Weekly Review and Outlook

Forex Markets Look for Breakout With NFP, ECB Featured

It was a rather mixed week with sentiments flipped flopped a few times. Dollar weakened against most major currencies in general but remained in familiar range. Markets are still undecided on which way to push the greenback further. Euro staged a strong rebound against Swissy, thanks to another round of SNB intervention and also managed to gain some ground against higher yielders but there was also lack of follow through buying in general. Nevertheless, traders will be prepared for a breakout this week considering the list of important events including Non Farm Payroll, ISM, ECB and Japanese Tankan.

Dollar was supported briefly by less dovish than expected statement from FOMC during the week. The committee members see less risk of deflation as they did in April. The statement simply said that inflation will "remain subdued for some time," rather than "persist for a time below rates that best foster economic growth and price stability in the longer term". The reference to support for credit extensions to households and business was removed indicating that Fed might be considering not to renew the current programs. Meanwhile, the securities purchase program was left unchanged too.

However, the greenback was sold off again towards the end of the week on more reserve diversification talk from China. PBoC said in the annual financial stability report that there is a need to create a "super-sovereign reserve currency" that's delinked from the economies of the issuers so as to "prevent the deficiencies in the main reserve currency". Without naming the dollar, the report also said that "an international monetary system dominated by a single sovereign currency has intensified the concentration of risk and the spread of the crisis." The bank also urged IMF to manage part of its members' FX reserves. The report reignited speculations China will further diversify its more than $1.95T reserves after reducing its dollar holdings by $4.4b to $763.5b in April.

Dollar's outlook remains rather mixed after last week's volatility. Looking at the dollar index, it's still bounded in range of 79.19 and 81.36. We continue to favor the case that fall from 89.62 has completed at 78.33, it's shaky as dollar even failed to take out 80.94 resistance during the week. Hence, we'd prefer to stay neutral for the moment and wait for a break of 80.94 resistance to confirm resumption of rebound form 78.33 to key resistance 82.62 (38.2% retracement of 89.62 to 78.93 at 82.64). Meanwhile a break below 79.19 support will suggests that a new low below 78.33 should be seen before bottoming. Though, even in such case, we'd still expect downside to be contained by 77.69 key support to conclude the fall from 89.62.

Another main focus of last week was the high volatility in Swiss Franc, likely by intervention from SNB. Both SNB and BIS declined to comment but markets believed SNB has the amount was more than EUR 3b. EUR/CHF was sharply higher and it was clear that large sized buying happened on Jun 24 which protected the cross from 1.5 handle and sent it sharply higher to as high as 1.5380. This level in EUR/CHF will likely be protected which should in turn provide support in other swiss crosses.

Another point to note is that Canadian dollar was indeed the weakest currency last week, as well as in the month of June. Crude oil's pull back from 73.23 to below 70 was one of the major factors in Loonie's weakness. In additional, BoC Governor Carney said earlier this week that recession in Canada is now as deep as in US. Carney also warned at least twice this month that Loonie's rapid rise threatened recovery of the economy. And some economists viewed that considering the sharp appreciation of Canadian from March to late May, it's logical to see some realignment. No matter what, Canadian dollar is noticeably weak against Yen and Euro. In particular, CAD/JPY is the only yen crosses that's sustaining below medium term trend line.

The broad based resilience in yen and sterling are also impressive. Note that Sterling managed to stay above key support against dollar and Euro despite some dovish comments from BoE Governor King that recovery from recession will be slow and "uncertain.". Also King said that "There has to be a risk that it will be a long, hard slog". Thanks to diving Treasury yield, the Japanese yen also managed to limit the losses in the latter part of the week against major currencies. Indeed, the Yen closed higher broadly even though it's quit far from the intraweek high. We'd like to point out again the EUR/JPY and AUD/JPY are vulnerable for at least a retest of the medium term trend line support in near term. CAD/JPY has took the lead in sustaining below corresponding trend line and it will be interested to see if that's an early signal or a false alert.

Currency Heat Map Weekly View

The Week Ahead

We are going to have a busy week despite US' public holiday Friday. The ECB will meet Thursday but will likely keep its policy rate unchanged. On the 'non-standard' easing front, we expect more details on the purchase on covered bonds. Moreover, after allotted 442.2B euro 12-month loans last week, we would like to see if the central bank will clarify any shift in policy from monitoring short-term to long- term rates. Earlier in the week, inflation report in the Eurozone will likely show the first negative reading and trigger the ECB to keep interest rate low at an extended period of time.

Also on Thursday, the US labor department will release June's employment report. While unemployment rate should have on the rise, the pace probably moderated. We also anticipate better-than-expected non-farm payrolls data given stabilization in jobless claims in recent weeks.

Important economic data to be released this week include:

1. US: S&P/Case-Shiller home price index, consumer confidence, ISM manufacturing, ADP employment, employment report, pending home sales, construction spending
2. Eurozone: Eurozone HICP, retail sales, unemployment, finalized PMIs
3. UK: Nationwide house price index, Halifax house price index, money supply, second estimates of 1Q09 GDP, PMI
4. Japan: Preliminary industrial production, BOJ Tankan surveys
5. Canada: Monthly GDP, industrial PPI
6. Australia, Retail sales, building approvals, private sector credits, trade balance
7. New Zealand: Trade balance, business confidence

Some of the more important events are discussed here - Events to Watch: ECB and US Employment As the Focus.

USD/CAD Weekly Outlook

USD/CAD's rise extended further to as high as 1.1636 last week, meeting mentioned resistance zone of 1.1475/1.1814 as expected. Though, the pair lost some momentum inside this zone and turned sideway after reaching 1.1636. Initial outlook is neutral this week and some consolidation could be seen with pull back to 1.1418 minor support or below. Nevertheless, downside is expected to be contained by 1.1226 support and bring rally resumption to test 1.1814 resistance. However, note that break of 1.1226 support will argue that whole rebound from 1.0784 has completed and will flip bias back to the downside for retesting this low.

In the bigger picture, fall from 1.3063 is treated as correction to impulsive rally from 0.9056 to 1.3063 and has met target support zone of 1.0297/0819 already. We're slightly favoring the case that such correction has completed at 1.0754 already. Break of mentioned 1.1475/1.1814 resistance zone will confirm this case and should at least bring strong rally to key cluster resistance at 1.2191 (61.8% retracement of 1.3063 to 1.7084 at 1.2192). Nevertheless, a break below 1.0940 support will confirm that such rise from 1.0784 has completed. In addition, the corrective structure will aurge that fall from 1.3063 is still in progress, probably to 61.8% retracement of 0.9056 to 1.3063 at 1.0587 before completion.

In the longer term picture, while a medium term top might be in place at 1.3063 already, there is no change in the view that whole rise from 0.9056 is impulsive in nature. In other words, fall from 1.3063 is treated as correction in the larger up trend only and will likely be contained by mentioned 1.0297/1.0819 support zone, with 61.8% retracement of 0.9056 to 1.3063 at 1.0587 inside. We'd expect at least another medium term rally to above 1.3063 before completing the rise from 0.9056.

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