FX Trading Australia Market Weekly Outlook – 14/02

Two crucial events will provide clues with the Capital Inflows data expected to exceed the deficit which is more important from a psychological point of view for investors. Another event is Fed Chairman Greenspan’s testimony on the Economy and Fed policy, expectations are for Greenspan’s to repeat his optimism of the deficits shrinking gradually. The market is also keeping an eye on how high, will the American rates go. At this stage while Fed officials are committed to steady rate hikes, they would be a bit clueless once it reaches 3.5%. Any indication of the Fed staying put before that mark would be a big negative for the Greenback.

The American economy looks in healthy shape with consumer confidence and spending solid and the stock market picking up strongly from the start of this month, concrete signs of the deficit reducing would help the Dollar rally significantly but for now the sentiment remains mixed.

The Commodity bloc appears to be in the strongest position coming into this week with prospect of rate hike in Australia probably as soon as next month adding to other positives around it. Employment data was robust and any doubts of the housing market crashing were dispelled by the strong home loans result. Commodity prices are also expected to increase steadily over the course of this year.

Geo-political factors are causing some concern with the outcome of Iraqi elections likely to keep some groups dissatisfied and could escalate violence while North Korea’s admission of processing nuclear weapons having major long term implications. Once the Korean story subsides and renewed talk of Chinese Yuan revaluation surfaces back, the Yen could regain its previous support but further signs of the economy slowing could prove that support to be short lived.

After a light data schedule last week, a busy one is up ahead. Key data for the U.S. kicks of on Tuesday with Empire state Manufacturing with expectations of stay steady, Retail Sales should inch higher as post holiday discounts continue while the crucial Capital Inflows result should show a figure above $60 Bn. Wednesday has Housing Starts which should stay around recent levels while Industrial Production is expected to be lower as new orders have declined. Probably the most crucial event this week is Greenspan’s testimony on the Economy and Fed policy to the congress. Thursday has Leading Indicators which could decrease while Philly Fed should bounce back up after last months poor result. Friday has PPI which should inch higher after as oil & energy prices have gone back up while the Univ. of Michigan Consumer Confidence survey should stay unchanged.

For the Euro-Zone, key data starts from Tuesday with German PPI expected to increase with slight pick up in domestic demand, the ZEW Economic Sentiment survey should show an increase. The Euro-Zone’s 4Q GDP should increase slightly helped by higher domestic demand in Germany & France. Wednesday has French Non Farm Payrolls expected to stay unchanged. Thursday has the zone’s Industrial Production which is expected to increase as export orders have increased due to the fall in Euro. Friday has German PPI & CPI both are expected to increase as oil & energy prices have increased.

For the U.K., key data starts from Monday with PPI with expectations of an increase as oil prices have inched higher. The House Price index should show another decline. Tuesday has CPI which should ease back a little while RICS House Price balance should continue to decline. Wednesday has Employment data which should stay nearly unchanged while BoE’s Quarterly Inflation report is also released on that day. Thursday has Retail Sales which should rebound up. Friday has net borrowing and Money supply expected to stay largely unchanged.

A light data week for Japan, key data starts from Monday with Industrial Production expected to inch lower while Consumer Confidence should rise slightly. Tuesday has Machine Tool orders expected to decline. Wednesday has GDP which should remain unchanged from last period while BoJ’s monetary policy report is released on Thursday.

The Euro seems to have found a nice base around the 1.2725-40 support zone but needs a strong break over 1.2975-1.30 to re instill bullish momentum. 1.28 is the grey area where sentiment is neutral with a break below the support zone bringing 1.2640 into focus where very strong support exists.

The Yen’s losses extended beyond 106.50 largely due to the Korean news but it has pulled back since. Decent Dollar bids remain in the 104.75-105.00 region with strong support around 104.25. Barring any geo-political negatives for the Yen, strong offers should cap Dollars rally above 106.

The Pound is hovering around 1.87 with decent support in the 1.8625-40 zone and stronger one around 1.8525-50. It needs to go beyond 1.8740-55 zone other wise it could be locked in broad range trade.

The Aussie is again eyeing its 80 cent target with bullish momentum picking up over the course of last week. Good support and buying interest has moved up to 0.7750-75 with a clearance of 0.7900-25 resistance needed to lead the way towards its target. Continuous failure to break above this resistance zone could lead liquidation of longs with Dollar’s general direction eyed.