Weekly Review and Outlook

QE3 Talk Stole the Show from EU Summit and Dollar Tumbled

Finance markets struggled in range for most of the week and the situation of European debt crisis remained unclear. Supposedly, we should get something concrete after this Sunday's EU summit but the hope was dented as a second summit was called for this Wednesday. Decisions would be made on Wednesday and the summit on Sunday would most probably be a non-event. However, the markets experienced some drastic developments towards to the end as the speculation of QE3 from Fed suddenly resurfaced. The talk of QE3, as triggered by comments from Fed officials, sent DOW sharply higher to close at 11808, way above the 10404 low set in early October. Dollar was sold off across the board and even dived to new record low against the Japanese yen. The significance of the development is that we're now possibly facing sustainable rally in risks and persistent weakness in dollar ahead.

Fed Governor Daniel Tarullo's call for resuming large scale purchases of mortgage backed securities was seriously taken by the markets, possibly because Tarullo rarely comments on monetary policy. Fed Vice Chairman Yellen noted that the scale of Fed's Operation Twist is limited by the amount of the short-term securities and buying a large portion of long-term securities “could potentially have adverse effects on market functioning.” And thus, “securities purchases across a wide spectrum of maturities might become appropriate if evolving economic conditions called for significantly greater monetary accommodation." Chicago Fed Evans called for further stimulus and proposed to continue until either unemployment falls below 7% or medium term inflation outlook rises above 3%. This was agreed by Yellen as "potentially promising". Boston Fed Rosengren said more asset purchases are "certainly a possibility". St. Louis Fed Bullard also said a third round of quantitative easing was "still on the table" if conditions should worsen.

We had much rumors and headlines flying around about EU summit and the so called comprehensive package to solve the debt crisis. The messaged were conflicting and confusing. But no matter what politicians and newspapers said, the key is, Europeans leaders are still divided on many issues, and most importantly, the way to beef up the EFSF bailout fund, bank recapitalization plan and how much of a write-down to Greek bondholders would be needed. We won't be speculating on what the outcome would be, as like many of the market participants, we're tired of hearing rumors all the time. We're quite sure that nothing concrete will be delivered on Sunday. For Wednesday? Probably yes, Probably no. Though, even the decisions could be delayed yet again, we're quite confident that they would be made before the G20 meeting on November 3-4 in Canne. So for the time being, let's wait and see and focus on trading the QE3 rumors first.

Other than Fed's QE3 speculation, another key development last week was Japan's approval of the JPY 12T extra budget plan. Among that, JPY 2T would be used in measures to help the economy contends with a strong yen. The measures are viewed by some analysts as a sign that the Japanese government is increasingly resigned to adapt the economy to a strong yen, rather than fighting yen's appreciation. The plan also encourages companies to embrace the strong yet by offering support for overseas acquisitions. Also, markets are seeing less chance of concerted G7 intervention, like what happened in March. So, a focus ahead will be on whether USD/JPY would extend the current decline towards 70 psychological level and how Japan will react when that happens.

The Week Ahead

EU summit will continue to dominate headlines this week. But we speculate that QE3 talks would be the main driving force in the markets. A number of important economic data will be released from US including Q3 GDP and markets could embrace weak data for increasing chance of QE3. Originally, we thought DOW would face strong resistance from 11862 and reverse. But Friday's strong rally instead argues that 11862 would likely be taken out with ease this week. This will be a main technical focus which, when happens, should trigger deeper selloff in dollar. Also, if risk rally does extend, the main focus will be on which commodity currency would gain most. And that would very much depend on event including Australia PPI and CPI, RBNZ and NZ CPI, BoC and retail sales. For more on BoC and RBNZ, Both BoC and RBNZ Will Stay on the Sideline.

Monday: Australia PPI; China HSBC PMI Manufacturing; Eurozone Flash PMIs; New Zealand CPI
Tuesday: German Gfk consumer sentiment; Canada retail sales, BoC rate decision; US S&P house price, consumer confidence
Wednesday: Australia CPI; US durable goods, new home sales; RBNZ rate decision, NZ trade balance
Thursday: Japan retail sales, BoJ rate decision; German CPI, Eurozone M3; US GDP, pending home sales;
Friday: Japan CPI; Swiss KOF; US personal income and spending

Technical Highlights

The anticipated reversal in DOW didn't materialize and instead, it managed to stay firm above 55 days EMA and is now moving away from it. Friday's rally indicates that whole rise from 10404.49 is still in progress and will likely take out 11862.53 key resistance. In that case, DOW would likely have a test on 12753.89/12876.00 resistance zone. A break of 11296.12 is needed to signal reversal or we'll now stay cautiously bullish.

Dollar index's fall resumed after consolidation and reached as low as 76.23. 76.06 support now looks vulnerable and sustained break there will argue that whole rebound from 72.69 has finished with three waves up to 79.838. And in such case, deeper decline would be seen to retest 72.69 low. Also, the corrective structure of rebound form 72.69 to 79.838 will also suggest that whole down trend from 88.70 is not over yet. In any case, we'll now stay cautiously bearish in dollar index as long as 77.552 minor resistance holds.

AUD/NZD's rebound from 1.2317 extended further last week and remained firm so far. Further rise will remain in favor and might target 61.8% retracement of 1.3793 to 1.2317 at 1.3229. However, firstly, the fall from 1.3793 looks impulsive. Secondly, the rebound from 1.2317 looks corrective. That is, rebound from 1.2317 could indeed be a correction only. Hence, while we're preferring Aussie over Kiwi in near term, we'd be cautious on sudden reversal in strength. And, a break of 1.2700 should turn the cross bearish and shift favors back to Kiwi.

AUD/CAD has be bounded in triangle consolidation since reaching 1.0555 back in June. The rebound from 0.9937 is impressive so far and could extend further. But we'd be cautious on reversal as AUD/CAD approaches 1.0516/0555 resistance zone. A break below 1.0312 should turn bias back to the downside for another falling leg inside the consolidation pattern. So in short, Aussie is slightly preferred against both Kiwi and Loonie in near term. But we won't surprise to see Aussie lose strength after the next rise.

USD/JPY Weekly Outlook

USD/JPY finally had a downside breakout last week and made new record low at 75.80 before recovering. Some consolidations might be seen initially this week but recovery should be limited by 76.60 minor resistance and bring another fall. Below 75.80 will target 61.8% projection of 80.23 to 75.94 from 77.48 at 74.82 first, and the 100% projection at 73.19. Though, a break of 76.60 will turn focus back to 77.48 resistance instead.

In the bigger picture, USD/JPY is still staying well inside the falling channel that started back in 2007 at 124.13. There is no indication of trend reversal yet even though medium term downside momentum is diminishing with bullish convergence condition in weekly MACD. Such down trend is still in favor to continue to 70 psychological level. In any case, break of 77.48 resistance is first needed to indicate completion of fall from 85.51. Secondly, break of 85.51 is needed to be the first signal of medium term reversal. Otherwise, we'll stay bearish in the pair.

In the long term picture, current decline suggests that the long term down trend in USD/JPY is still in progress. Such down trend is expected to extend further into uncharted territory with 70 psychological level as next target. In any case, we'd at least need to see sustained break of 85.51 before considering trend reversal.

USD/JPY 4 Hours Chart