Weekly Review and Outlook

Mixed Outlook as Markets Immune to Poor Data

The biggest question in everyone's mind now is on the reason for the lack of follow though reactions in the financial markets after a string of poor economic data from around the world. The world is without a doubt in recession and indeed NBER confirmed that recession in US started last Dec already. Friday's shockingly poor non-farm payroll report strongly suggests that recession is not going to end soon. However, stocks managed to rebound and closed higher after initial selloff. While dollar and yen were generally higher last week, the strength was not that broad based. EUR/USD, AUD/USD are still held above last month's low. USD/CAD and USD/CHF are also kept below recent high too. USD/JPY and EUR/JPY are still staying above Oct's low and recent fall is rather unconvincing. AUD/JPY is also struggling around the middle of recent range only.

Technically speaking, a couple of developments need to be noted. Firstly, as we mentioned during the week, it's possible that dollar index is completing a head and shoulder top reversal pattern to conclude the rise from 71.31. Focus is on neck line support at 85/86 level and break will significantly increase the chance that a medium term top is in place. Broad based profit taking on dollar long positions would then take place that send the dollar index lower to 75/80 support zone. Secondly, last week's development in DOW suggests that the price actions from 8828 to 8118 is merely consolidating the rebound from 7450. In other words, such rebound is still in favor to extend in short term, probably to retest 9500 level. However, thirdly, development in crude oil and gold suggests that some more downside should still be seen in commodity markets in general.

Hence, the overall outlook is quite mixed in the financial markets and investors are probably waiting to see the "January Effect" before committing. Still, some developments could provide the guidance in near term:

1. If DOW manages to break 8828 resistance together will USD/JPY and EUR/JPY breaking 97.43 and 126.24 respectively, that will indicate that stock markets are staging another strong rebound. That is, risk aversion will recede. This will be inline with the view that USD/JPY's and EUR/JPY's consolidation from 90.92 and 113.63 are still in progress and another strong rise should be seen to retest 100.54 and 131.32 resistance levels before completing such consolidation. However, DOW's break of 8118 with USD/JPY and EUR/JPY breaking 90.92 and 113.63 will invalidate this view and suggests that another massive risk aversion trade is underway.
2. Dollar index needs to hold above mentioned neck line support at 85/86 for the short term bullish view to remain intact. Breaking of 88.46 high, together with EUR/USD and AUD/USD taking out recent low of 1.2329 and 0.6008 will confirm that dollar's medium term up trend is resuming. However, a break of the mentioned trend line together with USD/CAD breaking 1.2125 support and USD/CHF breaking 1.1924 support will be an important alert that the back has topped out in medium term and some massive selling could be seen to correction prior rally.

Currency Heat Map Weekly View

National Bureau of Economic Research (NBER) said that the US economy has been in recession since Dec 07. The report from NBER said that "domestic production and employment are the primary conceptual measures of economic activity" and payroll employment "reached a peak in December 2007 and has declined every month since then." Fed Bernanke said the room to lower interests from form the current 1% level is "obviously limited" even though it's still feasible. Fed will dig deeper into the toolkits instead and economists said that this could be the start of a shift to "quantitative easing" that resembles what BoJ did in 2001-2006.

Non-farm payroll report showed US economy lose -533k jobs in Nov, much worse than expectation of -340k, largest contraction in 34 years since 1974. Oct's number was revised further down from -240k to -329k. Unemployment rate climbed from 6.5% to 6.7%, hitting the highest level since 1993. This was the 11th consecutive month of contraction in payrolls and indeed, there was no single month of expansion this year.

ISM manufacturing index in US dropped more than expected to 36.2 in Nov, suggesting the manufacturing industry is contracting in the fastest pace since 1982. Price paid component continued it's steep slide to from 37.0 to 25.5. Employment component remains deep in contraction region and deteriorated further from 34.6 to 34.2. ISM non-manufacturing index dropped to record low of 37.3 in Nov, suggesting contraction in services section is accelerating. Price paid index dropped sharply from 53.4 while employment component also dived further in sub-50 region from 41.5 to 31.3.

Construction spending dropped -1.0% in Oct versus expectation of -0.9%. Initial jobless claims dropped slightly to 509k. However, continuing claims rose to 4.09m, largest since 1982. Factory orders dropped sharply by -5.1% in Oct.

ECB surprised the markets by delivering the largest ever rate cuts by 75bps, bringing the benchmark interest rates down from 3.25% to 2.5% while economists generally expected a 50bps cut. ECB revised down GDP growth forecasts and expect that it could be negative in 2009. Inflation is expected to slow to below ECB's target to 1.1-1.7% in 2009 before climbing back to near to the banks' 2% target in 2010. More on ECB here.

Eurozone manufacturing PMI was revised down to 35.6 (Oct: 42.9), compared with preliminary figure of 36.2. This is the lowest figure since the index began 11 years ago and the 6th month that the manufacturing index stayed below 50. Final number for November's services PMI was revised to 42.5 from 43.3 initially. Falling from 45.8 in October, the figure marked the sharpest drop in 10 years and the 6th consecutive month that the sector is in contraction. GDP contracted for the second quarter in Q4 by -0.2% qoq, confirming Eurozone is already in technical recession. Retail sales shrank -0.8% mom, -1.5% yoy in October, worse than consensus of -0.4% mom and -1.4% yoy. PPI has record drop of -0.8% mom in Oct versus expectation of -0.3%. Year-on-year rate moderated from 7.9% to 6.3%.

BoE cut its key rate by 100bps to 2.00%, lowest since 1951, inline with market expectations. In the rather lengthy accompanying statement, BoE noted that " business surveys have weakened further and suggest that the downturn has gathered pace,". Then bank said that consumer spending and business investments have "stalled". Activity indicators in the rest of the world have weakened too. Note that since MPC warned of a "substantial" risk that inflation would undershoot the target range of 2-3%. It's still expected that the current easing cycle is not over yet. Focus will turn to the MPC minutes to be released on Dec 17. More on BoE here

November Manufacturing PMI for the UK also dropped more than expected to 34.4 (consensus: 39.2). This is the 7th straight month that the index showed a contraction in the nation's manufacturing sector. Services PMI surprised on the downside to 40.1(consensus: 41.2, Oct: 42.4), the 7th straight month of contraction and the lowest level since the index began in 1996. Construction PMI came in at 31.8, worse than consensus of 33.5 and October's 35.1, the lowest level since the index began in 1997, and the ninth consecutive month that the index stayed below 50. Nationwide Consumer Confidence Index fell to 50 (consensus: 50, October: 56), the lowest level since the survey began in May 2004. Halifax house prices sank -2.6% mom, -14.9% yoy in Nov. The average house price stood at 163k pounds, the lowest level since July 2005 but still higher than 90k pounds in November 1998.

(consensus: -1%) in November from last month, according to a report by Halifax. Worse still, October's figure was revised down to -2.4% from + 2.3%. Year on year, house prices have declined 14.9% from 13.7%. The average house price stood at 163 605 pounds, the lowest level since July 2005 but still higher than 90 000 pounds in November 1998. Volume, on the other hand, has been stabilized as the number of mortgages approved was largely unchanged in October for the fourth consecutive month.

Swiss SVME PMI plunged for the third month in a row to 35.2 in Nov, much lower than consensus of 44.5. CPI dropped -0.7% mom in November, worse than market expectation of -0.4% and +0.5% in October. CPI rose an annualized 1.5%, compared with consensus of 1.9%. GDP was flat qoq in Q3, with yoy rate down from revised 2.6% to 1.6%.

After an unscheduled emergency meeting, BoJ decided to, effective Dec 9, accept corporate debt of BBB rating or higher in order to encourage lending and activate trading of corporate bonds and commercial papers. The BoJ will also start a new lending facility for commercial banks in January. Q3 business capex declined for the 6th quarter to 13%, worse than consensus of -10% and -6.5%.

Canadian GDP rose 0.1% mom in Sep, below expectation of 0.2%. Though, Q3 annualized growth rate came in at 1.3%, above expectation of 1.1%. Building permits dropped more than expected by -15.7% in Oct. Ivey PMI dropped more than expected to 40.2 in Nov. After two months of upside surprise, the job market in Canada shrank sharply by losing -70.6k jobs in November, largest fall since 1982. Unemployment rate climbed from 6.2% to 6.3%, below expectation of 6.4%. However that was only due to -0.3% fall in the labor force size.

RBA has the deepest rate cut since 1991, cut by 100bps, bringing the OCR down to six year low of 4.25%. More on RBA here. Retail sales surprisingly rose 0.7% mom in November, big improvement from -1.1% in September and better than market expectation of -0.2%. Current account deficit came in at -A$9.736B in 3Q08, better than consensus of a deficit of -A$11.1B. Q3 GDP increased 0.1% from Q2, lower than 0.2% as market expected, showing the economy is in its weakest growth in 8 years. On annualized basis, growth was 1.9% (2Q: 2.9). Trade balance came in at A$2.952B, brought by a strong increase in non-rural goods exports such as minerals and metal ores. The figure beat market expectation of A$ 1.41B and was more than doubled the downwardly revised A$1.25B in September.

RBNZ lowered the OCR by 150bp to 5% today. The move is consistent with consensus and pushes the interest rate to the lowest since early 2004. More on RBNZ here.

Suggested Readings:

• This Week's Market Outlook
• Weekly Foreign Exchange Insights
• FX Briefing: ECB Tight-lipped
• Financial Markets Review: UK Base Rate Cut to 2%, £/€ Hits New Low
• Hand in Hand for the Long Term
• Monetizing the Debt
• King Dollar in a Depressed World?

ECB

• BOE and ECB Cut to the Chase
• ECB Embraces an Aggressive Monetary Policy Stance
• Euroland: ECB Cut Rates by 75 bp - and Ready to Cut Again in January
• ECB Press Conference Analysis
• Trying to Catch Up, ECB Slashed Interest Rate By 75 bps, The Biggest Cut Ever
• ECB Press Conference More Dovish Than Formal Statement
• ECB Cuts Rates by 75 bps - EUR/USD Forecast For 2009
• (ECB) Press Conference Introductory Statement 4 December 2008
• Further Evidence of Decreasing Inflation, Slowing Demand, Says ECB's Trichet (Update)
• ECB Cuts Refi Rate by an Unprecedented 75bps to 2.50%

BoE

• BOE and ECB Cut to the Chase
• Bank of England Cuts 100bp, Rates at 2%
• Bank Of England Eased The Monetary Stance By 100 Basis Points
• Bank of England Eases 100 Basis Points
• BOE Cuts Rates by 100bps to 2.00% as Investment and Spending Stall (Update)
• (BOE) Bank of England Reduces Bank Rate by 1.0 Percentage Points to 2.0%

RBA

• RBA Cuts by 100bps to 4.25%, Another 50bps Still Expected in 1Q09
• Reserve Bank of Australia Cuts Cash Rate to 4.25% From 5.25%
• Australia Cuts Interest Rates by 1%, RBA Signals Easing Over
• RBA Has Settled Comfortably After 300 Basis Points in Cuts, Economists Say
• RBA Cuts Interest Rates by 100bp, to 4.25%
• (RBA) Monetary Policy Statement by Glenn Stevens, Governor - 2 December 2008
• Australia Cash Rate Lowered A Full 100 Basis Points
• RBA Cuts by a Full Percentage Point to "Expansionary" Setting

RBNZ

• RBNZ Dec Monetary Policy Statement: OCR Cut By 150bp To 5.00%
• New Zealand Cash Rate Cut to 5.0% from 6.5%
• RBNZ Cut Cash Rate By 150 bp To 5%, Fulfilled Expectations And We Anticipate More To Come
• RBNZ Won't Hesitate to Cut Again After 150 Basis Point Cut
• RBNZ Cuts Its Benchmark 150bps In Line With Expectations
• RBNZ Slashes Rates by 150 Basis Points As Expected
• (RBNZ) OCR Reduced to 5.0 Percent

The Week Ahead

While a number of key event are scheduled this week, it remains doubtful on how markets will react to those events based on recent pattern. The key focus will remain on the above mentioned levels in DOW and dollar index. That is, whether DOW could break 8828 resistance and whether dollar index could hold above the neckline support.

Bank of Canada will announce rate decision on Tuesday and markets expect another 50bps cut in rates to 1.75%. SNB is also expected to cut rates by 50bps to 0.50% on Thursday.

Economic data to watch for include US pending home sales, import prices, trade balance, PPI, personal income and spending and retail sales; Germany ZEW and Eurozone industrial production; UK PPI, industrial production and manufacturing production, trade balance; Japan GDP, consumer confidence and industrial production; Swiss unemployment, ZEW; Canadian housing starts, trade balance; Australian unemployment rate ; New Zealand retail sales.

Suggested Readings:

• Economic Calendar Summary 12/7 - 12/12
• BoC: Monetary Policy Monitor
• EMU Economic Indicators Preview
• The Weekly Bottom Line
• Weekly Economic and Financial Commentary
• Weekly Focus: More History Writing
• Australian & New Zealand Weekly: Big Stimulus to Date Will Not be Sufficient
• The Week Ahead Canada & U.S.: BOC Interest Rate Decision, U.S. Retail Sales
• The Week Ahead UK & Europe: German ZEW, UK Trade Balance
• The Week Ahead Japan and Australia: Chinese Inflation Data, Australian Employment

USD/CAD Weekly Outlook

USD/CAD rose sharply to as high as 1.3005 last week but failed to take out mentioned 1.2984/3015 resistance zone and retreated sharply on Friday. Short term outlook is turned neutral for the moment. Recent development argues that price actions from 1.3015 is developing into ascending triangle and another fall could now be seen to complete such pattern. Based on this view, fall from 1.3005 should be contained above 1.2125 support. Decisive break of 1.3015 will confirm that medium term up trend has resumed for 61.8% retracement of 1.6196 to 0.9056 at 1.3469. However, a break below 1.2125 will dampen this view and indicates that deeper fall should be seen to retest 1.1464 support before completing the consolidation.

In the bigger picture, preferred interpretation of the up trend from 0.9056 is that first wave rally is completed at 1.0248. Subsequent second wave consolidation was in form of triangle and finished at 0.9823. Rise from 0.9823 is treated as third wave rally and should have completed at 1.3015 already. Subsequent consolidation from 1.3015 is probably in form of triangle. Sustained break of 1.3015 will confirm that medium term up trend has resumed for 61.8% retracement of 1.6196 to 0.9056 at 1.3469. Though, note that sustained break of 1.1464 will indicate that the fifth wave is possibly completed In other words, whole rise from 0.9056 has possibly completed too. Deeper correction should then be seen in such case.

In the longer term picture, the decisive break of 55 months EMA affirms that case that a long term bottom is already formed at 0.9056 with bullish convergence condition in monthly MACD. At this moment, it's too early to conclude how far this up trend will eventually extend to. Nevertheless, note that the impulsive nature of the rise from 0.9056 indicates that the price actions after the rise from 0.9056 completes a five wave sequence will be corrective in nature, and be followed at least another medium term up trend before completing the long term rise.

For Crude Oil and Gold analysis, click here

Subscribe to our daily and mid-day newsletter to get this report delivered to your mail box