Weekly Review and Outlook: Dollar Turned into Consolidation, But Remains Vulnerable Against …

By: Milla Shaw in Forex Consultant on Apr. 14, 2011

After edging lower initially, dollar turned into consolidation last week while the Japanese yen recovered on a couple of factors. Firstly, European debt crisis came back into focus on concern that Greece will have to restructure it’s debts and Irelands credit rating was downgraded again by Moody’s. Secondly, stronger than expected Chinese inflation data affirmed the view of more tightening ahead. Thirdly, there were also renewed concern on Japan’s nuclear crisis. Nevertheless, dollar’s recovery was weak so far as it faced strong pressure from strength in commodities, where gold made another record high. Swiss Franc was impressively strong in the markets, making another record high against the greenback. Commodity currencies were mixed even though strength was apparent in New Zealand dollar.

The Fed’s Beige Book based on information collected before April 4 2011 was modestly upbeat. The economy in the 12 regional Fed districts ‘generally continued to improve’. The Fed stated that ‘while many districts described the improvements as only moderate, most districts stated that gains were widespread across sectors’. Concerning recent surges in commodity prices, the survey revealed that pressures to increase wages were ‘weak or subdued’. More in Beige Book Shows Widespread Improvements In Virtually Every District.

Moody’s downgraded Ireland’s rating by two notches to Baa3 from Baa1 and issued a negative outlook. That’s just one notch above BB or junk level. Moody’s said “further weakening of the Irish government’s financial strength, given the subdued economic activity and the crystallization of additional bank contingent liabilities.” German Finance Minister Wolfgang Schaeuble told a newspaper that Greece may may need to renegotiate its debt if the review by IMF and European authorities in June raises doubt about the country’s “debt sustainability”. The news revived some concerns on European debt situations and turned Euro into consolidations. Nevertheless, we’re not seeing any sign of reversal in EUR/USD and EUR/GBP and the uptrend in these two pairs remained intact.

Japan raised the crisis level of the Fukushima Daiichi nuclear power plant to match the same level as the 1986 Chernobyl disaster, i.e. , level 7. An official that the amount of radiation released was only about one tenth of that from Chernobyl. But the plant operator didn’t rule out the possibility of eventually exceeding that from Chernobyl. The news triggered some risk aversion in the middle of the week and extended yen’s recovery.

Sterling was bounded in consolidation against the greenback but weakened noticeably against Swiss Franc last week. Weaker than expected CPI, which unexpectedly moderated to 4.0% yoy in March dented rate BoE rate outlook. Markets pushed expectation of rate hike from BoE from July/August to October. Andrew Sentance, who voted to raise rates since last June, sounded hawkish again and warned of inflation jumping to 5% but the comments were largely ignored by the markets.

The BOC left the overnight rate at 1% but delivered slightly more hawkish accompanying statement as domestic economic growth has been running faster than expected. The central bank revised higher its growth forecast for 2011 but downgraded that for 2012. Concerning inflation, policymakers viewed recent upward price pressures as only ‘temporary’ as driven ‘recent sharp increases in energy prices and the ongoing boost from changes in provincial indirect taxes’. More in BOC Leaves Rates Unchanged. Raises Growth Outlook.

China’s macroeconomic report revealed a robust economic environment despite government tightening. GDP expanded +9.7% y/y in 1Q11 while CPI jumped to +5.4%, the highest level in 32 months, in March. Asian stock markets declined after the report as investors worried that the government will accelerate tightening measures as inflation remains elevated. While we believe we should be cautious towards further tightening, we should not view it too pessimistically. Indeed, Premier Wen Jiao Bao warned earlier in the week about over-tightening while raising the tone on inflation fighting. More in China to Tighten Further as Inflation Remains Elevated

Technical Highlights

Dollar index edged lower to 74.62 last week before turning sideway. After all, with 76.61 resistance intact, there is no sign of near term bottoming yet and outlook remains bearish. Current medium term down trend from 88.70 is expected to continue through 74.19 support to 61.8% projection of 88.70 to 75.63 from 81.31 at 73.27 which is close to 100% projection of 89.62 to 74.19 from 88.70 at 73.27.

Euro lost some momentum last week and that could clearly be seen in the strength in XAU/EUR. The break of 1025.09 resistance last week suggests that consolidation from 1041.70 has likely completed at 998.55 already. In other words, the rebound from 953.50 is likely resuming and should break through 1041.70 in near term to 61.8% projection of 953.50 to 1041.70 from 998.55 at 1053.05. The move would possibly trigger some deeper retreat in EUR/USD.

As noted above, New Zealand dollar is among the strongest commodity currencies last week. The strong rise from 0.7115 accelerated further through 0.7973 resistance and resumed the whole long term up trend form 0.4890. Near term outlook will remain bullish as long as 0.7745 support holds. We’d expect the up trend to extend through 0.8213 high to 61.8% projection of 0.4890 to 0.7632 from 0.6559 at 0.8254 in medium term.

The Week Ahead

Dollar would possibly continue to consolidate against Euro in this holiday shortened week. Though, the greenback will remain vulnerable to a new low against Swiss franc. BoE minutes will be a main focus in the week but given weaker than expected CPI data released last week, the vote split might have less impact on rate outlook.

Monday: New Zealand CPI; UK Rightmove house price; Eurozone consumer confidence; US NAHB housing market index
Tuesday: RBA minutes; Eurozone PMI flash; Canada CPI; US housing starts and building permits
Wednesday: BoE minutes; US existing home sales
Thursday: Australia PPI; German Ifo; UK public sector net borrowing, retail sales; Canada retail sales; US jobless claims, Philly Fed survey
Friday: Market holiday

USD/CHF dropped to as low as 0.8895 last week and the break of 0.8921 support indicates that recent down trend has resumed. While USD/CHF lost some intraday downside momentum, recovery is so far weak. Hence, initial bias will remain on the downside this week and below 0.8895 will target 61.8% projection of 0.9774 to 0.8921 from 0.9339 at 0.8812 next. On the upside, above 0.8990 will suggest short term bottoming and bring recovery through 4 hours 55 EMA (now at 0.9041).

In the bigger picture, whole decline from 1.1729 is still in progress and is expected to develop into a five wave impulsive pattern, with fall from 1.0065 as third leg. Sustained trading below 0.9 psychological level will target 61.8% projection of 1.1729 to 0.9462 from 1.0065 at 0.8664 first and then 100% projection at 0.7798. On the upside, break of 0.9339 resistance is needed to be the first signal of medium term reversal. Otherwise, outlook will remain bearish.

In the longer term picture, long term down trend from 2000 high of 1.8305 is still in progress. There are various interpretation of the price actions. But after all, USD/CHF should be resuming the set of impulsive fall from 1.8305 to 1.1288. 61.8% projection of 1.8305 to 1.1288 from 1.3283 at 0.8946 is already met. Sustained trading below 0.9 psychological level will pave the way towards 100% projection at 0.6266.