Weekly Review and Outlook

Can Risk Appetites Sustain?

Investors sentiments continued to improve last week despite a string of negative events including the spread of swine flu, news that Citibank and Bank of America failed stress tests, bankruptcy of Chrysler and a disappointing Q1 GDP report from US. Indeed, markets were lifted by Fed's less optimistic than expected statement and built up momentum from there. DOW rose to intra-week high of 8307 and closed at 8212, 136 pts higher. As usual, the Japanese yen was lower across the board on improved risk appetite. Canadian dollar and Sterling were the biggest winner last week on better than expected Canadian GDP and UK PMI Manufacturing. Nevertheless, New Zealand Dollar was somewhat left behind after RBNZ's rate cut.

Fed left rates unchanged at historical low of 0-0.25% as widely expected and kept target of purchases of Treasuries and mortgage securities unchanged. In the accompanying statement, Fed noted that economic outlook has "improved modestly" since last meeting but activity is likely to remain weak for a time. Household spending has also shown signs of "stabilizing" even though remains constrained by "job losses, lower housing wealth, and tight credit". Inflation is expected to be "subdued" and persist below target.

Real GDP in the US contracted -6.1% yoy in 1Q09, worse the market expectation of -4.3%, after a decline of -6.3% in 4Q08. What surprised the market the most was that real personal consumption expenditures surged the most in 2 years, by +2.2% in 1Q09, compared with a decrease of -4.3% in the 4th quarter. This indeed sent a positive message that the worst of US' recession may be behind us. ISM Manufacturing index rose much more than expected to 40.1 in Apr, the first above 40 reading since last Sept. While improvements are seen in all components, the jump from 28.1 to 34.4 in the employment component was impressive. Chicago PMI improved to 40.1 in Apr. In addition, Conference Board Consumer Confidence improved sharply to 39.2 in Apr while U of Michigan was revised sharply higher to 65.1. Though, Mar Personal income and spending dropped deeper than expected by -0.2% and -0.2% respectively. But after all, the reports were generally consistent with the view that contraction in the US economy is slowing.

Data from Eurozone showed much improvements in confidence. But unemployment rated rose more than expected to 8.9% in March. CPI estimate remain unchanged at 0.6% yoy in Apr. M3 money supply growth slowed sharply to 5.1% yoy in March.

Data from UK saw PMI manufacturing rose more than expected to 42.9 in Apr. Nationwide house price dropped less tan expected by -0.4% mom. Gfk consumer confidence improved to -27 in Apr. CBI Distributive Trade index also improved sharply from -44 to +3 in Apr.

Japanese yen was pressured by rising stocks as well as weak data from Japan. Retail sales dropped -3.9% yoy in March. House hold spending dropped more than expected by -3.7% yoy while unemployment rate surged sharply to 4.8% in MArch. CPI dropped -0.3% yoy in March with core CPI dropped -0.1% yoy. BoJ left rates unchanged at 0.1% as widely expected.

Canadian dollar continued to build on the boost by Bank of Canada's hold back from quantitative easing and rose further after Feb GDP contracted merely -0.1% mom, above expectation of -0.2%.

The main question remains on whether recent improvements in risk sentiments and economic data are just "temporary" in the bear markets or are the markets really turning around. While stocks managed to advance, upside momentum remains unconvincing. Bearish divergence conditions remain in DOW's hourly chart. It's possibly completing a rising wedge formation too. More overall, DOW, and similarly in S&P, is pressing an important resistance level at 8314 which is close to 23.6% retracement of 14198 to 6469 at 8293 level. It should be difficult in getting rid of this resistance and bounces off from the current level will likely trigger some sizeable selloffs. Remember the old saying "Sell in May and go away" and beware.

Most of the yen crosses are still kept below recent highs, including USD/JPY, EUR/JPY, GBP/JPY and even AUD/USD. Nevertheless, last week's development did dampen the view the these yen crosses have topped out already. Instead some more upside could be seen in near term. But the main tests in yen crosses lie ahead in some key resistance levels. USD/JPY will face trend line resistance at 102.4 level. EUR/JPY, GBP/JPY and AUD/JPY will face medium term fibonacci resistance at 141.03, 155.88 and 73.96. We're expecting limited upside potential in yen crosses in general and expect a reversal soon.

The outlook in dollar index is rather mixed for the moment. As mentioned before, we're facing the bearish case that choppy rise from 82.63 is merely correction to the fall from 89.62 and has completed with three waves up to 86.87 already, with fall from there resuming decline from 89.62. On the other hand, there is a possible bullish case that price actions from 86.13 are consolidation to rise from 82.63 only, with fall from 86.87 as the third leg. A break above 86.87 resistance will turn favors back to the bullish case and could probably trigger some strong rally. Last week's development did shift favors to the bearish case but the decline from 86.87 is so far unconvincing. Admittedly, further downside is in favor towards 82.63 with 86.01 intact. But the dollar index will likely soar if the above mentioned reversal in stocks and yen crosses happens. So even in case of further fall in dollar index, we'd prefer to wait for confirmation of break out in yen crosses and stocks for double confirmation.

The Week Ahead

Liquidity will probably be low as U.K. markets will be closed on Monday for May Day while Japanese markets will be closed from Monday to Wednesday for the Golden Week holidays. However, considering the string of key events scheduled, volatility would likely be high and exaggerated by the thin liquidity. So, let's prepare for a roller-coaster ride.

From US, Fed Bernanke will testify before Joint Economic Committee on Tuesday and Banks Stress Test results will be released on Thursday. Pending homes sales, ISM services will be featured. And the week will wrap up with the highly anticipated non-farm payroll report, which is expected to show over 600k contraction again in APr with unemployment rate jumping further to 8.9%.

ECB meeting will be the main highlight from Eurozone this week. A 25 bps cut to 1.00% is widely expected. Trichet should also announce details of quantitative easing program as mentioned in various occasions. final PMIs, PPI and retail sales will be featured.

BoE is expected to leave rates unchanged at 0.50% and will likely be a non event. Focus is indeed on PMI services and Sterling will likely be boosted in case of upside surprise there. PPI will also be released. From Swiss, SVME PMI will be featured.

It will also be an important week for Australian dollar. RBA is expected to keep rates unchanged at 3.00% but the Aussie will be vulnerable if the bank surprises markets by a cut. Q1 house price index, retail sales and job report will also be released. Other data featured include Canadian Ivey PMI and job report as well as New Zealand job report.

Currency Heat Map Weekly View

GBP/JPY Weekly Outlook

GBP/JPY's strong rebound from 138.99 dampened the bearish that it has topped out at 151.49 and aruge that whole rebound from 118.81 might still be in progress. Initial bias is on the upside this week as long as 144.54 minor support holds. Further rally to above 151.49 resistance cannot be ruled out. But upside potential should be limited above there as strong resistance should be seen as GBP/JPY approaches 38.2% retracement of 215.87 to 118.81 at 155.88 and bring reversal. On the downside, below 144.54 will turn intraday outlook neutral first. Break of 138.99 support will now be an important signal that GBP/JPY's rise from 118.81 has finally completed.

In the bigger picture, there is no change in the view that rise from 118.81 is correction to medium term fall from 215.87 only. While such rise might extend further, it's still expected to conclud at 38.2% retracement of 215.87 to 118.81 at 155.88 and bring reversal. Below 138.99 will indicate that such rebound has completed and the long term down trend from 251.09 is resuming. In such case, we'd be looking forward to a break of 118.81 low eventually. However, note that sustained break of 155.88 resistance will dampen this view and set the stage for stronger rebound to 50% retracement at 167.34 next.

In the longer term picture, prior break of 129.32 (95 low) is consistent with the view that fall from 251.09 is resuming multi decade down trend. Note that the fall from 215.87 is not treated as the fifth wave, but the third wave inside the third wave that started at 241.35. In other words, the whole down trend shouldn't be over yet and would probably extend further to test 100 psychological level after completing the fourth wave consolidation from 118.81. Some evidence is needed to indicate that 118.81 is a long term bottom before abandoning the bearish view.

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