continuing to increase based on persistent uptrend in the Price Paid Indices.
Data from the Eurozone were generally solid. Apr Eurozone CPI estimate moderated slightly from 1.9% to 1.8% in. Manufacturing PMI stayed at 55.4 in Apr, vs expectation of 55.7 while Services PMI dropped slightly to 57.0, versus consensus of 57.6. Eurozone PPI rose 0.3% mom, 2.7% yoy in Mar. Retail sales rose 0.5% mom, 2.6% yoy, prior 0.4% mom, 1.2% yoy. Though Germany retail sales were disappointing in Mar by dropping -0.8% versus consensus of 0.8%.
From UK, Manufacturing PMI dropped slight from 54.4 to 53.9 in Apr, which Services PMI dropped slightly from 57.6 to 57.2. CBI distributive trade index beat expectation by rising from 32 to 44, highest in two years. The report suggests that retail spending continued to grow solidly and is supportive to further tightening from BoE.
Swiss CPI rose by 1.1% mom, 0.5% yoy in Apr, much higher than prior 0.1% mom, 0.2% yoy and consensus expectation of 0.9% mom, 0.2% yoy. The acceleration was mainly driven by clothing and oil. With robust KoF and ZEW, the mild strength in CPI should underpin the need for further rate hike from SNB in Q2 during the Jun meeting. However, the boost to Swissy was briefly as it continued to weaken towards the end of the week together with the Japanese yen.
Aussie remained pressured last week after RBA kept rate unchanged at 6.25% as widely expected. There were further sell off after RBA lowered its inflation forecasts in the Monetary Policy Statement . Consumer inflation forecasts is lowered from 2.75% to 2.5% in 2007 and is expected to remain in the top half of RBA’s target range of 2-3% in 2007. More importantly, RBA commented that “an appreciable tightening of policy had already been implemented during 2006” suggesting that they may wait to see the impact on the economy which will come with a lag before building the case for further policy movements.
Canadian dollar’s impressive rally continued last week, with USDCAD reaching as low as 1.1031, which was over 800 pts from this year’s high of 1.1874 and just 100 points above last year’s low of 1.0930. Feb Canadian GDP rose 0.4% yoy, which was much better than expectation of 0.2%. Mar PPI rose 1.3% mom, which was also much higher than expectation of 0.8%.
The Week Ahead
The week ahead will be dominated by central bank meetings. FOMC is widely expected to keep rates unchanged at 5.25% on Wednesday and focus will again be on the language of the accompanying statement. Firstly, moderation of inflation seems back on track as suggested by data since last meeting, including core CPI which dropped back to 2.5% yoy rate which core PCE dropped to 2.1% yoy. Meanwhile, growth data, in particular, Q1 GDP was much weaker than expected. It will be interested to see if inflation remains the ‘predominant concerns’ of the Fed members, or the weight is shifting more towards growth. Part of the markets have withdrawn expectation of a June cut last week after successive strength shown in both ISM indices but that could be changed again if the FOMC delivers a more dovish than expected statement. Other data from US include wholesale inventories, trade balance, PPI and retail sales.
ECB is also widely expected to keep rates unchanged at 3.75% on Thurs. Based on current strength in the overall Eurozone economy and persistently strong M3 money supply growth. ECB is widely expected to have another 25bps hike in Q2 in June. Hence, the focus this time will be on the use of the magical word “vigilance” by Trichet to signal a June hike. It will be a surprise if Trichet doesn’t do so. Other data include German factory orders, industrial productions and trade balance
BoE will also announce rate decision on Thursday. BoE is widely expected to hike again this time after the surprisingly high inflation of 3.1% yoy in Mar. Opinion is divided on whether BoE will hike by 25bps or 50bps. However, in his open letter to Chancellor Brown, King has played down the significant in one particular month of inflation data and emphasized that the MPC will continue to “look through the short-term volatility in inflation” which resulted from “fluctuations in domestic energy prices”. Hence, BoE will more likely hike by 25bps. Also, the MPC members should have discussed the current inflation outlook thoroughly in this meeting and therefore, there should be some valuable information on the member’s view on inflation in the MPC statement to be released after the hike. And that will play an important part in shaping up expectations on further monetary policy movements ahead of the Inflation Report on May 16. Other data from UK include industrial and manufacturing production as well as trade balance.
Japan will come back from Golden week holiday and will start with BoJ meeting minutes on Mon, followed by leading indicator and machine tools orders. Trade balance in Canada will also be closely watched, in particular to see whether it could extend the Loonies’ recent strength. Retails sales and unemployment rate from Australia will also be featured.
EUR/USD
From a short term angle, EUR/USD has made a top at 1.3681 on bearish divergence condition in 4 hours MACD and RSI. However, it’s too early to draw a conclusion on whether the rise from 1.2865 has finished at 1.3681 already as subsequent retreat to 1.3535 was supported by mentioned short term rising channel support. Nevertheless, further decline is still mildly in favor as long as EUR/USD stays below 1.3621 resistance.
Below 1.3535 again will indicate fall from 1.3681 has resumed. More importantly, sustained break of the short term channel support (now at 1.3541) will warn that whole rally from 1.2856 has already completed at 1.3681 and bring deeper decline to 1.3406/10 support first. However, on the upside, break of 1.3621 will indicate the fall from 1.3681 is merely a mild correction only and has completed. Further rally should be seen to retest 1.3681 high. Break will confirm recent rally has resumed for a test of short term rising channel resistance (now at 1.3746) first.
In the bigger picture, with 1.3668 target met, risk of medium term reversal is also increasing. As discussed before, medium term up trend from 1.1639 is interpreted as having first move completed with three waves up to 1.2978, subsequent sideway consolidation completed at 1.2483. Rise from 1.2483 is treated as resumption of the whole up trend from 1.1639. With such interpretation we’d expect risk of medium term reversal to increase significantly as EUR/USD enter into resistance zone between 1.3668 and 100% projection of 1.1639 to 1.2978 from 1.2483 at 1.3822. Hence, is now on reversal signals.
On the downside, break of the short term rising channel support will indicate the rise from 1.2865 has likely completed. Break of 1.3406/10 support will confirm such case and deeper decline should then be seen to 55 days EMA (now at 1.3394). More importantly, with bearish divergence condition in daily MACD and RSI, this will be the first warning that the rise rally from 1.2483 has also completed, and thus, so is the whole up trend from 1.1639. Focus will then be back to medium term rising channel support (now at 1.2977).
However, note that, as long as the short term rising channel remains intact, rise from 1.2865 is still in good shape, and thus, EUR/USD’s rise could continue to extend further to medium term rising channel resistance (now at 1.3791) and mentioned 1.3822 projection target.
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, as discussed above, 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. But sustained break of this resistance zone will path the way towards 95 high of 1.4523.
Read full report (EUR/USD, GBP/USD, USD/CHF, USD/JPY, EUR/JPY) here.
Shing-Ip Tsui is the founder and CEO of www.ActionForex.com. ActionForex is set up with the aim to empower individual forex traders by providing insightful contents. Analysis reports, live pivot points on majors and crosses, etc are provided with collection of carefully selected educational articles and free trading ebook downloads.