FX Trading Australia Market Weekly Outlook 10/05/2

FX Market Weekly Outlook 10/05/05

FX Trading Australia – Weekly FOREX Market Summaryz

Once again the Dollar managed to get something special out of the bag just when it looked like it was poised for further losses. Payrolls came much above expectations while the previous two months outcomes were revised up. Thus the key question is, will the Dollar be able to sustain this momentum and put the recent doubts on its growth onto the back bench?

The first test comes on Wednesday with the Trade Balance figures with expectations for the deficit to be around the $60 bn mark, signs of reduction should set the tone for a Dollar rally. Of course the Fed’s addition of the deleted line, which implied that long term inflationary pressures are well contained, from its accompanying statement has added an interesting twist to the rate hike scenario. It currently stands at 3% and things would get interesting when and if it reaches 4%, with their current belief they are bound to pause within meetings over the course of the next few months. This of course would shift the focus back on the U.S. ballooning deficits and that’s when the real Dollar weakness could transpire.

But for now things seem reasonably positive for the Greenback and it is also helped by weak data from other regions. The Euro-zone economy is stuck in a rut which has no easy solutions. The main problem is its manufacturing sector which forms the back bone of the economy. A weaker Dollar is making its own exports look less attractive while at the same it is increasing the cost of commodities which means costly raw materials for manufacturers. Heavyweights like BMW has posted its 1^st Quarterly profit drop in nearly 2 years due to these reasons.

The U.K. elections have had a bitter sweet effect as Labour getting reelected is what the market hoped for, however its majority has been reduced significantly. Also many MP’s are putting pressure on Prime Minister Blair to resign well before his term finishes so that his successor Chancellor Brown has a good hold on the re election campaign four years from now. On the other hand Blair is determined to spend the full third term in office and pressure would start mounting in a couple of years. Inflation should retreat on the pullback in oil prices and spending remains on the weak side with House price likely to decline or stabilize, thus BoE should continue to remain on hold.

The Yen has given back some of its gains as no announcement came form the Chinese side in terms of Yuan revaluation as was expected by some sections of the market during the holiday week in Asia. But the Yen still remains supported, an analogy for the current situation can be expressed as passengers (investors) waiting patiently for the train to arrive (Yuan revaluation) even though it is delayed. Thus in spite of the fact that the train is bound to come the question is how many passengers would stick around till its eventual arrival or would pursue an alternate route. Thus lack of any concrete steps in near term on this issue or strong denials from the Chinese side would put focus back on Yen’s fundamental weaknesses.

Commodities have been subject to another bout of profit taking as the complicated supply demand equation keeps changing. Since recent rise is driven by demand from emerging markets, the major players in the West aren’t fully aware of the ground realities in these markets as chances are high of the demand easing significantly. The Aussie and the New Zealand Dollar have benefited from the uncertainty surrounding the growth prospects of other regions, but their currencies high value has severe mid to long term repercussions. NZ’s Trade Deficit has widened due to this, with exports losing their allure on a higher Kiwi.

Economic Releases

USA – Key data starts from Monday with Wholesale Sales which should rebound from last period while inventories should stay steady. Tsy Sect. Snow speaks to Business leaders in Hartford. Tuesday has ABC Consumer Confidence which should inch higher on the back of easing in oil prices while Fed’s Hoenig speaks on monetary policy and economic outlook. Wednesday has the key Trade Balance report with deficit expected to remain around $60 Bn, also on tap are speeches by Fed’s Poole, Bies, Ferguson and Gramlich. Thursday has Retail Sales which should increase as spending remains robust. Friday has Business Inventories expected to inch higher while the Import Price index should decline on the easing in oil prices. Univ. of Michigan Consumer Confidence survey should inch higher.

Euro-Zone – Key data starts from Monday with Retail PMI from across the zone with forecasts of decline across the zone. Tuesday has German Export and Import Price index with the pullback in oil prices to help in reducing import costs. Wednesday has German CPI with expectations of a decline while French Industrial Production should improve from last period but still around low levels. Thursday has French Trade Balance with deficit expected to increase while Italian Industrial Production is expected to decline. The zone’s Q1 GDP is expected to increase from a slight pick up in activity compared to the sluggish conditions of last year. Friday has French CPI which should decline as apart from drop in oil prices common item prices have decline as well. Finance Ministers from the zone are expected meet on this day.

Japan – Key data starts from Tuesday with Household Spending which is expected to rebound but overall conditions remain mixed. Wednesday has Official Reserve Assets expected to stay around recent levels while the Leading economic and Coincident Index should rebound from the decline of last period. Thursday has Trade Balance with surplus expected to inch higher while Money Supply should remain around steady levels. Friday has Machine Tool Orders which are expected to decline offsetting last month’s above average result.

U.K. – Key data starts from Monday with PPI as the pullback in oil prices should lead to a decline. Industrial Production for March is expected to be revised higher while House Prices should continue on the path of steady decline. BoE is expected to keep rates on hold while the BRC Retail Sales Monitor should show a slight decline. Wednesday has Trade Balance figures with deficit expected to increase while BoE’s Quarterly Inflation report is likely to show that inflation is under control.

Australia – Key data starts from Monday with Job ads which are expected to inch higher. The Government will present the Budget on Tuesday with special focus on workforce participation to counter the ageing population problem. Wednesday has Home loans with expectations of a decline as the housing sector remains mixed. Thursday has the Employment report with unemployment rate expected to stay steady but jobs added should decline.

Technical Scenario

EUR/USD – The pair looks vulnerable for further losses after the strong U.S. payrolls number, for now support exists in the 1.2785-1.28 zone which has been a good base for it during the last 3 months. A break below would target its yearly lows around 1.2750, this mark is crucial and a decisive break could accelerate losses for the Euro. Mild support exists around 1.2675 and then we are looking at the 1.25 region. On the upside bottom pickers might help the pair go towards 1.2890 where mild resistance exists followed by the 1.2775-90 zone where resistance is very strong. For now any move above 1.3025 should bring in decent selling interest.

USD/JPY – The pair has gone back towards 105.25 as some position squaring has eventuated on the lack of any signs of Yuan revaluation. This topic will continue to be the driving factor for this pair and the Yen remains reasonably bid due to this. For now offers are strong around 105.55 but they will give away on a broader Greenback rally. Any foray above 106.15 should bring in decent selling interest. On the downside decent Dollar bids continue around 104.55 with a break below bringing into focus the strong support zone at 103.75-90.

GBP/USD – The pair has slipped on the tri-factor of strong U.S. data, mixed U.K. data and a significantly reduced majority for the reelected Labour government. Mild support exists around 1.8840-55 with a break below bringing into focus 1.8775-90. Bottom pickers would be looking to buy on dips around 1.88 as data outcome is eyed. On the upside resistance lies in the pivot region of 1.8940-55, a break above brings 1.9025 into focus with selling interest on a break above that mark. 1.92 is the extreme mark that should bring strong selling interest irrespective of any Dollar weakness.

AUD/USD – The pair is taking cue from other majors with support around 0.7710-25 a decisive break below could accelerate losses for it. Key local data is eyed for general direction with very strong support and buying interest on approach of the 0.7625-40 zone. On the upside mild resistance exists around 0.7795 with decent selling interest to continue in the 0.7825-40 zone. The pair is in a mixed direction as long as it stays in the 0.77 region.