Weekly Review and Outlook

Euro Broadly Lower on Concern of Quantitative Easing by ECB

The theme of the markets was gradually changing from risk aversion/appetite to anticipation of further rate cuts and start of quantitative easing by ECB. Euro was broadly lower and had indeed fell -2.86% (-461 pips) against Canadian dollar, -2.84% (-520 pips) against Australian dollar, -2.38% (-314 pips) against US dollar. The common currency even ended up -2.3% (-304 pips) lower than Japanese yen. Aussie and Loonie were generally higher, shrugging off unexpected rate cuts from RBA as well as poor employment data from Canada, following rising stocks. However, upside momentum in yen crosses were seen diminishing and the close correction with stocks seem diminishing. On the other hand, dollar was mixed only, risen against European majors but weakened against Aussie and Loonie, and that argues that the greenback is probably loosening the track with stocks too.

Various ECB officials had spoken over the week. Trichet is still optimistic that economic recovery in the Eurozone will happen in 2010 but said that ECB will start to look at unconventional measures, quantitative easing, to bolster the Eurozone economy and more details will be made available in next meeting in May. Provopoulos said he didn't see 1% as a "threshold" for the ECB benchmark rate. Wellink said that there is still "room for lowering the interest rate" and "room for other measures". Nowotny said that rates below 1% is "open for debate" even though his "personal opinion" is that rate should not go below 1%. He also said that the purchase of commercial paper and corporate bonds is "a sensible and efficient measure". Weber, on the other hand opposed to cutting rates further and buying corporate debts. There seems to be widely divided opinion within the ECB Governing Council about the future path of monetary policy and the debate will go on. Nevertheless, markets are getting worried that the deteriorating Eurozone economy will eventual force ECB to follow the path of FED, BoJ and BoE to go into quantitative easing.

Technically speaking, while the outlook is EUR/USD is still mildly bullish, the common currencies' outlook has clearly deteriorated against Sterling, Aussie and Loonie in recent weeks. As pointed out in the technical outlook reports, EUR/GBP should have completed the rise from Feb's low of 0.8635 at 0.9494 in Mar. The corrective structure of such rise argues that whole correction from last year's high of 0.9799 is resuming, with much chance of heading towards 0.83 level.

EUR/AUD broke out of the multi month range last week and dived through 1.8487 support as well as 55 weeks EMA at 1.8500. The development argues that some deeper decline could be seen to 61.8% retracement of 1.5472 to 2.1127 at 1.7632. A break above last week's high of 1.8994 is needed to be an initial sign of stabilization in the cross.

On the other hand, EUR/CAD dived through 55 days EMA last week. Fall from last year's high of 1.7499 is set to resume to take on key medium term trend line support at 1.5461 level. The point now is whether Euro's weakness in the above mentioned crosses will drag it down against dollar and yen.

The dollar index strengthened last week and closed above 55 days EMA, thanks to weakness in Euro. While it's still limited below near term resistance of 86.13, the case for resuming rally from 82.63 has been building up. As mentioned before, we're still maintaining the view that long term up trend from 70.70 is still in force with key support of 82 level (cluster support of 61.8% retracement of 77.69 to 89.62 at 82.24 and 38.2% retracement of 70.70 to 89.62 at 82.39, as well as long term rising trend line at 82.03) intact. Break above 86.13 will add further weight to the case and set the stage for retesting 89.62 high. Though a break below 84.93 will dampen the bullish case and argues that some more sideway trading would be seen before an upside break out.

Also, note that while DOW continued to make new highs, the dollar index was not following. The close risk aversion correlation is loosening recently. While the reversal in stocks that we anticipated haven't happened yet, we're maintaining the view that upside momentum in stocks is diminishing and strong resistance should be seen at 8314 level in DOW, which is close to 23.6% retracement of 14198 to 6469 at 8293. Dollar and yen could strike a more noticeable comeback if DOW bounces off sharply from this level.

Currency Heat Map Weekly View

Suggested Readings:

• This Week's Market Outlook
• The American Enigma
• Financial Markets Review
• The Weekly Bottom Line
• Minutes of FOMC Indicate the Move to Quantitative Easing Prompted by Worsening Economic Outlook
• The Fed Minutes "Blah Blah Blah"
• FOMC Minutes Shows Rising Pressures along with Deteriorating Market Conditions
• Bank of England Leaves Rates at 0.50%
• BOJ Monetary Policy Meeting Produces Nothing New
• Japan: Bank of Japan Takes a Breather
• Japan Overnight Call Rate Remains At 0.10%
• Fine-tuning Its Monetary Policy, RBA Slashed Interest Rate by 25 bps to 3%
• RBA Reduces The Cash Rate By 0.25% In A Surprise Move

The Week Ahead

In another holiday shortened week, focus will turn back to the heavy economic calendar of US and Q1 corporate earnings that would trigger much volatility in stocks. Goldman Sachs, JP Morgan, Citicorp will release Q1 reports this week. Last week's rally in stocks was fueled by optimism after Wells Fargo offered a Q1 earnings forecast that was double the consensus estimates and a revenue number $1B higher than expected. However, stocks remain vulnerable on profit taking and disappointments from banks this week.

The economic calendar is jam packed with US data including PPI, CPI , retail sales, business inventories, TIC capital flow, NAHB housing market index and new residential construction, Philly Fed survey and U of Michigan consumer sentiment. Other data include Eurozone HICP final, industrial orders, trade balance, Japan Domestic CGPI, industrial production, Tertiary industry index consumer confidence and Canadian CPI.

Suggested Readings:

• US Economic Indicators Preview
• EMU Economic Indicators Preview
• Focus on US Data and Q1 Corporate Earnings
• RBA to be Cutting Rates in Second Half of 2009 - Banks' Reaction will Determine the Lowpoint
• The Week Ahead North America.: Q1 Earnings to Dictate Market Direction
• The Week Ahead Europe & UK: Markets to Focus on U.S. Due to Light Schedule
• The Week Ahead Asia Pacific: Light Data Week with Markets Looking West

EUR/GBP Weekly Outlook

EUR/GBP's fall from 0.9494 continued last week and reached as low as 0.8952 so far. From a short term angle, initial bias remains on the downside this week and further fall should be seen towards 0.8635 low. Break will confirm that whole corrective decline from 0.9799 has resumed for 100% projection of 0.9799 to 0.8635 from 0.9494 at 0.8330. On the upside, above 0.9086 will turn intraday outlook neutral first but risk remains on the downside as long as 0.9416 resistance holds.

In the bigger picture, the corrective nature of the rise from 0.8635 to 0.9494 indicates that it's the second leg of consolidation that started at 0.9799. Further decline could now be seen to 100% projection of 0.9799 to 0.8635 from 0.9494 at 0.8330. Above 0.9494 is needed to invalidate this bearish view and turn outlook bullish . Also, note that rise from 0.7693 has completed with five waves up to 0.9799 (0.8195, 0.7808, 0.8660, 0.8234, 0.9799). Also, whole medium term rise from 0.6535 has probably completed the five wave sequence too (0.6867, 0.6678, 0.8186,. 0.7693. 0.9799). So even though EUR/GBP might not have reversed the long term up trend yet, some extended medium term consolidation should still be seen below 0.9799.

In the long term picture, it's too early to conclude whether long term rise from 0.5680 has completed. Nevertheless, it's no doubt that a medium term top is formed at 0.9799 after meeting 200% projection of 0.5680 to 0.7250 from 0.6535 at 0.9765. As long as mentioned 0.8186/8234 key cluster support zone holds (38.2% retracement of 0.5680 to 0.9799 at 0.8223) holds, we'll treat price actions from 0.9799 as a correction/consolidation in the long term up trend only. However, sustained break of mentioned support zone will be an important signal that the long term rise has completed and will pave the way for deeper fall to next key support level of 0.7258 (61.8% retracement of 0.5680 to 0.9799 at 0.7253) next.

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