Will FOMC and Housing Data Trigger More Dollar Weakness?
Forex Weekly Review and Outlook
Will FOMC and Housing Data Trigger More Dollar Weakness?
Dollar was sold off across the board last week on worries in US subprime mortgage market problems and a string of disappointing economic data. Swiss franc was able to get the most out of the market’s risk aversion sentiment and staged a broad based rally. Euro also ride on this opportunity to break above 1.33 level against dollar. The Aussie received additional support from hawkish comments from RBA officials. Sterling remained the weaker one among majors. Meanwhile, Japanese yen continued to correct prior sharp rally and engaged in choppy consolidative trading. The focus this week will be mainly on FOMC meeting as well as a string of housing data from US. In addition, sterling traders will look into a string of important data from UK too.
Data from the US Mortgage Bankers Association turned markets’ focus to increasing risk in the US housing market. THe data showed deteriorating credit conditions, with delinquency rate for all mortgages rose to 4.95% in Q4, up from 4.67%. The problems are concentrated in the subprime arena with all delinquency rate rose to 13.3%. This has prompted broader revaluation of risk in the global financial system. Such risk aversion sentiments was pushed further after the news that the Securities and Exchange Commission opened an investigation on New Century Financial Corp., the second-biggest U.S. subprime mortgage lender, and the company is on the verge of bankruptcy. Former fed chairman Greenspan added to the woe by saying that he expected the fallout from subprime mortgage delinquencies to spread to other parts of the economy, in particular if house prices fall.
Economic data from the US were not giving any special support to the greenback. In particular, retail sales increased a mere 0.1% in Feb with ex-auto sales dropping 0.1%. Both NY state manufacturing index and Philly Fed Index were disappointing, dropping to 1.85 and 0.2 in Mar respectively. However, inflation pressure remains as Feb PPI came in much stronger than expected by growing 1.3% mom, 2.5% yoy, core PPI rose 0.4% mom, 1.8% yoy, Feb CPI also accelerated to 0.4% mom, 2.4% yoy with core CPI staying at 0.2%, 2.7%. The better data were Q4 current account deficit that shrank more than expected to -196b, Jan TIC capital inflow which rebounded strongly to 97.4b, and industrial production that rose strongly by 1.0% in Feb.
Euro received support from hawkish comments from ECB officials as well as stronger than expected rise in German Zew economic sentiment that rose to 5.8 in March. Feb CPI was confirmed to rise 0.3% mom, keeping yoy rate at 1.8% only, still below ECB’s 2% target. Jan industrial production was disappointing and dropped 0.2% mom, dragging yoy rate to 3.7%. Nevertheless, Euro was able to ride on dollar’s weakness and strength in crosses, as seen in rally in EUR/GBP and rebound in EUR/JPY and broke above 1.33 level against dollar.
The Japanese yen engaged in choppy consolidation against majors last week. This time the yen has not benefited much by the risk aversion selling in dollar. Nor did the stronger than expected revision in Q4 GDP to 5.5% growth triggered sustainable rally in the yen. Inflationary pressure remains non-existent as Feb domestic CGPI was flat mom. It seems that the yen will take more time to digest prior sharp rally before staging another rise.
Sterling remains pressured in crosses last week despite rebounding against dollar. PPI inflation data were mixed with PPI input rising 1.3% mom, dropping -1% yoy following downwardly revised -2.5% and -2.1%. PPI output were slightly above expectation with 0.3% mom, 2.2% rise. Trade deficit was better than expectation at -6.23b. But Claimant count fell less than expected by -3.8k in Feb.
As widely expected, the Swiss National Bank raised both the upper and lower three-month Libor interest rates 25bps to 1.50% and 2.50%, thus bringing the effective midpoint to 2.00%. Inflation forecast was adjusted up from 0.4% to 0.5% in 07, from 0.9% to 1.4% in 08, with weakness in the Swiss franc as the main reason. However, the tone of the statement was somewhat softened as the economic outlook is expected to shift down in 07 and sees a chance that inflation could turn out to be lower than it expects. But still further rate hike is still expected in Q2 as “the SNB will probably have to continue its policy of interest rate normalization”. Anyway, the Swissy was the main benefited currency on last week’s risk aversion theme as it surged strongly across the board. Markets will likely continue to be risk sensitive and the Swissy and Yen will still likely be the main beneficial of such sentiment and probably continue to alternate their strengths onwards.
The Aussie was supported by stronger than expectation job growth in Feb even though unemployment rate rose to 4.6%. More importantly, the Aussie was boosted by hawkish comments from RBA Assistant Governor Malcolm Edey who said the core inflation rate is “likely to be too high”, echoing prior comments from Governor Glenn Stevens that interest rates will likely rise.
The Week Ahead
FOMC meeting will be the main feature of the week. Fed is widely expected to keep rates unchanged at 5.25%, but focus will be on the accompanying statement, in particular on any reference to the recent worries on housing markets as there were some speculation that the Fed will need to cut rates to save the subprime mortgage problem. Also, a wave of housing data, including NABH housing market index on Mon, building permits and housing starts on Tues, and existing home sales on Friday. Those data could trigger additional volatility in the markets based on current sentiments.
CPI inflation, retails sales will be released from UK this week together with BoE minutes. Sterling remained weak, especially in crosses after the inflation report and BoE minutes suggested that there will only be one more hike from BoE to bring down inflation to its 2% target by year end and more importantly, BoE could adopt a wait and see attitude at this moment. It will take a series of strong data to reverse the current weakness in sterling and otherwise, it will likely remained pressured.
BoJ is widely expected to keep rates unchanged at 0.5% this week after last month’s hike. Fukui’s comments will be eyed. Trade balance and all industry index will also be released. Other data include trade balance, current account and industrial new orders from Eurozone, PPI in Germany. From Switzerland, industrial production, combined PPI and trade balance will be released too. For Canadian dollar traders, CPI inflation data and retail sales will be closely watched.
EUR/USD’s rally extended further last week, reaching as high as 1.3338. Break of 1.3258 resistance confirmed that recent rise from 1.2865 has resumed. From a short term angle, initial bias remains on the upside this week as long as EUR/USD and further rally is expected for last year’s high of 1.3364 and then 61.8% projection of 1.2483 to 1.3364 from 1.2865 at 1.3409. Touching of 1.3279 minor support will turn intraday outlook consolidative first but the rise from 1.3070 should still be in force as long as 1.3185 resistance turned support remains intact.
In the bigger picture, correction from 1.3364 should have already completed with three waves down to 1.2865 and the current rise from there is treated as resumption of the whole medium term up trend from 1.1639 as EUR/USD is still staying well within the rising channel. Sustained break of 1.336409 resistance zone will confirm this case and bring stronger rally towards 1.3668 resistance (04 high). However, with bearish divergence condition in weekly MACD and RSI, a medium term top could be around the corner. Upside of this medium term up trend could be limited by resistance zone of 1.3668 (04 high) and 100% projection of 1.1639 to 1.2978 from 1.2483 at 1.3822. But clear reversal pattern or a break of the lower channel line (now at 1.2865) is needed to indicate a medium term top is formed, otherwise, further rise is still in favor.
On the downside, below 1.3185 support will be the first warning that whole rise from 1.2865 has completed and will put 1.3070 support back into focus again. Sustained break of 1.3070 will confirm this and bring deeper decline towards medium term rising channel (now at 1.2865).
In the longer term picture, it’s still too 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.
Shing-Ip Tsui is the founder and CEO of
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