Weekly Review and Outlook

Dollar Rallied Further on Commodity Meltdown and Global Slowdown

Correction in commodity markets and global slowdown remained the dominant theme last week, driving the greenback further higher with just minimal consolidation during the week. Spot gold took out $845 level decisively and dived to as low as 772.60 level while crude oil also weakened further to $111.34 level. Sterling was hit hard by growing concern of recession in the UK while Euro was also hammered by worry of slowdown in the Eurozone economy. Aussie remained pressured throughout the week on speculation of rate cut from RBA in Sep. Yen crosses tumbled sharply as markets were getting out from yen funded carry trades. The rally in USD/JPY suggested that such funds are switching to dollar denominated assets. One thing to note is that the Canadian dollar was rather firm in crosses, supported by solid data from Canada which resulted in USD/CAD's retreat.

Technically speaking, one of the most important developments last week was GBP/USD's decisive break of the long term trendline support which served as an indication that the multi year up trend from 2001 low of 1.3680 has already completed. GBP/JPY also took out a medium term trend line support which confirmed that medium term correction from 192.60 has completed and the downtrend from 251.09 is resuming.

Looking ahead, while a number of important economic data will be released across the Atlantic, the technical development in EUR/USD, USD/CHF and EUR/JPY as well as spot gold will need particular attention. EUR/USD is now having its eye of 1.43 level with a medium term trend line and an important support level coinciding. USD/CHF is pressing key medium term resistance level at 1.1. EUR/JPY is set to take on the multi year channel support again. Spot gold looks set to take out 772 medium term support level and dive further into 600s region. Such developments will be important to solidify the current trend, i.e., unwinding of carry trades and flow of fund into dollar assets.

Currency Heat Map Weekly View

On the data front, headline inflation in US accelerated much more than expected to 5.6% yoy in Jul, the biggest jump in 17 years. Core CPI also climbed more than expected to 2.5% yoy. Import price index rose 1.7% mom, 21.6% yoy in Jul. Headline retail sales dropped -0.1% mom in Jul, inline with expectation. Ex-auto sales climbed 0.4%, below consensus of 0.5%. Trade deficit was much narrower than expected at -56.8b in Jun. Empire state manufacturing index surprised on the upside and turned positive for the first time sin Apr, rebounding to 2.8 in Aug. Industrial produce also expand for the second consecutive months by 0.2% in Jul with capacity utilization unchanged at 79.9%. TIC capital flow showed $53.4b include in Jun, above expectation of 50.0b. U of Michigan consumer sentiment improved to 61.7 but was below expectation of 62.0. Jobless claims remained elevated at 450k.

Flash estimate for Q2 GDP in Eurozone showed contraction of -0.2% qoq. Year on year growth slowed for a third straight quarter to 1.5%. Underlying components are not yet available but slowing demand and domestic spending were believed to be the reason behind the downturn. Final HICP inflation in Eurozone was revised down to 4.0% yoy in Jul. Industrial production flat mom in Jun and dropped -0.5% yoy, worse than expected.

Quarterly Inflation Report from BoE released showed the bank significantly revised down growth forecasts on 2009 Q1 from 1% yoy to 0.1% yoy. BoE Governor King mentioned in the press conference that "broadly flat output means there is a possibility of a quarter or two of negative growth." When asked about the risks of first recession since 1991, Governor admitted that there are clearly "downside risks". Regarding inflation, the report said that the current record inflation is temporary and should fall back to the bank's 2% target in two years if interest rates remains unchanged at the current 5%. The reports are clearly dovish and there has been growing speculation that once inflation risks recede, the next move from BoE will be a cut and could be a sharp cut to stimulate the economy.

UK CPI surging to record high of 4.4% yoy in Jul, far above expectation of 4.1%. Core CPI also climbed more than expected to 1.9% yoy. PPI output rose by record 10.2% yoy Jul but was below expectation of 10.3%. Input prices climbed 30.1%. Core PPI rose more sharply than expected by 6.7% yoy. Trade deficit in UK widened sharply to -4.74b in Jul. Unemployment rate climbed more than expected to 5.4% in Jun. Claimant count had the biggest increase since Dec 92 in Jul and jumped 20.1k to 864.7k. RICS house prices balance showed unexpected improvement to -83.9% in Jul. BRC retail sales dropped -0.9% in Jul.

Japan Q2 GDP dropped by -0.6% qoq, -2.4% yoy following downward revision in Q1. Current account surplus widened to 493.9b. Trade surplus shrank to 252.1B. Domestic CGPI climbed to 7.1% yoy in Jul, above expectation of 5.7%.

RBA monetary policy statement reaffirmed market's concern that the bank is paving the way for less restrictive monetary policy. RBA said that it will have more scope to ease because of "significant moderation" in domestic demand and slowing economy will bring down inflation over time. RBA Deputy Governor Ric Battellino told a Parliamentary committee that the bank "cannot wait to see a fall in inflation before we start cutting rates, because by then it would be too late."

Canadian manufacturing shipments climbed much more than expected by 2.1%. Trade surplus widened to 5.76b in Jun. Housing starts dropped to 187k in. New housing price index rose 0.1%.

Suggested Readings:

• The Dollar: Short-Term Rebalancing Of Expectations, Long Term Risk
• FX Forecast Update: On the Brink of a Global Recession
• The Case For and Against the Dollar
• FX Briefing: Dollar Rally Continues
• This Week's Market Outlook
• Weekly Economic and Financial Commentary
• The Weekly Bottom Line
• Weekly Focus: Weak Growth in Euroland Set to Make its Mark on Denmark
• (BOE) Inflation Report Aug 2008
• BoE August Inflation Report Shakes Markets
• (RBA) Statement on Monetary Policy, Aug 2008

The Week Ahead

BoE and RBA meeting minutes will catch much attention this week and more dovish messages will send both currencies further south across the board. BoJ is widely expected to keep rates unchanged at 0.5% even though Japan has entered into negative growth again in Q2.

From US, markets will pay particular attention to housing data including NAHB housing market index and new residential construction data. Any upside surprise there and sign of bottoming in the housing recession will give the dollar another lift. Other data to watch include leading indicators and Philly Fed survey.

From Eurozone, Germany ZEW is expected to have mild improvement in Aug but Eurozone manufacturing and services PMI are both expected to deteriorate further. Eurozone trade balance, current account balance and industrial orders will also be released.

Other data to watch include, UK Q2 GDP, Rightmove house prices , retail sales; Swiss retail sales, trade balance, combined PPI, ZEW; Japan, all industry index, trade balance; and Canadian CPI and retail sales.

Suggested Readings:

• Economic Calendar Summary 8/18 - 8/22
• Economic Outlook: Cold Winds Blowing Over the Eurozone
• The Economic Week Ahead - Inflation, Growth, Confidence and Retail Numbers
• Week Ahead In US Financial Markets August 18-22 2008
• Australian & New Zealand Weekly: Minutes to Indicate the Degree of Urgency of Rate Cuts
• The Week Ahead Canada & U.S.: U.S. PPI, Philly Fed; Canadian Retail Sales
• The Week Ahead Europe & UK: ZEW and PMI Data, BOE Minutes
• The Week Ahead Japan & Australia: BOJ Interest Rate Announcement, RBA Minutes

GBP/USD Weekly Outlook

Cable's sharp decline extended further to as low as 1.8512 last week. From a short term angle, mild bullish convergence condition in 4 hours RSI argues that a short term bottom might be around the corner. But still, further decline is expected as long as 1.8787 minor resistance holds, towards next target of 100% projection of 2.1161 to 1.9337 from 2.0158 at 1.8360. On the upside, though, above 1.8787 will argue that cable has finally made a short term bottom and will rebound towards 4 hours 55 EMA (now at 1.9077) first before staging another fall.

In the bigger picture, medium term fall from 2.1161 (07 high) is still in progress. The developments so far are arguing that whole multi year up trend from 1.3680 (01 low) has also completed too. Those developments include strong break of the long term trend line and 55 months EMA, bearish divergence conditions and trend breaking in monthly MACD and RSI.

Focus is now on cluster support at 1.8303/60 (100% projection of 2.1161 to 1.9337 from 2.0158 at 1.8360 and 38.2% retracement of 1.3680 to 2.1161 at 1.8303). Sustained break of while will indicate that whole decline from 2.1161 is probably impulsive in nature and add more credence to the case of long term reversal. This will pave the way to next key support at 1.7047 first.

On the upside, while strong rebound might be seen, a break of 2.0158 resistance is still needed to indicate fall from 2.1161 has completed. Otherwise, another fall should still be seen after correction.

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