Mon, Mar 24 2008, 06:46 GMT
by Cornelius Luca
Foreign exchange encountered one of the most volatile periods in a while during last week. The aggressive recovery of the US currency took no prisoners, but the pause for Easter is jeopardizing the move. The dollar must extend its upmove quickly, or the recovery will end and the major downtrend will resume.
United States
The dollar has been deeply entrenched in a long-term downtrend and the near collapse of Bear Stearns sent the currency even lower early last Monday. The Federal Reserve cut the discount rate by a quarter of a percentage point to 3.25 percent in its first weekend emergency action in nearly three decades in an all-out effort to prevent a further implosion of the financial markets. The Fed also will provide up to $30 billion to JPMorgan Chase to help it finance the purchase of Bear Stearns (at $2 a share!).
Then, the Federal Reserve cut its main lending rate by 75 bps to 2.25 percent and the discount rate to 2.5 percent, as officials try to support the faltering economy and the U.S. financial system. In support of the Fed, the Bank of England offered 5 billion pounds of extra three-day funds in an emergency fine-tuning operation, while the Bank of Japan added $4.1 billion to the financial system.
And then the dollar took off aggressively, but in a choppy manner.
In a move betraying the overbought conditions of the market and the fear at these stratospheric levels, euro/dollar collapsed on Monday after ECB President Trichet appealed for central-bank cooperation and warned about the dangers of big changes in major currencies.
The economic data was bad, as expected.
The New York Federal Reserve Bank’s "Empire State" manufacturing activity index fell to -22.23 in March from -11.72 in February.
Building permits fell 7.8 percent to 978,000 in February from an upwardly revised 1,061,000 in January and 36.5 percent on a yearly basis ago. Meanwhile, housing starts fell 0.6 percent to 1,065,000 on the month and 28.4 percent from last year.
The Philadelphia Federal Reserve Bank’s business activity index “improved” to -17.4 in March from -24.0 in February, but this was the fourth consecutive contraction.
The Conference Board’s Leading Economic Indicators index fell 0.3 percent in February, fifth consecutive decline, following a 0.4 percent drop in January (originally reported as -0.1 percent). The last time the leading index fell for five consecutive months was in 2001.
The PPI slowed to +0.3 percent in February from the mammoth 1 percent gain in January. The core PPI rose to 0.5 percent.
The current account deficit unexpectedly narrowed in the fourth quarter to $172.9 billion from a downwardly revised $177.4 billion in the third quarter.
The jobless claims rose to 378,000 from the previous week's upwardly revised (as nearly always) figure of 356,000 (from 353,000).
The Eurozone
The euro/dollar apparently peaked early last week, but it’s early to say a significant top is in place.
The markets was hoping for a rate cut in the Eurozone, but ECB’s Noyer expressed concern that inflation pressures will increase in the Eurozone, thus reducing speculation for a rate cut this year.
German producer prices slipped to 0.7 percent in February from 0.8 percent in January, but rose to 3.8 percent on a yearly basis from 3.3 percent.
The Eurozone employment slowed to +0.2 percent in the fourth quarter from 0.3 percent in the third quarter and 0.5 percent in the second quarter. On an annual basis, employment slipped to 1.7 percent, down from 1.8 percent in the third quarter.
The Italian trade deficit widened to EUR 4.219 billion in January from EUR 3.69 billion on a yearly basis.
Japan
Dollar/yen put in a good bottom early last Monday, but its subsequent rally decelerated and the remains below parity. More information is needed and that should come from the carry trades.
Japan's tertiary sector index of service industry activity rose 0.7 percent in January after falling 0.9 percent in December and being flat in November.
Meanwhile, the all-industries index was flat in January.
The UK
The sterling/dollar fell sharply into Thursday, and then consolidated. The high-yielding cable needs more information here, as some of the UK data was better than expected. This means that the Bank of England can wait before cutting interest rates.
Consumer prices rose 0.7 percent on the month and to 2.5 percent in February from 2.2 percent in January on annual basis.
Meanwhile, retail sales unexpectedly rose 1 percent in February.
Meanwhile, Bank of England policy makers voted 7-2 to keep the benchmark interest rate at 5.25 percent this month, defeating two calls for a 25-basis point cut to boost economic growth.
Canada
Dollar/Canada surged last Wednesday and Thursday amid some weakness at the top in commodities. If they slip further or if the US economy shows more signs of recession, the pair will advance as well.
Canada's consumer prices rose 0.4 percent in February and the core index gained 0.5 percent. On an annual basis, the CPI fell to a six-month low of 1.8 percent from 2.2 percent, while core inflation accelerated for the first time since June to 1.5 percent from 1.4 percent in January.
A rebound in car sales lifted manufacturers' sales in January by a bigger-than-expected 1.3 percent to C$49.3 billion from a three-year low in December. The December sales figure was revised down to -3.7 percent from -3.4 percent.
The composite leading indicator unexpectedly contracted 0.3 percent in February because a sharp drop in manufacturing outweighed strong household demand.
Switzerland
Dollar/Swiss franc bottomed early last week and then rallied sharply. While it remains oversold, more proof is needed to signal a sustained upmove.
Australia
The Aussie/dollar closed fell sharply in four of the past six days and hit a five-week low amid profit taking in overpriced commodities. It formed a double top that targets 0.8780, but only a close below 0.8950 would strengthen this bearish scenario.
This Week's Data and Events
United States
The US economic calendar will start on Monday with the release of the Existing Home sales report for February.
The Conference Board Consumer Confidence report for March is due on Tuesday.
Wednesday will see the release of the New Home Sales and the Durable Goods Orders reports for February.
The Personal Income and Spending reports for February and the revision of the University of Michigan survey for March are due on Friday.
The Eurozone
The Eurozone markets are closed on Monday for Easter.
The economic agenda will open on Wednesday with the release of the key IFO survey of German Business Climate report for March.
Also on Wednesday there will be Italy’s Business Confidence report for March.
Germany’s GfK Consumer Confidence report for April is due on Thursday.
Friday will see the revision of the French GDP for the fourth quarter, the French Consumer confidence report for March, and the Eurozone Retail PMI report for March.
Japan
Japan’s economic agenda will start on Tuesday with the release of the Trade Balance report for February.
Thursday will see the release of a large bunch of significant data: Unemployment Rate and Household Living Expenditure reports for February, the National CPI report for February and the Tokyo CPI report for March, and the Retail Trade report for February.
The UK
The UK market is closed on Monday for Easter.
The economic agenda will start on Wednesday with the release of the CBI distributive trades survey for March.
The Nationwide House Prices report for March and the final fourth quarter GDP report are due on Thursday.
Canada
Canada’s economic agenda is light this week.
It only features the Retail Sales report for January, which is due on Tuesday.
Overview
Euro/dollar
Last week's range: 1.5399 – 1.5904 (Down)
Previous range: 1.5284 – 1.5690 (Up)
The overbought euro/dollar sank from a new record high to form a bearish reversal formation. My model promptly turned bearish (see the Daily reports) and this was a profitable position to take last week. The decline should continue, but after two days of pause, be careful. The pair remains very overbought.
Immediate support is at 1.5365. Below 1.5285, euro/dollar has support at 1.5235. This is followed by 1.5170. Below 1.5030, there is distant support at 1.4850.
Initial resistance is at 1.5530. Above 1.5625, resistance now comes at 1.5710. Distant resistance is now seen at 1.5904.
NEAR-TERM:Mixed
MEDIUM-TERM:Mixed
LONG-TERM: Bullish
Dollar/yen
Last week's range: 95.75 – 100.44 (Mixed)
Previous range: 98.91 – 103.59 (Down)
Dollar/yen recouped aggressive losses that took it to a new multi-year low to close the week unchanged. My system went long, but a close above 110.30 will help confidence on the upside.
Immediate resistance is now seen at 100.25 from a 50-point pivot, which targets 99.75 and 100.75. Then, there is the 50-point pivot at 101.25, which targets 100.75 and 101.75. Distant resistance is at 102.30 from another 50-point pivot, which targets 101.80 and 102.80.
Initial support is at 99.25 from a 50-point pivot, which targets 98.75 and 99.75. This is followed by 98.15. The next support comes from a 50-point pivot at 97.30, and this targets 96.80 and 97.80. Below it, distant support is at 96.60.
NEAR-TERM: Mixed
MEDIUM-TERM: Mixed
LONG-TERM: Bearish
Sterling/dollar
Last week's range: 1.9738 – 2.0273 (Down)
Previous range: 1.9995 – 2.0397 (Mixed)
Sterling/dollar sank sharply last week after the slide the previous Friday warned of trouble. My model went short – quite timely and was profitable last week. Only a close below 1.9765 is needed to add confidence to the bearish outlook.
Immediate support is now seen at 1.9765. This is followed by 1.9680. Below 1.9575, the next level follows at 1.9495. Distant support is 1.9395.
Initial resistance now comes at 1.9885. This is followed by 1.9940. A break above 2.0000 would signal a further rally to 2.0155. Distant resistance looms at 2.0275.
NEAR-TERM:Mixed
MEDIUM-TERM:Mixed
LONG-TERM:Mixed
Dollar/Swiss franc
Last week's range: 0.9642 – 1.0167 (Up)
Previous range: 0.9979 – 1.0353 (Down)
Dollar/Swiss reversed aggressive losses to a new record low to close higher last week. My model went long and the pair remains heavily oversold. A further brief bounce is likely, but more proof is needed for a medium-term rally.
Initial resistance now comes at 1.0167. This is followed by 1.0273. The next level is 1.0390. Above 1.0450, distant resistance now comes at 1.0650.
Immediate support is now seen at 0.9955. Below 0.9885, support is now pegged at 0.9790. Distant support is at 0.9642.
NEAR-TERM: Mixed
MEDIUM-TERM:Mixed
LONG-TERM: Bearish
Dollar/Canada
Last week's range: 0.9860 – 1.0295 (Up)
Previous range: 0.9798 – 0.9982 (Mixed)
Dollar/Canada traded sideways through Tuesday and then surged the following two days to reach a two-month high. My model went long, but a close above 1.0360 is needed for a new burst of confidence.
So, immediate resistance is at 1.0295. Above 1.0360, strong resistance is at 1.0465. There is a pivot high at 1.0867.
Initial support is now seen at 1.0175. This is followed by 1.0100 and 1.0040. Below 0.9965, distant support is pegged at 0.9745.
NEAR-TERM: Mixed
MEDIUM-TERM: Mixed
LONG-TERM: Bearish
Euro/yen
Last week's range: 151.75 – 157.03 (Down)
Previous range: 154.88 – 159.13 (Down)
Euro/yen sank aggressively last week and nailed a seven-month low. My model went short. Trading has been and will remain choppy.
Immediate support is at 151.75. The next level is at 149.27from a pivot low.Below 147.45, distant support is at 143.80.
Resistance is at 154.60. This is followed by 155.45 and 156.75. Above 157.85, resistance is at 159.05. The euro/yen has distant resistance at 160.70.
NEAR-TERM: Bearish
MEDIUM-TERM: Mixed
LONG-TERM: Bullish
Euro/sterling
Last week's range: 0.7760 – 0.7911 (Mixed)
Previous range: 0.7596 – 0.7758 (Up)
Euro/sterling reached a new over 12-year high last Monday, but alternating up and down days made trading conditions horrible. The cross is severely overbought and the weekly chart suggests a bearish reversal. But only a close below 0.7718 would increase these odds.
Initial support is at 0.7730. This is followed by 0.7700. A break below 0.7665 would signal a further decline to 0.7618. Distant supports come at 0.7596 and 0.7515.
Immediate resistance is now seen at 0.7830. Strong resistance lies at 0.7910. Above 0.7970, the next level now comes at 0.8000. Distant resistance is then seen at 0.8080.
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