Australian FOREX Weekly Outlook 02/07/2007

Housing sector weighs heavy on USD as commodity bloc currencies rally. Interest rate announcements the flavor of the week.

02/07/07

last week’s currency trading review

The Dollar poor economic data out of the U.S. economy did little to support the dollar any further as slowing housing sector, and further concerns of further defaulting in the Sub Prime Mortgage sector. Demand for the USD further diminished as Thursday’s FOMC decision to keep rates unchanged, revealing further moderation in inflationary pressures, boosting the view that the rates may remain unchanged for some time yet. The Euro performed well over the week against the US dollar as further desire for high yielding currencies continued to be supportive of the Currency. The Euro closed last week at 1.3533 having opened at 1.3164. The Japanese was subject to plenty of volatility through out the week as the currency remained profitable to fund carry trades to start the week. The Japanese Yen however did benefit from risk aversion mid week with Finance Minister Omi warning markets of risky one way bets against the currency. However the reprieve in the currency was short lived as the carry trade returned later on in the week further weighing heavy to see the Japanese Yen end the week at 123.16 having opened at 123.16. The GBP was the biggest mover throughout the week as the Sterling Pound was well supported by investor’s appetite for risk. Yet the GBP bullish outlook remained more prominent then other currencies with ongoing speculation (aided by hawkish comments) that the BoE would look to increase interest rates as early as this week (Thursday the 5^th of July).The GBP closed last week at 2.0064 having opened at 1.9983 at the start of the week. The AUD once again was subject to a quiet data week yet experienced plenty of volatility trading on the back of other majors. With ongoing speculation that the RBA would look to increase interest rates by year end, investors found comfort in the high yielding currency, which closed the week near fresh 18 year highs at 0.8501 having opened the week at 0.8477. In similar fashion, the Kiwi dollar traded at 22 year highs as it too benefited from its 8% cash target. The Kiwi dollar closed last week at 0.7692 having opened at 0.7639

The forex trading week preview

In the States although much focus has been on housing sector in recent times, focus is expected to shift towards jobs data later on in the week, with both unemployment and Non Farm Payrolls due out on Friday. We will provide our previews and reviews of these data releases in the daily summary.

In the Eurozone a heavy data week is expected out of the EZ, beginning with Manufacturing PMI (Monday), Producer Prices, Unemployment rate (Tuesday), Retail Sales on Wednesday, before the ECB rate announcement on Thursday. In the UK will also see a rate announcement from the Central Bank on Thursday. Manufacturing data will also be a prominent theme for the UK throughout the week. We will provide our previews and reviews of these data releases in the daily summary.

In Japan will start of the week with the Tankan Survey for the second quarter on Monday it what is a relatively quiet week.. We will provide our previews and reviews of these data releases in the daily summary.

In Australia interest will surround the release of Retail Sales on Tuesday ahead of the RBA rate announcement on Wednesday. We will provide our previews and reviews of these data releases in the daily summary.

The currency in focus

CAD/JPY like other Yen crosses has seen significant gains recently as the market continues selling Yen to fund carry trades. CAD/JPY being a popular proxy trade for oil, has also benefited from rises in the price of crude to over USD$70 a barrel. With expectations of imminent rate hikes from the Bank of Canada and no clear signal of future rate hikes from the Bank of Japan, CAD/JPY seems to be well supported. In the past four months CAD/JPY has jumped by more than 17% to reach a high above 117. The key economic release in an otherwise quiet week for the CAD is the unemployment rate due out on the 6^th of July. Key short-term resistance is situated at 116.00 with the CAD/JPY making several attempts recently to remain above this level. 115.50 down to 115.20 is an area of support for this cross (See chart below). Momentum seems to be forming an uptrend back to positive territory. Look for CAD/JPY to possibly capitalize on breaking through the 116.00 level.

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KEY WEEKLY PIVOT LEVELS

• Euro 1.3620 

Initial support at 1.3527 (June 2 low) followed by 1.3414 (Jun 27 low). Initial resistance is now located at 1.3641 (Jul 2 high) followed by 1.3683 (Apr 27 trend high)

• Yen 122.40 

Initial support is located at 122.06 (0.618 of 120.76 -124 advance) followed by 121.49 (Jun 13 low). Initial resistance is now at 123.56 (Jun 29 reaction high) followed by 124.17 (Jun 22 trend high)

• Pound – 2.0165 

Initial support at 1.9974 (June 28 low) followed by 1.9929 (Jun 27 low). Initial resistance is now at 2.0200 (Round Number resistance) followed by 2.0220 (Mar 1979 high)

• Australian Dollar – 0.8580 

Initial support a 0.8460 (June 29 low) followed by 0.8354 (Jun 87 low). Initial resistance is now at 0.8602 (Jul 2 trend high) followed by 0.8700 (Round Number)

• Gold – 656.80 

Initial support at 640.00 (June 26 low) followed by 637.36 (Mar 14 low). Initial resistance is now at 659.00 (July 2 high) followed by 662.35 (61.8% retracement 674.00 to 643.50 decline)