Weekly Review and Outlook

Investors' Sentiments Fragile, Anticipating Breakout in Dollar Index

Sentiments in the markets flipped flopped after the events last week. Another round massive risk aversion trades was set to start after US Treasury's Financial Stability Plan failed to convince investors. The equity markets were saved by speculations that Obama is launching a mortgage plan and rebounded strongly. Yen crosses rebounded strongly and pared much of the earlier losses. While Sterling crosses were the top losers last week, after being sold off of risk aversion as well as dovish BoE Inflation Report, key near term levels still hold and thus giving no clear confirmation of weakness resumption. Dollar index was set to break out from recent range but lacked enough momentum so far as markets remain undecided. Nevertheless, the uncertainties in the markets were seen as delaying the resumption of dollar and yen's strength only.

Treasury Geithner unveiled the Financial Stability Plan, then called TARP, that include establishing a public-private investment fund to purchase troubled assets, quintupling the Fed's TALF program for consumer and business lending. Though, other than being a grand plan, there wasn't much details provided so far. US Congress has finally passed the now settled $787B economic stimulus plan on Friday and is now just waiting for Obama's signature on Feb 17. The White House is believed to be spending $50b to stem home foreclosures and reduce monthly mortgage payments. Obama is believed to outline the proposal this week.

G7 Finance Ministers said the the post meeting communique in Rome that "The stabilization of the global economy and financial markets remains our highest priority." The group reaffirmed their commitment to "support growth and employment and strengthen the financial sector" with full range of policy tools. Also, the group said it "remains committed to avoiding protectionist measures, which risks exacerbating the downturn."

After all, investors sentiments remain fragile. Despite the strong rebound from intraweek low of 7694, DOW still closed below the psychologically important 8000 level. Gold's break of 936.3 medium term resistance and Crude oil's dive to 33.55 level were other evidence of pessimism in the economic outlook as well as seek for safe haven.

Developments in the dollar index is so far still consistent with the view that the rise from 77.69 is not finished yet. Consolidation from 86.81, in form triangle, is likely near to completion and and upside break of 86.81 will send the dollar index towards a retest of 88.46 high. A break of 84.47 is needed to invalidate this bullish view. Meanwhile, the development in yen crosses also affirm the medium term bearish outlook even though the near term consolidation might extend a bit further.

Currency Heat Map

Suggested Readings:

• This Week's Market Outlook
• FX Briefing: Finance Ministers in the Spotlight
• US Dollar May Find Itself As The Top FX Safe Haven And Growth Leader
• BoE Prepares for More Rate Cuts and Quantitative Easing
• Weekly Focus: Protectionism Back on the Agenda
• Australian & New Zealand Weekly: Consumer Fear at Record Levels

The Week Ahead

Reactions to G7 will likely be mild. While a number of important economic data will be released from around the world, key focus remains on the development in investors sentiments. One of the biggest event risks will be the mortgage plan announcement from Obama and focus will be on whether such announcement could trigger sustainable rally in stocks that helps DOW break above 8000 level decisively, or will another round of sell-on-news selling occurs. Another focus will be on the development of the situation in General Motors Corp. GM and Chrysler are required to submit plans to the US government on how they can repay the billions in loans. At the moment, we're still near term bullish on dollar and gold and bearish on stocks and are anticipating upside breakout in dollar index, sustaining up trend in gold to 1000 and bounce off of DOW from 8000 level. Such developments, if come as anticipated, will send the yen higher together on risk aversion.

A busy economic calendar ahead which features, FOMC minutes, US PPI and CPI, new residential construction, Empire State, Philly Fed survey and industrial production as well as TIC capital flow. From Eurozone, focus will be on ZEW and Feb PMIs. From UK, BoE Minutes, CPI and retail sales will be released. BoJ is expected to keep rates unchanged at 0.1% and Japan will release Q4 GDP. Other data include Swiss retail sales, ZEW, Canadian CPI and RBA Minutes.

Suggested Readings:

• Economic Calendar Summary 2/15 - 2/20
• EMU Economic Indicators Preview
• US Dollar, Japanese Yen to Remain Volatile Ahead of Key GDP, CPI Reports
• Weekly Economic and Financial Commentary
• The Weekly Bottom Line
• The Week Ahead Canada & US: Politics to Remain in Focus Next Week, Data to Take
• The Week Ahead UK & Europe: German ZEW, BOE, MPC Minutes
• The Week Ahead Japan & Australia: Japanese GDP, Bank of Japan Meeting

EUR/USD Weekly Outlook

EUR/USD continued to be bounded in established range above 1.2706 last week as consolidation continued. While some more sideway trading might be seen, upside is expected to be limited by 1.3093. On the other hand, below 1.2706 will suggest that whole decline from 1.4719 is resuming for a retest of 1.2329 low next. However, note that a break above 1.3329 resistance will indicate that fall from 1.4719 has completed and bring strong rebound.

In the bigger picture, a medium term bottom in place at 1.2329. Whether such fall from 1.6038 to 1.2329 is impulsive or corrective in nature is debatable. But after all, with 1.4867 resistance intact, whole decline from 1.6038 is still expected to resume. Also, fall from 1.4719 is tentatively treated as resumption of such medium term down trend. Sustained break of 1.2329 will target 1.1639 medium term support next. On the other hand, above 1.3329 resistance will also shift favor to the case that consolidation from 1.2329 is still in progress with another rising leg just started for a retest of 1.4719 resistance.

In the long term picture, outlook is rather unclear for the moment. While 1.6038 is no doubt an important long term top, there is no clear answer on whether subsequent price actions from 1.6038 are unfolding as sideway consolidation, deep correction, or a reversal in trend. Nevertheless, note that another fall is still in favor as long as 1.4867 resistance holds and in such case, EUR/USD should at least have a test of 1.1639 long term support.

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