Australian FOREX Weekly Outlook 25/10/2005

As dollars main supporting factor continues to be the yield factor, the data releases that come out last week were viewed as mildly positive for the dollar, as they strengthen the Federal Reserves case for further rate hikes. This combined with the constant hawkish comments by Federal Reserve officials were the main fundamental drivers for dollars strength. The reason for dollar not being able to make a much bigger push would be largely due to the decline in the US stock market. The market seems to be taking the view that company profits have peaked and equity value will come lower. Another argument for dollar sales is heightened risk aversion concerns which have been evident in both equity and credit markets recently and is expected to impact currency markets. Although little evidence to indicate this is a major factor, as risk averse environments see high yielders usually suffer i.e. USD, AUD and NZD with Euro and CHF likely to benefit.

The week ahead sees the dollar at a key stage as it holds just below the year’s highs vs. the JPY and Euro. The week sees a number of key releases in the US markets, with the highlight coming on Friday with the release of 3rd quarter GDP. Estimates range from 2.8% to 3.5%. GDP was on track for 4% annualized growth in July and August, but this week should bring further evidence of hurricanes Katrina’s impact, being the reason for the downward revision. Other key releases in the US markets this week will be consumer confidence followed by US durable goods. We will provide our previews of these data releases in the daily summary.

In the Eurozone there are two key themes in the coming week inflation and business sentiment. We should get the first indication of Eurozone inflationary pressures for October from German regional numbers due out today, followed by the flash estimate due out Friday. The data calendar for the UK is very light over the coming week with the quarterly CBI Industrial Trends survey (Tuesday) the only release of any note. We will provide our previews of these data releases in the daily summary.

EUR/USD – The importance of they key support level at 1.1870 was again highlighted with another sharp bounce off this level earlier in the week. In order to bring the next major support level of 1.1762 into play, the market must pierce this key double bottom at 1.1870. In terms of resistance, a break above Friday’s high of 1.2075, Oct 21 high would mark a positive development and expose 1.2119, the Oct 17 high and 1.2204, the Oct 6 high. A break of this latter resistance would be considered a significant bullish development and also define a key base / reversal in the EURUSD. Looking at momentum studies, the existence of divergence between momentum and price does also highlight the prospect of base building and we are monitoring closely whether key support level will hold.

USD/JPY – Overbought RSI questions whether moves over the long-term resistance of 116.00 can be sustained. However, weakness below last Tuesday’s 114.90 low needed to threaten the short-term up-trend and ideally beyond last Monday’s 113.75 low required to define a broader top. In lieu of sub-113.75 price action and certainly while 114.90 holds, the broader uptrend remains intact, with fresh upside beyond last Wednesday’s 115.99 high seen as the catalyst for an extension towards the top of the past 5 months’ channel resistance at 116.95, but with scope for 118.43, the 50% retracement of the 135.18 to 101.67 Jan ’02 to Jan ’05 decline.

GBP/USD – Cable failed to break the key resistance level at 1.7817, which represents the 38.2% retracement of the 1.8501-to-1.7391 decline of Sept.-Oct. and is also near the 1.7814 high of Oct6. A move up through 1.7817 would have had broader bullish implications as it would confirm medium term low in place at 1.7391 low of Oct. 12 and indicate a broader recovery towards 1.7946, with scope for 1.8077. However the downtrend remains intact with market now focusing on first support at 1.7650 followed by 1.7470.