Weekly Review and Outlook

Focus Turned to Commodities Crash, Dollar Rebounded

Markets' sentiment shifted sharply from panic dollar selling to commodity currency crashes last week. Indeed, after diving to new record low against Euro and Swissy, and as low as 95.77 against the yen, dollar rebounded strongly and closed the week higher. Fed's smaller than expected 75bps cut in the federal fund rate played a role in dollar's rebound. But more important, sharp reversal in commodity prices, including an 11% fall in gold prices from it's record high of 1032/oz and more than $13 dive in Crude oil prices was more important to the dollar's bounce. Meanwhile, even though extreme volatility is seen in the Japanese yen, following roller coaster ride in the equity markets, the Yen still managed to end higher against most major currencies except the greenback. The net result is that commodity currencies and respective yen crosses are the biggest loser last week, topping the weekly top movers chart.

Currency Heat Map Weekly View

The global financial markets were extremely nervous early last week, following the sale of emergency cut in discount rate from Fed by 25bps to 3.25% as well as the news of sale of Bear Sterns to JPMorgan Chase. At that point, it seemed that Fed was extremely concerned with the deepening of credit market problems and markets were betting on 100bps cut from Fed in the federal funds rates. Though, the Fed surprised most by cutting 75bps only on Tuesday. Stocks and Dollar rebounded from there and was also boosted further by better than expected quarterly results from Lehman Brothers and Goldman Sachs.

Fed's decision to cut 75bps to 2.25% was not unanimous, with Plosser and Fisher preferring "less aggressive" actions. In the accompanying statement, Fed acknowledged that economic activity has "weakened further", with slowing consumer spending and softening labor markets. Financial markets are still under "considerable stress". Tight credit conditions and deepening housing contraction will likely weigh on economic growth over the "next few quarters." But, the Fed said that the move, together with recent efforts to boost liquidity in the markets, " should help to promote moderate growth over time and to mitigate the risks to economic activity." But again, " downside risks to growth remain." Inflation is still described as elevated but members expect inflation to moderate in coming quarters. Uncertainty on the outlook increased and Fed will continue to monitor inflation developments carefully. Fed also voted unanimously to cut discount rate by 75bps to 2.5%. After all, the tone of the statement remains dovish and further easing is still expected as the statement noted Fed will "act in a timely manner as needed to promote sustainable economic growth and price stability."

Data from US were mixed last week. Empire state manufacturing index tumbled to -22.23 in Mar but Philly Fed index recovered more than expected to -17.4 in Mar. Industrial production dropped more than expected by -0.5% in Feb. Headline PPI was tamer than expected, slowing to 6.4% yoy in Feb but core PPI climbed to 2.4% yoy. Housing starts dropped another -0.6% to 1065k. But building permits tumbled sharply by -7.8% to 16 year low of 978k annualized rate. Q4 current account deficit was slightly narrower than expected at -172.9b. TIC recorded 62.0b capital inflow in Jan.

Euro pulled back sharply after surging to new record high against the dollar. Though it's generally mixed against other currencies only. Though, weaker than expected Service PMI, which dropped from 52.3 to 51.7 in Mar, prompted some concern of further slowing in the Eurozone economy. Manufacturing PMI was also mildly lower from 52.3 to 52.0. Q4 employment growth slowed from 1.9% yoy to 1.7% yoy.

Carry trade and stock markets continued to be a key driver in the Japan yen in an extremely volatile week. Masaaki Shirakawa was selected to fill the vacancy left by Fukui as acting BoJ governor before the government can settle on the successor to Fukui. There were also speculations flying around that BoJ would cut rates from the current 0.50% as soon as in Apr and believe Shirakawa won't be impediment to policy easing. The main focus will be on the quarterly Tankan survey due Apr 1.

Sterling continued to be among the weaker ones against most major currencies. MPC minutes released reveal that BoE's decision to keep rates on hold earlier this month was done by a 7-2 vote, instead of an 8-1 vote as markets expected. Blanchflower and Gieve voted for a 25bps rate cut. BoE is still facing the dilemma of rising inflation and slowing growth. However, the minutes also highlighted dissenter's concern about delayed actions. Markets generally expect another 25bps cut in Q2 but opinions on the timing is divided. The dovish vote split raised the chance that it will happen in Apr and further worsening in the financial markets and upcoming economic data.

However, retail sales came in much better than expected by rising 1.0% mom in Feb, with yoy rate just mildly down from 5.6% to 5.5%. Employment report showed unemployment rate unchanged at 5.2% in Jan and claimant count unchanged at 2.5% in Feb. CPI climbed further from 2.2% yoy to 2.5% yoy in Feb but core CPI slowed slightly from 1.3% yoy to 1.2% yoy. After all, the timing of the next cut from BoE is still debatable.

From Canada, Feb headline CPI slowed more than expected from 2.2% to 1.8%. Meanwhile, core CPI unexpectedly climbed from 1.4% yoy to 1.5% yoy.

Suggested Readings:

• This Week's Market Outlook
• Weekly Economic and Financial Commentary
• FOMC: Bernanke Takes Charge of Markets
• FOMC Continues its Aggressive Easing Policy
• FOMC Cuts Fed Funds Rate by 75bps
• FOMC Cuts the Funds/Discount Rates: Growth the Goal
• Fed Cuts Rates by 75bp, US Dollar Becomes Second Lowest Yielding Currency
• (FED) FOMC Statement March 18, 2008
• USA: More Initiatives from the Fed
• (FED) Federal Reserve Announces Two Initiatives Designed to Bolster Market Liquidity
• (BOE) Minutes of Monetary Policy Committee Meeting 5 and 6 March 2008
• Economics Weekly: Policy Decision Getting Tougher for MPC
• GBP: Sterling Hit by Financial Jitters
• Bank of Japan Left Leaderless
• Canada: BOC Response to U.S. Turmoil

The Week Ahead

Note that after initial panic selling last week, dollar should have finally found a short term bottom. Though, upside potential against Euro and yen is rather limited at this point. Upcoming data from US this week are mostly tier two indicators which shouldn't change the expectation of further policy easing from the Fed. Indeed, developments in the commodity markets and stock markets as well as the Japanese yen will likely continue to be the main force behind the movements in the forex markets too.

Judging from the overall strength in crosses, the Japanese yen and to a lesser extent the swissy and the euro, will likely be the larger gainer in another round of dollar weakness. Meanwhile, commodities currencies and sterling will likely be the larger losers in case of further rebound in the greenback.

Data from US include Existing home sales, house price index and new home sales which are expected to show further weakness in the housing markets. Consumer confidence, durable goods, Q4 GDP final print, will also be released. The most important data of the week will be on personal income and consumption on Friday.

In Eurozone, biggest focus will be on Germany Ifo which is expected to drop from 104.1 to 103.3. This piece of economic data would probably determine whether the record high of 1.5902 made last week was a short term top or a medium term to.

From UK, various house price indices will be released throughout the week. From Japan, main focus will be on Friday's batch of data which include Feb CPI, household spending, unemployment and retail sales. From Swiss, March KOF leading indicator will catch most attention. Canadian retail sales will also be closely watched.

Suggested Readings:

• Economic Calendar Summary 3/24 - 3/28
• Oil, Gold Have Plunged - Could the Australian and Canadian Dollars Fall Further?
• Top 5 Most Market Moving Indicators for the US Dollar
• US Economic Indicators Preview
• EMU Economic Indicators Preview
• USD/JPY May Be Set to Break Above 100 - Will Japanese Data Spark the Move?
• Swiss / Yen Could Plunge
• The Weekly Bottom Line
• Australian & New Zealand Weekly

USD/CAD Weekly Outlook

USD/CAD's rebound from 0.9709 extended sharply higher last week to 1.0293. Break of 1.0198 resistance confirms that fall from 1.0378 has completed with three waves down to 0.9709. From a short term angle, initial bias remains on the upside this week and further rise should be seen to retest 1.0378 high first. On the downside, below 1.0137 minor support will indicate that an intraday top is in place and bring consolidation. Though pull back should be contained by 1.0014 resistance and bring another rally.

In the bigger picture, the corrective nature of the fall from 1.0378 indicates that it's merely a correction to whole rise from 0.9056. In other words, such medium term rebound from 0.9056 is still expected to extend further and break of 1.0378 will confirm this case and bring rally to 61.8% projection of 0.9056 to 1.0378 from 0.9709 at 1.0526 or higher. On the downside, below 1.0014 again will dampen this view and turn outlook neutral first.

In the longer term picture, a medium term bottom is in place at 0.9056 after USD/CAD just missed double projection target of 161.8% projection of 1.4006 to 1.1716 from 1.2737 at 0.9032 and 161.8% projection of 1.2737 to 1.0930 from 1.1874 at 0.8950. But with key medium term resistance zone of 1.0930, 38.2% retracement of 1.4006 to 0.9056 at 1.0947 and 50% retracement of 1.2737 to 0.9056 at 1.0897 remains intact, the long term down trend from 1.6196 is still in force.

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