Weekly Review and Outlook

Risk Rally Extended on Global Economic Data, Aussie and Kiwi Gained Most

Risk markets' pull back was rather shallow last week with help of solid global economic data and indeed, major equity indices finally resumed recent rise after much stronger than expected employment data from US. While DOW is still limited by an intraday high made last year at 12876, the close of 12862 on Friday was the strongest close since May 2008. UK FTSE 100 hit six month high of 5901 before closing near to this level while German DAX also closed at six month high of 6766. Commodity markets were mixed. Gold pared much of the week's gain on Friday while Crude oil regained some ground following stocks. CRB commodity index jumped to close the week on 314 level. In the currency markets, dollar was mixed as it was bounded in range against European majors, strengthened against yen but weakened against commodity currencies. Nonetheless, the trend in European commodity crosses was clear as EUR/AUD and GBP/AUD dived to new lows. After some indecisive price actions, we're now back to the mode of sell European, buy AUD and NZD on risk rallies.

The non-farm payroll report from US was impressively good. Headline job growth accelerated to 243k in January comparing to expectation of 150k and prior month's 203k. The 3-month moving average is back above 200k level for the first time since April 2011. Gains were widespread with growth seen in profession and business services, manufacturing etc with government hiring the only weak spot. Unemployment rate dropped to 8.3%, lowest since February 2009. Also from US, ISM non-manufacturing index rose to 56.8 in January, best number in a year. ISM manufacturing also rose to 54.1 in January. PMI data from other countries were generally positive too. Japan Manufacturing PMI rose from to 50.7 in January. China Manufacturing PMI rose to 50.5 versus expectation of a fall to 49.6. US PMI manufacturing unexpectedly rose to 52.1. UK services PMI jumped sharply to 56.

Optimism in global economic resilience overshadowed the stalemate in Greece debt swap negotiation. Greek Finance Minister Venizelos said on Friday that "after 12 hours of tough negotiations, we have solved many issues but other crucial issues are still open." It's believed that while the deal on Private Sector Involvement is rather clear, the part on Official Sector Involvement, including ECB, is dragging the progress on. Luxembourg Prime Minister Jean-Claude Juncker said euro-area finance ministers won't meet on Monday to discuss Greece. Instead, there would be a conference call over the weekend while a meeting would be held on Wednesday.

Overall sentiments would likely remain positive in near term, possibly even for the rest of February. While DOW is still being limited by 12876 key resistance and S&P 500 below 1370.58 resistance, both indices are seen regaining momentum. Also, other markets, like UK, Germany and China, would likely catch up with US and thus, help push DOW through this mentioned 12876 key resistance. In such risk taking environment, Aussie and Kiwi would continue to benefit most. Canadian dollar will likely lag being Aussie and Kiwi a bit on relative weakness of its economic data. Outlook in European majors are still mildly bullish against dollar, but the overall picture will remain mixed until the Greece situation is cleared. So, before that, we'd continue to favor selling Europeans, buying Aussie and Kiwi.

Technical Highlights

The pull back in DOW last week was rather shallow and the index regained strength after NFP release. 12876 high would likely be taken out this week to resume whole medium term up trend from 6469.95. And in that case, DOW should target historical high of 14198.1 (2008) next later this year and even further to 61.8% projection of 6469.95 to 12876 from 1404.49 at 14363, i.e. a new high. In any case, outlook will now remain bullish as long as 12284 resistance turned support holds.

Dollar index traded below 55 days EMA last week even though downside momentum diminished much. Near term outlook remains bearish for 74.72 support. As noted before, whole corrective rebound from 72.69 should have completed with three waves up to 81.78 after just missing 100% projection level at 81.86. We'd play close attention to the structure of the current fall to determine if it's resuming the down trend from 88.70. Sustained trading below 55 weeks EMA (now at 77.85) will affirm the bearish case and pave the way to 72.69 low and possibly below. In any case, near term outlook will remain cautiously bearish as long as 80 psychological level holds.

Comparing commodity currencies, Aussie is clearly having an advantage over Canadian. AUD/CAD's recent rise extended last week and reached as high as 1.0735. Price actions has been choppy since last March but the cross stays in near term rising channel nonetheless. We'd expect to cross to spiral higher, at least, until it touches 1996 high at 1.1029

Meanwhile, Kiwi is having an upper hand against Aussie. AUD/NZD's rebound from 1.2317 has finished at 1.3276 and fall from there might be resuming the whole decline from 1.3793. In any case, near term outlook will stay bearish as long as 1.3053 resistance holds. AUD/NZD should target a test on 1.2317 low in short to medium term.

Looking ahead

Greece will remain a focus this week "as usual". In addition, three central bank meetings will be watched. RBA will be an interesting one as markets are expecting a 25bps cut. But the result could vary a lot, be it a 50bps cut or on hold. Any surprise would trigger much volatility before aligning the Aussie back with risk trend again. There are some expectations that BoE would expand the asset purchase program this week from GBP 275b to GBP 325b, i.e. by another GBP 50b. ECB is expected to stand pat this week.

Monday: Australia retail sales; Swiss forex reserves; Eurozone Sentix investor confidence; Canada Ivey PMI
Tuesday: RBA rate decision; German industrial production; Canadian building permits.
Wednesday: Swiss unemployment; German trade balance; Canada housing starts
Thursday: New Zealand employment; China CPI; UK productions, BoE rate decision; ECB rate decisions; US jobless claims
Friday: Swiss CPI; UK PPI; Canada trade balance; US trade balance

AUD/USD Weekly Outlook

AUD/USD rose to as high as 1.0793 last week and the break of 1.0752 serves as the first signal that consolidation pattern from 1.1079 is finished at 0.9663 and the larger up trend might be resuming. Initial bias remains on the upside and AUD/USD should now target a test on 1.1079 high next. However, note that it's far from certain that the consolidation from 1.1079 is completed. And indeed, a break below 1.0525 support will flip bias back to the downside and possibly start another falling leg inside the consolidation pattern toward 0.9387 support level.

In the bigger picture, the up trend from 0.6008 (2008 low) is still intact. Price actions from 1.1079 are treated as consolidation in the up trend only. In any case, with 0.9387 support intact, an eventual upside break out is anticipated, for a new high above 1.1079. However, break of 0.9387 would possibly bring deeper pull back towards 0.8066 key support before the long term up trend finally resumes.

In the longer term picture, whole up trend from 0.4773 (01 low) extended to a point where it just missed 100% projection of 0.4773 to 0.9849 from 0.6008 at 1.1084. At this point, there is still prospect for a lengthier medium term consolidation. But there is no indication of long term reversal yet. We'll stay bullish as long as 0.8066 support holds and expect an eventual break of 1.1084 to 138.2% projection at 1.3023, which is close to 1.3 psychological level, in the long term.

AUD/USD 4 Hours Chart