Weekly Review and Outlook

Sterling Weakness and Yen Strength to Continue, Dollar Fate Depends on Commodities

Looking back at the past week, Sterling's weakness and yen strength dominated the forex markets while dollar also strengthened on risk aversion. GBP/USD hit new 23 year low and closed -936 pips (-6.79%) while GBP/JPY made new record low and closed down -1129 pips (-0.23%). Nevertheless, the picture was mixed up a little bit towards the end of Friday as dollar retreated on strength in gold and rebound in oil while DOW's refusal to close below 8000 level limited yen crosses' fall. Indeed, the Canadian dollar staged a strong rebound on Friday following rebound in crude oil prices while Aussie also pared some of last week's losses as Gold is back pressing 900 level. The outlook is turning somewhat unclear.

Nevertheless, firstly, note that EUR/JPY, GBP/JPY, CAD/JPY and NZD/JPY's break of recent important support last week should have confirmed medium term down trend resumption. As discussed before, major stock indices are expected to take out last year's low in the near future and European stocks are leading the way now. CAC 40 has already taken out Nov's low while DAX is also in proximity to Oct's low too. DOW is still stubbornly holding on 8000 level but there is no change in the view that rebound from 7392 has completed. Investors are probably just waiting for Q4 GDP from US this week to commit further selling in US stocks. Hence after all, yen's strength is still expected to continue.

Secondly, it now seems that every news from UK is bad news. Last week's selling in Sterling was triggered by announcement of the second bank rescue plan and the fear of debt rating downgrade and BoE King's message that the bank will enter into quantitative easing soon. Further selling was triggered after the dovish MPC minutes, climbing unemployment rate to 6.1% and release of worst contraction in GDP in Q4 by -1.5% qoq. In between, markets had no reaction to higher than expected CPI reading of 3.1% yoy in Dec and surprised growth in retail sales by 1.6% mom in Dec. The pound will likely remains pressured.

Thirdly, note that Canadian staged a very impressive rebound on oil prices even though BoC cut rates by 50bps to 1.00% and signaled further easing. Retail sales in Canadian fell more than expected by -2.4% in Nov while CPI moderated more than expected to 1.2% yoy in Dec. However, there is no confirmation in reversal in crude oil yet and last week's rebound may merely be part of consolidations. On the other hand, Gold's break of 892 resistance is building up the case that 681 is an important low and that provided the support to Aussie which keep it above Oct's lows against dollar and yen.

Fourthly, Dollar continued to respond positively to negative news even though new residential construction data dived further to new record low in Nov and initial jobless claims soaring to 15 year high of 589k. Though some weakness was seen towards the end of the week as gold strengthened.

Considering the above, Sterling will likely remain the weakest currency, in particular against the broadly strong yen. The timing of another round of yen buying will probably depend on when DOW finally gives up 8000 level. Euro and Swissy will likely remain soft against the greenback and yen too, but less weak than Sterling. Aussie could be "relatively" steady, supported by gold and AUD/NZD flows. Canadian dollar is rather uncertain, depending on whether crude oil can extend the rebound further. If gold and oil rises together, dollar will likely retreat further against commodity currencies and be dragged down against yen even though it's still likely be firm against European majors. However, even if gold rises, if oil fails 50 level and weakens again, the impact on dollar will counter each other and should add some fuel for dollar's rally in general and in particular in USD/CAD.

Currency Heat Map Weekly View

Suggested Readings

• This Week's Market Outlook
• Weekly Foreign Exchange Insights
• FX Briefing: No End to Crisis Yet in Sight
• Financial Markets Review: Sterling Wilts as UK Recession is Confirmed
• Australian & New Zealand Weekly: Consumers on Edge
• Weekly Economic and Financial Commentary

BoC

• BOC Monetary Policy Report Update - Recession in 2009, Recovery in 2010
• Bank of Canada's Monetary Policy Report Update Fleshes out Details of Economic Forecast
• Bank of Canada Lowers Overnight Rate to 1.00%
• BoC Leaves The Door Open To Further Rate Cuts
• Bank of Canada Cuts Its Benchmark Rate To A Record Low, Bolsters Case For Zero
• Bank of Canada Eased 50 Basis Points As Expected
• Bank of Canada Cuts Policy Rate by Another 50 Basis Points to 1%
• Bank of Canada Slashes Rates to Lowest Since Bank's Founding in 1934
• Bank of Canada Cuts Rates by 1%, More Easing Ahead
• (BOC) Bank of Canada Lowers Overnight Rate Target by 1/2 Percentage Point to 1 Per cent
• Bank of Canada Cuts Overnight Rate 50 Basis Points to 1.00%

BoJ

• Bank of Japan Press Conference
• Japan: BoJ Fears a Return to Deflation

Highlights from US will definitely be on Friday's prelim Q4 GDP which is expected to show annualized contraction of -5.3%. FOMC will announce rate decision but markets will likely have little reaction to Fed being on hold at 0-0.25%. Other important data from US include existing home sales and new home sales, consumer confidence, durable goods orders.

From Eurozone, main focus should be on Friday's Jan CPI estimate which is expected to slow to 1.4% yoy, further down below ECB's target of 2%. Other data include Germany Ifo, Eurozone M3, economic sentiment and unemployment rate.

Aussie PPI and CPI will also be featured. In particular, CPI is expected to contract by -0.4% in Q4 which should pave the way for RBA to cut rates again in Feb.

RBNZ is expected to cut rates by 100bps from 5.00% to 4.00% this week, making the OCR temporarily below RBA's 4.25% before RBA meets on Feb 3.

Other important data to watch include UK Gfk, nationwide house price, Canadian GDP and PPI, Japan CPI, unemployment rate and retail sales, Swiss KOF.

Suggested Readings

• Economic Calendar Summary 1/26 - 1/30
• The Weekly Bottom Line
• Forex Traders May See Shift in Risk Trends Amidst Rate Decisions, CPI, GDP
• US Dollar Trend Hangs On The Outcome Of 4Q GDP And FOMC Decision
• FOMC Preview: Fed to Maintain Aggressive Policy, Signal Purchase of Treasuries
• The Week Ahead Canada & U.S.: All Eyes on FOMC Rate Decision
• The Week Ahead UK & Europe: German Ifo Business Climate, ECB Money Supply
• The Week Ahead Japan and Australia: RBNZ Decision, Australian and Japanese CPI

GBP/JPY Weekly Outlook

GBP/JPY dived further to as low as 118.81 last week after taking out 128.78 low. Though, with 4 hours MACD crossed above signal line, an intraday low might be in place. Some consolidation could be seen initially this week, with risk of recovering to 125.40 or above. But upside should be limited by 128.78 support turned resistance and bring resumption. Current fall from 141.52 is expected to target 161.8% projection of 141.52 to 128.78 from 135.82 at 115.21 on resumption.

In the bigger picture, the strong break of 128.78/129.71 support zone confirms that medium term fall from 215.87 is still in progress and has resumed. Revised interpretation is that such fall is developing into a five wave sequence (184.47, 197.42, 129.71.......) Fourth wave correction was brief and has completed at 141.52 already. Decline from there is treated as the fifth wave. Having said that, downside could extend further to 61.8% projection of 197.42 to 129.71 from 141.52 at 99.67 which is very close to 100 psychological support. On the upside, a break of 135.82 will be the first signal that a medium term bottom is finally formed.

In the longer term picture, as discussed before, the corrective nature of the rise from 129.32 (95 low) to 251.09 (07 high) suggests that it's merely consolidation in the longer term down trend. The strength of the decline from 251.09 is also consistent with the view that it's resumption of the multi-decade down trend. Such decline should develop into a five wave structure. Note that the decline from 215.87 is not treated as the fifth wave, but the third wave inside the third wave that started at 241.35. While downside momentum is seen diminishing in weekly MACD, there is no signal of a reversal yet.

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