Australian FOREX Weekly Outlook 11/07/2005

11/07/05

The positive sentiment around the Greenback strengthened further last week but that wasn’t reflected in the price action. The Euro in fact has started the week higher than the last as it has broken back above 1.20 due to concerns about the Hurricanes hitting the U.S. coast threatening to disrupt work at the Oil rigs, thus keeping oil prices well bid. However this bout of mild profit taking on Dollar longs is more like a temporary refueling pit stop of a racing car before it zooms fast again.

The spike in oil prices is increasing inflation around the globe and a weaker Euro has helped boost exports for the zone. This has helped in increasing Business Confidence which has translated in a slight pick up in the beleaguered labour market. Thus we have seen pick up in the economic data from across the zone which has thrown cold water on any chances of the ECB reducing interest rates in the short term horizon. Thus many aggressive short positions anticipating a rate cut have been squared, thus one bearish factor for the Euro has subsided for now but there are quite few other factors to contend with. The yield gap with the Dollar is getting wider and there is a good chance of the Fed likely to raise rates to 4% by the end of this year. This would make the U.S. rates double that of the Euro-Zone more investment assets would start shifting to the U.S.

High oil prices are having a substantial negative effect on the Japanese economy on two counts. Since it imports all of its Oil, its import costs are rising rapidly shrinking its Trade Surplus and further stiffening domestic consumer demand which is struggling to emerge out of recessionary conditions. Also the strong demand for oil remains firm across the globe in spite of record high prices; this is giving speculators more confidence to keep pushing prices higher. Thus Households are cutting back on their purchases of durable goods and luxury items as fuel has become a basic necessity. Thus since Japan is an export dependant economy Japanese corporations are reeling from high prices.

The pound seems to have stabilized after the bombings in London and the market seems to have shrugged off this event, as unfortunately they are getting used these terrible incidents. But what it has done is increased the likely hood of Bank of England to reduce interest rates in the August meeting. The Market would be keenly eyeing the data releases from the UK especially on Monday, which has PPI, House Price Survey and Trade balance. Inflation is likely to increase but this may not be enough to ensure that rates remain on hold. The economy is in a sluggish state with house prices sliding and a concrete set of robust data releases is required to prevent BoE from reducing Rates.

Commodity prices have witnessed huge bout of profit taking and this has hit the commodity block currencies hard. Slowly but surely the sentiment is shifting away from the Aussie and the Kiwi dollar. Since New Zealand has the highest interest rates in the developed world this is stiffening growth, and business confidence is declining at a very fast rate. New Zealand products aren’t as attractive as they were a few years ago in a significantly weaker Kiwi dollar and environment. In spite of robust employment figures the Aussie has failed to find much support and remains suspect to another bout of acceleration of losses.

The Dollar faces a few key tests this week, which include the crucial trade balance data. Deficit is expected to stay below $60 bn but a figure above this mark could mark a period of profit taking on dollar longs. Also on the radar is the inflation as well as the retail sales data both are expected to be positive for the Greenback. Thus the Feds plan to stay on the path of measured rate hikes should not be altered. In spite of the payrolls outcome coming below expectations the labour market remains robust, while the manufacturing sector which has been causing a few problems of late also seems to be picking up. However oil price movements are also eyed but as long as they can stay below $60 pb dollar should continue its juggernaut.

Forex USA

Euro-Zone

Forex Japan

Forex U.K.

EUR/USD – The pair ended last week at the same levels as it started with as the crucial pivot support region of 1.1850-75 has held well throughout last week. However, sentiment remains in negative territory and a decisive loss could accelerate its losses with distant support around the 1.1745 mark followed by decent buying interest in the 1.16 region. On the upside, the pair is expected to be sold on any mild rallies or profit taking bouts with mild resistance around 1.2055 and decent selling interest on any forays above 1.2125. 1.22 holds very strong resistance and any move above that mark should lead to selling interest; a decisive break above that mark could shift the sentiment in the Euro’s favour.

USD/JPY – The pair’s losses further accelerated as it reels from the loss of decisive resistance levels a week before last. It has mild resistance around the 112.55-70 zone and with Oil prices remaining high further losses are likely. Any foray into the 113 region could accelerate losses towards 114 which is a very crucial region and holds mixed technical interest. Resistance is very strong in the 114.25-50 zone with a decisive break above that region could lead to the further worsening of the sentiment around the Yen and also lead to losses on its crosses. On the downside, the pair has mild support around 111.55 with Dollar buying interest around that mark. A break below targets the strong support zone of 110.90-111.10 and a decisive break below could shift the weekly sentiment in the Yen’s favour.

GBP/USD – The pair has broken below every support level foreseen for the short term and its losses have accelerated as sentiment around the Pound remains in deep negative territory. Immediate support is seen in the 1.7310-25 zone with decent buying interest around that region. A decisive break below has distant support in the 1.7190-1.7205 region with decent buying interest around that mark; a break below could further accelerate its losses. On the upside, mild resistance lies in the 1.7455-70 region followed by strong resistance in the 1.7525-40 zone with decent offers around that region. A decisive break above 1.76 could shift weekly sentiment in the Pound’s favour.

AUD/USD – The Australian Dollar broke key support levels as it followed the massive bout of profit taking on key commodities. Sentiment has turned against it with further losses in the pipeline with mild support in the 0.7385-0.7405 zone. Decent buying interest lies in the 0.7325-40 zone with a break below to further accelerate its losses with distant support around 0.72. On the upside, mild resistance is seen around 0.7475 with a break above leading to resistance around 0.7555 with strong selling interest around that mark. A break above 0.76 could shift sentiment back in the Aussie’s favour.

Kunal Sharma
Forex Analyst

Easy Forex Pty Ltd. (Australia)
E-mail: kunal@easy-forex.com

Australian Financial Services License 246566

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