Australian FOREX Weekly Outlook 08/11/2005

08/11/05

The Dollar ended the week higher against all the major currencies. The Euro closed last week at 1.1823 having started the week at 1.2065. US$/JPY closed last week at 118.27 having started the week at 115.68. The GBP closed last week at 1.7519 having started the week at 1.7736. The A$ closed last week at 0.7379 having started the week at 0.7562.

The dollars strength continued due to robust economic data earlier in the week, combined with favorable interest differentials as the Federal Reserve raised interest rates by 25 basis points. As the week progressed Fed Chairman Alan Greenspan said the U.S. economy remains “firm” and gave no sign the Fed is nearing the end of its rate increases. ECB President Jean-Claude Trichet said the current level of interest rates is “still appropriate,” while Japanese officials said deflation still limits growth in the world’s second-largest economy. These comments would be the overriding factor for dollar strength, as the market preferred the actions of the Federal Reserve rather than the words of its counterparties. The weak payroll data out of the States did not hamper the dollars advance, as the market felt this would impact the Federal Reserve to change its tightening bias.

The week ahead

In the US, the calendar is quite bare but there are two key data releases to keep an eye on. The trade balance on Thursday which is expected to be heavily impacted by hurricanes Katrina and Rita. The other important release in the US will be on the Thursday, when the University of Michigan’s reading on consumer sentiment for the month of November is released. We will provide our previews of these data releases in the daily summary.

In the Eurozone, the main data will be out of France. Thursday sees the release of industrial production and the first estimate of Q3 GDP. This is the first Q3 GDP data for any of the major economies, with the German report due out the following week. In the UK, all eyes will be on the Monetary Policy Committee (MPC) meeting on Thursday. The expectations of a rate cut have largely disappeared with recent data releases, and therefore the market expects no change on Thursday. We will provide our previews of these data releases in the daily summary.

In Japan, the main focus will be on the first estimate of Q3 GDP due out on Friday. Machinery orders are due out on the Thursday. The results have been more upbeat recently, but as always, this series is exceptionally volatile. In Australia, the main focus was on the RBA Statement on Monetary Policy released yesterday. The other data release of interest will be employment which is due out on Thursday. We will provide our previews and reviews of these data releases in the daily summary.

Key Weekly Pivot levels

EUR/USD – 1.1810

The Euro starts off the week on a softer note following Friday’s key break and close of triple bottom support at 1.1871. This is a new low for 2005 and analysts believe it confirms a resumption of this year’s downtrend. This now exposes last year’s low of 1.1762 recorded on Apr 26 2004. A break of this latter support would then open the door for a possible test of 1.1588, the 38.2% retracement of the rally from the 0.8232 historic low to last years 1.3663 high. Initial resistance is located at 1.1877, the Oct 19 low.

USD/JPY – 117.65

Having traded to a high of 118.43 (50% retracement of the 135.18 to 101.67 decline), which was the objective of many analysts. Analysts are now cautious of threatening bearish divergence, which if confirmed would provoke a larger-degree setback with respect to the 108.76 to 118.39 advance. To define an interim high the currency pair would need to trade firstly below 117.17 (Friday’s low) and more importantly 116.25 which was previous resistance level. For the up-trend to remain intact, gains beyond 118.43 are required and will be viewed as an indication for an extension towards the psychological 120 level (and area of Aug 19, 2003 peak at 119.83).

GBP/USD – 1.7440

The Pound is approaching the Oct 12 low of 1.7391 and a break of this level will expose this year’s low of 1.7271. A recovery beyond the former support level of 1.7609 is required to buck the trend and ideally above 1.7795, the peak from Nov 3 is needed to more objectively define a low ahead of a larger-degree recovery.

AUD/USD – 0.7330

Last week extended decline from Oct 27’s 0.7605 which was also the 50% retracement of the 0.7765 to 0.7438 decline. The down move took out this year’s 0.7365 low from July 7, thereby setting the scene for further slippage towards 0.7238, the 61.8% retracement of the 0.7590 to 0.6773, Feb-June ’02 decline. For the heavy tone to be relieved arecovery beyond the formerly supportive 0.7365 level and ideally above last Friday’s 0.7400 high is necessary.

Rory Kennedy