Forex Weekly Review and Outlook
Euro Broke Key Support, Will Sterling and Swissy Follow
Dollar staged a strong rebound last week after a massive sell off in the bond market which pushed 10 year bond yields back to a five year high above 5%. Such sell off is believed to be triggered by RBNZ's surprised rate hike that raised concern that other central banks will follow suits. Stock markets also corrected with S&P 500 and Dow Jones industrials both retreated 2.7% on the week, while the Nasdaq dipped 2.3%. The net result is that dollar surged against European currencies after market priced out of a rate cut from Fed this year, Aussie and Kiwi surged across the board on rate expectations, the Japanese yen rebounded against Euro and Sterling yen on risk aversion.
Technically speaking, last week's could prove to be a defining week for some pairs. EUR/USD's break of 1.3364 support is an indication that an important medium term top is possibly in place at 1.3681 already. Meanwhile, both GBP/USD and USD/CHF are now pressing important levels which will confirm medium term reversal in both pairs. EUR/JPY should also at least made a short term top at 164.59, which could also be a medium term top, after completing a terminal pattern inches below projection target. Meanwhile USD/JPY, though less clear due to dollar's strength, could have also ended a multi month high ahead of 122.17 key resistance.
The coming week will feature handful of important economic data but focus will likely be on the development of both the bond markets as well as how the technical patterns play out.
Data from US were generally solid with ISM non-manufacturing index rose surprisingly strongly to 59.7 in May comparing to expectation of 55.3. Q1 labor costs were revised much higher to from 0.6% to 1.8% vs consensus of 1.2% though productivity was revised lower than expected to 1.0%. Apr trade deficit unexpectedly improved to -58.5b thanks to thanks to 2.6% rise in exports and -1.1% fall in imports. Though, dollar was pressured during the week after after comments from Bernanke which said that housing market's drag on the economy could persist somewhat longer than expected even though the slump has not spilled over into other parts of the economy yet. Also, there was speculation that United Arab Emirates may be the next Middle Eastern country to end the dollar peg after Syria and Kuwait had recent announced that they would dump the dollar peg to curb rising import costs and inflation.
ECB raised rates by 25bps to 4.00% as widely expected. In the press conference, Trichet, to the contrast of some analysts, still described rates as "on the accommodative side." Financing condition was still described as favorable. Risk to inflation is still on the upside and "acting in a firm and timely manner to ensure price stability in the medium term is warranted." The staff projections on inflation and growth confirmed to be upwardly revised. 07 CPI to 1.8-2.2% up from 1.5-2.1% previously and 08 still 1.4-2.6%. 07 GDP is seen at 2.3-2.9% from 2.1-2.9% with 08 1.8-2.8% from 1.9-2.9%. Though the press conference wasn't anything dovish, it seemed that markets were dissatisfied with ECB's keeping 08 inflation forecasts unchanged with mid-point at 2.0% which didn't give any guidance to the monetary policy in 08. After all, another hike in Sep is still widely expected by the markets.
BoE held interest rates unchanged at 5.50% last week. From the market actions, it seemed like the expected no change from BoE was indeed quite unexpected to part of the markets which bid up GBP/USD to as high as 1.9968 earlier last week. Sterling tumbled since then, with additional pressure from dollar and yen. Mixed industrial production and manufacturing production data was unable to provide any help to the Pound.
Data from Japan saw Q1 capital spending rising more than expected by 13.6% versus consensus of 9.6%. However, Apr machine orders fell short of expectation by rising 2.2% in Apr only. There were some jitters on the yen after news report that North Korea fired several short-range missiles off its west coast. But, the yen still ended the week higher against dollar and euro as important resistance played the effect and as EUR/JPY carry trade unwinding continued.
RBA kept rates unchanged at 6.25% as widely expected. Though, the Aussie was boosted by much stronger than expected Q1 GDP which grew 1.6% qoq, 3.8% yoy comparing to consensus of 1.2%, 3.1%. Unemployment rateunexpectedly fell from 4.4% to 4.2% in May, which is a 32 years low, thanks to a net increase of 39,400 jobs over the month. Persistent strength in the Aussie economy is continuing to increase the chance that RBA will restart the tightening sooner than originally thought. AUD/USD strengthened to 17 year high of 0.8476 before consolidating towards the end of the week.
Kiwi soared to a 22 year high after surprised rate hike from RBNZ by 25bps, for the third time this year, that brought overnight cash rate to 8.00%, which was an unexpected move to most analysts. The accompanying statement was very hawkish with RBNZ focusing almost solely on upside risks and that a "sustained period of slower growth in domestic activity will be required to alleviate inflation pressures." This is raising the expectation that RBNZ is not yet done and at least one more rate hike could be seen in Q3.
Canadian dollar turned sideway after reaching new 30 year high of 1.0547. Mixed data saw Ivey PMI at 62.7, building permits dropped -8.4%, missing expectation. Unemployment rate remained at 6.1% while housing starts rose to 229.7k and trade surplus widened to 5.76b
