Weekly Review and Outlook: Dollar Broadly Lower as Markets Prepare for More Easing from Fed
Dollar Broadly Lower as Markets Prepare for More Easing from Fed
Dollar was broadly lower last week as poor non-farm payroll report intensified speculation that Fed will re-start the quantitative easing program in this week’s meeting. Dollar index dropped to as low as 80.08 before closing at 80.41. Indeed, it was the ninth consecutive week of decline in the index, which was the worst losing streak since 2004. EUR/USD breached 1.33 level briefly before closing at 1.3278 while USD/JPY dived to 85.01, inches above 2009 low of 84.81. The Japanese yen continued to stay in range against most currencies, except dollar, as stocks maintained gain in spite of poor job data. Meanwhile, Canadian dollar lagged behind other majors for it’s own poor employment data.
Positive US data from early part of the week was overshadowed by the disappointing non-farm payroll report. Headline NFP number showed -131k contraction in July versus expectation of -75k. Prior month’s figure was also revised sharply down from -125k to -221k. Private payroll rose 71k only, lower than expectation of 80k. Unemployment rate, though was unchanged at 9.5%. Other important leading indicator saw ISM manufacturing index dropped less than expected to 55.5 in July while ISM non-manufacturing index rose to 54.3, personal income and spending were flat in June. Pending home sales dropped -2.6% mom in June. After all, last week’s data provided nothing to change market’s expectation of further quantitative easing from Fed. Yield on 10 year note dived further to close at 2.824% and dragged USD/JPY to within touching distance to 2009 low. Greenback was also extremely weak against Euro and Sterling.
While ECB maintained the main refinancing rate at 1%, the upbeat economic outlook was encouraging. President Trichet said in the statement that there’s ‘strengthening in economic activity in the second quarter of 2010′ while data for the third quarter are ‘better than expected’. The central bank continued to view the current key ECB interest rates remain ‘appropriate’ and ‘the risks to the economic outlook are broadly balanced in an environment of uncertainty’. ECB’s bullish outlook on the region’s economy boosted market sentiment. At the press conference, Trichet noted that ‘Q2 seems to be really exceptional’. This signals that the GDP in 2Q10 may be stronger than Bundesbank’s projection of +1.2% q/q made in June 2010. More in ECB Delivered Upbeat Economic Outlook.
BoE left ranges unchanged at 0.5% and kept the asset purchase program unchanged at GBP 200b today. The statement was brief with no details. Focus will turn to the quarterly Inflation Report to be released on August 11 and minutes to be released on August 18.
The RBA left the OCR unchanged at 4.5% for the 3rd consecutive month. Few surprises were seen in the accompanying statement. The overall tone was similar to that of July while the economic outlook was also unchanged. The RBA appeared comfortable with current levels of interest rates and economic backdrop both at home and in overseas warrants the central bank to take a wait-and-see stance in coming months. We expect further rate hike is likely but there’s no urgent need in the near-term. More in RBA Left OCR Unchanged At 4.5%, Taking A Wait-And-See Stance.
Canadian dollar and New Zealand Dollar were both hit hard pressured by poor job data. The Canadian employment market unexpectedly contracted by -9.3k in July versus expectation of 10.3k rise. Unemployment rate also climbed from 7.9% to 8.0%. Markets pared bet on another hike from BoC in September and sent the Loonnie sharply lower after the release. New Zealand employment unexpectedly dropped -0.3% qoq in Q2 while unemployment rate jumped sharply from 6.0% to 6.8%. RBNZ has stated that the tightening cycle will be slower than it thought in June. Considering the poor employment outlook, and a tamer than expected Q2 CPI of 1.8% yoy as released in mid July, RBNZ would likely be on hold for longer, as least after getting Q3 data.
Technical Highlights
While the dollar was the weakest among major currencies, Canadian dollar and Swiss Franc were the second worst. Canadian dollar’s weakness was clearly seen against European majors. EUR/CAD’s sharp rally on Friday indicates that the rebound from 1.2449 is going to extend beyond 1.3689 soon. As noted before, a medium term bottom is in place at 1.2449 in EUR/CAD after missing 2000 low of 1.2430. Corrective rise from there should extend to 100% projection of 1.2449 to 1.3421 from 1.2949 at 1.3921 and possibly further to 1.4 psychological level.
CAD/JPY’s drop on Friday on suggest that the near term recovery is finished and put focus back to 81.58 support. After all, we’re still bearish on CAD/JPY with 86.40 resistance intact. Whole medium term decline from 94.46 is still is progress and expected to extend to test 78.52/79.89 support zone sooner or later.
Dollar index showed no sign of stabilization so far and the fall from 88.70 has indeed accelerated last week to as low as 80.08. Our original view was that fall from 88.70 is merely a correction to rise from 74.19 only and should be contained by 80 psychological level. However, the downside acceleration at such stage and the bullish outlook in EUR/USD and GBP/USD made this view very vulnerable. In any case, near term outlook will remain bearish as long as 81.13 resistance holds. Sustained trading below 80 psychological level will indicate that fall from 88.70 is part of a wide range sideway pattern from 70.70 and will target lower trend line support at 75.60 level. On the upside, break of 81.13 will be the first signal of stabilization and will turn focus back to 82.08/83.45 resistance zone.
The Week Ahead
FOMC meeting will be the main focus this week and speculations is around whether Fed will restart the quantitative easing campaign, and in what way. Fed still have a number of tools on its hands including resuming the asset purchase program, lowering interest rates on excess reserves or rolling over the stock of Treasury and MBS securities. Meanwhile, considering the sluggish job market outlook, Fed will likely deliver a more dovish statement. Another focus will be on whether Hoenig will change his stance and give up voting on removing the “extended period” language.
Another main focus of the week will be on BoE Quarterly Inflation Report. Sterling’s strength is built around optimism for H2 after the impressive Q2 GDP report. Hence, it will be important for Sterling that the QIR delivers messages that are inline with such optimism. However, there are uncertainty on how BoE will adjust the projections of 1.2% and 2.3% GDP growth in 2010 and 2011 based on the emergency budget plan as well as recent developments.
- Tuesday: BoJ rate decision; UK trade balance; Canada housing starts; US non-farm productivity, unit labor cost, FOMC rate decision
- Wednesday: UK job report; BoE inflation report; Canada trade balance; US trade balance
- Thursday: Australia job report; Eurozone industrial production; New Zealand retail sales
- Friday: Eurozone GDP flash; US CPI, retail sales, U of Michigan sentiment
USD/JPY Weekly Outlook
USD/JPY’s down trend extended further last week and reached as low as 85.01. Initial bias remains on the downside this week for 84.81 low. Break there will confirm that medium term down trend has resumed and should target 80 psychological level next. On the upside, above 85.72 minor resistance will turn intraday bias neutral and bring recovery. But after all, outlook will remain bearish as long as 88.11 resistance holds and we’d expect recent decline to extend further.
In the bigger picture, whole down trend from 2007 high of 124.13 is still in progress. Fall from 94.97 is tentatively treated as resumption of such down trend and should extend beyond 84.81 low. Break of 84.81 will target next key level of 79.75 (1995 low).On the upside, break of 88.11 resistance will indicate that fall from 94.97 is possibly completed and bring stronger rebound. However, note that break of 94.97 resistance is still needed to be the first sign of medium term reversal. Otherwise, we’ll stay bearish.
In the long term picture, current development suggests that USD/JPY has not bottomed out yet and the down trend will extend beyond 84.81 to 79.75. However, we’d be cautious on any sign of loss of momentum and reversal on next fall.
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DataEntry says:
All this will happens periodically until something will be changed. You see that all currencies are working on the law of economics so we as spectator can compare each other and somehow predict the numbers, but generally speaking it’s extremely difficult. We have to do something to rise this index. Thanks.