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Weekly Technical Strategist USDJPY
USDJPY shot and broke through its 2007 low at 107.22 on Wednesday testing a new 31-month high of 105.92 and resuming its medium term downtrend on hold since Nov 26'07.With the loss of the said support focus now shifts to the 106.50 level, its June 07'05 low followed by its Jan 16'08 low at 105.92 and then the 104.20, which marks its May'04 low. The weekly studies remain supportive of this view as they are trending lower implying further weakness. On the upside, the 107.22 level just eroded is now expected to reverse roles and provide resistance where a failure if it occurs could trigger additional strength towards the 109.13/108.99 zone, the location of its Nov 11'07 / May'06 lows ahead of its Aug 12'07 low at 111.58. Additional resistance stands at its Sept 12'07 low at 112.60.On the whole, having broken the 107.22 level and activated the resumption of its medium term downtrend, odds are for further extension of those losses.
Directional Bias:
Nearer Term -Bearish
Short Term -Bearish
Medium Term -Bearish
Performance in %:
Past Week: +1.84%
Past Month: +0.48%
Past Quarter: -2.67%
Year-To-Date: -4.36%
Weekly Range:
High -108.97
Low -105.92
Australian Dollar: Heading For a Big Move
The Australian dollar has been one of the best performing currencies over the past few years thanks to strong demand for commodities, rising gold prices, solid economic data and a weaker US dollar. However as good as Australian fundamentals may be, there is an ancillary factor that has caused the Australian dollar to sell off aggressively over the past week and that is risk aversion. The Australian dollar is setting up for a big move and the direction that it may be headed in may surprise most traders.
Running out of Economic Fuel
The primary source of growth for the Australian economy has been demand for commodities like gold, wheat, zinc and beef among a long list of others. Many of these goods were destined for booming Asian economies like China, whose growth rates have breeched double digit gains. However, the strength of the export sector may soon lose its momentum. While prices for raw materials may act as a temporary crutch, prices have begun to turn. Global growth has started to cool according to the IMF, which lowered its forecast for annual growth from 5.2 percent to 4.7 percent, but most importantly, the Baltic Exchange Dry Index which is a strong leading indicator for global inflationary pressures and commodity demand plunged to the lowest level in 6 years.
Everyone knows that the Australian dollar has a strong correlation with gold prices, but do they know that gold prices are correlated with the BDI? The relationship between the Baltic Dry Index and gold prices can be seen in the chart below, courtesy of InvestmentTools.com. Over the past week, we have already seen a drop in gold prices, but it is clear that the BDI tends to be a leading indicator for gold. The BDI measures the cost of shipping different commodities around the world and if demand to ship is strong, the price for shipping these raw materials increase but if demand is weakening, the price falls. The recent drop in the BDI is our first indication that commodity hungry countries like China and India are no longer immune to the slowdown in the US.
Even with the export sector out of service though, the Australian economy could theoretically survive on internal momentum. However, domestic growth trends may be fading just as quickly as the broader global trends. Business spending (initially supported by exports and latter funding the consumers' rise) dropped 6.5 percent over the third quarter - the sharpest drop in nearly eight years. At the same time, the consumer sector - the largest in the economy - may be reigning in their consumption habits. Even though the latest retail sales report was strong, for the January reading, the Westpac consumer confidence survey fell the most in 14 months, while the gauge measuring Aussie's outlook for the year ahead plunged 20 percent. This dramatic rise in pessimism has been driven by increases in lending rates along with tighter lending standards, stifling increases in gasoline prices, a sharp correction in stocks and a general dour outlook on growth. If consumers decide it's time to pack it in, it wouldn't take long for growth to cool.
High Yields Become a Liability Rather Than an Asset
Another major buttress for the Australian dollar has been its high yield. Last year, the Reserve Bank of Australia raised the overnight lending rate twice to an 11-year high 6.75 percent. What's more, RBA policy makers have yet to turn dovish like so many of their international counterparts. However, even if the central bank holds its high benchmark rate steady, the appeal of the Aussie dollar may still fade. The Australian currency has enjoyed a significant bid through the carry trade whereby traders sell lower yielding currencies like the Japanese yen and buy high yielders like the Aussie dollar. This strategy had become very popular over the years, but there was a catch: its popularity and success are highly correlated to low volatility conditions where the carry trade can make its steady income without the threat of capital losses. Markets have been anything but calm over the past six months. After a subprime lending explosion in the US led to massive losses in the world largest banks, turmoil in global credit markets and the beginning of a global turn in interest rates, all assets associated with risk saw dramatic increases in volatility. With many of the components of higher volatility only worsening, the outlook for the carry trade and the Australian dollar isn't promising.
Monthly Chart of AUDU
Weekly AUDU
Weekly Chart of AUDU
EUR/JPY Weekly Outlook
EUR/JPY decline from 166.64 extended further to as low as 155.69 last week, taking out mentioned 158.67 cluster support zone (50% retracement of 149.27 to 167.72 at 158.50). as well as 61.8% retracement of 149.27 to 167.72 at 156.32. From a short term angle, with 4 hours MACD staying above signal line, an intraday low is in place at 155.69 and further consolidation could be seen with risk of recovering to 158.45 resistance. Nevertheless, upside should be limited by 159.92 cluster resistance (38.2% retracement of 166.64 to 155.69 at 159.87) and bring another fall. Below 155.69 will indicate recent fall has resumed for 100% projection of 166.64 to 159.73 from 162.27 at 155.36 first and then 161.8% projection at 151.09.
In the bigger picture, as discussed before, the corrective nature of the rise from 159.67 to 166.64 suggests that further downside should be seen, at least in near term. Though, the main question remains on whether price actions from 168.93 has already completed at 149.27 or is still in progress. But in any case, deeper decline could be seen to retest 149.27 low. Meanwhile, above 159.92 cluster resistance will argue that fall from 166.64 has already completed. Short term outlook will be turned neutral in this case first and attention will then be 162.27 resistance.
In the longer term picture, the up trend from 88.97 has taken out an important cluster resistance zone of 162.42 (38.2% retracement of 285.56 (79 high) to 88.97 (00 low) at 164.67). Resumption of this up trend will encourage another rise to next important cluster resistance at 188.22 (50% retracement at 187.26). However, sustained break of 149.27 low will also have the long term rising channel taken out, which in turn add much weight to the case that rise from 88.97 has indeed completed at 168.83 and bring much deeper medium term decline.
Weekly Review and Outlook
Euro Sentiments Reversed, Yen Sharply Higher; BOJ, BOC, RBNZ to Meet
Price actions in the forex markets last week were characterized by a sharp reversal in sentiments towards the Euro, as well as massive strength in the Japanese yen. The greenback, on the other hand was helped by risk aversion and was just mixed again even after a string of weak economic data and a dovish testimony of Bernanke. Three major central banks, BoJ, BoC and RBNZ are scheduled to meet this week and the results will be the primary focus of the markets along with some important growth and inflation data from around the world.
In the prepared remarks in the Testimony before House Budge Committee, Bernanke echoed his speech earlier this month. He argued that overall economic outlook has worsened recently and the risks to the economy "have become more pronounced". Though Bernanke said that Fed is not forecasting a recession at this point, his speech did reaffirm the expectation that Fed will have an aggressive easing on Jan 30. On the other hand, Bernanke also said that if an efficient and temporary stimulus plan is adopted, it could help steer the economy away from Recession. He pointed out that a such stimulus plan should be implemented quickly and a package in the ballpark of $100b would be "significant".
Fedspeaks last week were generally dovish. Fisher said that policymakers are ready to act aggressively to provide insurance against downside risks to the economy. Pianalto said that , "the negative influence of housing on overall economic performance could affect the outlook for some time" and "related slowing in consumer spending" is seen.
Fed's Beige book showed a slightly more upbeat view on the economy than most other recent reports. Seven of the twelve districts reported a slight increase in activity. Two described the activity as mixed while three said they're slowing. Holiday shopping season was a disappointment but not a disaster. Retailers describe the spending outlook as "cautious" only. Labor markets are still described as relatively tight.
The highly anticipated retail sales unexpectedly dropped -0.4% in Dec, comparing to expectation of being flat and is the first fall since last June. Ex-auto sales also dropped -0.4%, even weaker than consensus of -0.1% fall. Regional fed surveys were also poor. NY state manufacturing index also dropped more than expected to 9 in Jan. Philly Fed survey dived to a six year low of -20.9 in Jan, worst reading since Oct 01. Industrial production was flat in Dec with capacity utilization dropped to 81.4%.
Housing data from US were shockingly poor housing data. Housing start plunged sharply by -14.2% to annualized rate of 1.006m in Dec, the lowest since 1991. Building permits dropped by most in 12 year, -8.1% to 1.068m annualized rate. Both were much weaker than markets' expectation. NAHB house price index rose 1 points from a downwardly revised 18 to 19 in Dec.
On inflation, headline PPI fell -0.1% in Dec, dragging yoy rate sharply lower from 7.2% to 6.3% comparing to expectation of 7.9%. Core PPI, though, remained unchanged at 2.0% yoy. Headline CPI moderated by a slight amount from 4.3% to 4.1% yoy. Core CPI climbed mildly from 2.3% to 2.4% yoy.
Other data saw TIC showed much larger than expected capital inflow of 90.9b. University of Michigan consumer sentiment unexpected improved to 80.5 in Jan.
Euro's fortune reversed sharply since dovish comments from ECB hawk Mersch and tumbled across the board since then. ECB council member Mersch pointed out there are "certainly downside risks to economic activity" and ECB should exercise caution as such risks to economic growth increases. Mersch also said that he did not rule out a downward revision of growth forecasts for the Eurozone in 08. Even though HICP inflation remains far above ECB's target at 3.1% yoy, as reported earlier today, Mersch said that "ECB can look through temporary inflation jump". The comments were significant in a way that Mersch was widely regarded as a hawk. His change in tone is taken by the markets as an indication that ECB members are starting to acknowledge the impact of credit market's impact on Eurozone's growth and ECB may follow Fed's path of policy easing sooner than originally expected.
Data from Eurozone saw HICP final confirmed at 3.1% in Dec, industrial production slowed from 4.1% yoy to 2.7% yoy. German investors' outlook continued to worsen in Jan, as the ZEW economic sentiment index for expectations slipped to -41.6 from -37.2. The current situation gauge also worsened, easing to 56.6 in Jan from 63.5. Uncertainty surrounding the economic growth outlook, stock market losses and higher input costs for business, strong Euro, are all having some impact of German investor sentiments.
The Japanese yen was boosted sharply higher on risk aversion following weakness in global equity markets, including the steepest decline in US stocks markets since Jul 02. BoJ Governor Fukui said that the Japanese economy is expected to slow for some time due to uncertainty over global economic conditions. The impact of subprime problem in the US is having greater than expected impact on Japanese financial institutions but would not seriously affect stability of the financial system.
The most market moving data from Sterling was the highly anticipated retail sales which were disappointing poor. Sales unexpectedly dropped -0.4% in Dec, much weaker than expectation of 0.2% growth. Yoy rate was dragged down from a revised 4.2% to 2.7%. The data reaffirm the case that BoE would go for another rate cut in Feb.
Other data saw PPI input surged to 11.3% yoy. Output rose to 5.0% yoy, highest since 1991, while core PPI is also up to 2.5%. On the other hand, Dec CPI came in at 2.1% yoy staying above BoE's target range. Core CPI remained unchanged at 1.4% yoy. RPI, though, moderated more than expected to 4.0%. UK labor markets remained firm in the three months through Dec. Headline ILO unemployment rate was unchanged at 5.3%. Average earnings growth was also unchanged at 4.0% yoy.
A string of strong data from New Zealand reaffirmed the expectation that RBNZ will remain on hold this week. Q4 CPI surged from 1.8% to 3.2%, beating expectation of 3.0%. Retail sales also beat expectation by growing 2.0%. Australian unemployment rate dropped further from 4.5% to 4.3% in Dec. Aussie was also supported by comments from RBA Governor Glenn Stevens that he's not distressed by the strong AUD/USD.
Euro
Three major central banks are scheduled to meet this week. BoC is expected to have another 25bps cut to 4.0. BoJ is expected to remain on hold at 0.50%. RBNZ is also expected to be on hold at 8.25%.
From US the economic calendar is light and focus will mainly be on Thursday's Existing home sales while is expected to tumble another -1.0% in Dec.
From Eurozone, major focus will be on German Ifo which is expected to deteriorate for another month in Jan to 102.2. Gfk consumer confidence is also expected to drop slightly to 4.4. PMI manufacturing and services are both expected to fall further in Jan too.
From UK BoE minutes will be highly anticipated for vote split as well as reasons for BoE being on hold earlier. Q4 GDP will also be closely watched and is expected to slow from 3.3% yoy to 2.8% yoy.
From Japan, in addition to BoJ meeting and minutes, CPI inflation data will catch most attention and is expected to climb further from 0.6% yoy to 0.7% yoy in Dec.
From Canada, after BoC's expected rate cut, Dec CPI will take center stage and is expected to slow from 2.5% yoy to 2.4% yoy, with core CPI climbing mildly from 1.6% yoy to 1.7% yoy.
From Australia, main focus will be on inflation. PPI is expected to climb further from 2.4% yoy to 3.3% yoy. CPI is expected to climb from 1.9% yoy to 3.0% yoy. The data will likely reinforce expectation that FBA will have another rate hike in near term.