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Weekly Outlook – 04.07.2005
FOREX – Australian Dollar Market Comment
A decisive week came to an end with the Dollar firing on all cylinders as the currency markets experienced some pre July 4th fireworks. After steadily declining over the last 3 years against all majors, the Dollar could well celebrate its own Independence Day as it has broken key technical barriers and sentiment is squarely in its favour.
The Fed is staying firm on its measured path of rate hikes and their optimism in the economy is being justified by strong U.S. fundamentals. The most telling result was last Friday when the ISM Manufacturing came above expectations this was significant as this sector was the sole sore point in the positive growth outlook for the economy and the outcome dispels fears of a slowdown. The fact that there is growing speculation of other Central Banks looking to cut rates or conditions in such a state where a rate cut is warranted is making the Fed’s stance stand out, making the Dollar more attractive.
Towards the end of last week, certain factors which were acting as a stumbling block in Dollar’s juggernaut fell by the wayside for the time being. Oil prices experienced a heavy bout of profit taking and eased back, however supply concerns persists and its strong resilience and ability to rebound makes way for more gains in the following months. Manufacturing sector is picking up again and in spite of oil prices’ spiking earlier, Consumer Confidence keeps rising. The Dollar’s ability to break key technical barriers also helped in accelerating its gains.
Lost among the barrage of Dollar positive events, is the main reason why it fell in the first place over last few years. The structural deficiencies in the economy haven’t subsided and trade deficit keeps increasing and in the current environment has no chance of improving. In an environment of robust consumer demand in the U.S. and preference for foreign goods, imports should keep rising steadily. This coupled with record high oil prices leading to a spike in import costs ensure that the imports side of the Balance equation would keep increasing. Thus it is acknowledged that imports won’t decrease and deficits have to be reduced, leaving a substantial increase in exports the only way out. But this appears even more unlikely in the current scenario of sluggish economic conditions plaguing the euro-zone and Japan.
A couple of significant points that slipped under the radar last week were the pick up in the data from the Euro-Zone. The sharp fall in the Euro has made exports from the zone very attractive and significant increase in orders has eventuated. This has increased Business confidence which has led to a pick up in the depressed employment sector. And with the Dollar likely to gain further in the short term, conditions in the Euro-Zone should steadily improve. Another point is no effect, of a stream of positive Japanese data on the Yen with the crucial Tankan surveys pointing towards a significant improvement in Economic sentiment in all sectors. Any signs of the Chinese moving towards an imminent Yuan revaluation move should see the Yen rocket ahead, more so now than seen previously.
Commodities were subjected to its customary strong bouts of profit taking after an equally strong rally, and the effect on the commodity bloc currencies has been telling. Already plagued by a declining business confidence and slower growth prospects, the Aussie and the Kiwi Dollar fell sharply. Rates are expected to stay on hold for the rest of the year with possibilities of rate cuts while the Pound faces a crucial test with BoE meeting eyed keenly. Thus for now, other currencies remain at the mercy of the Dollar.
FOREX RelatedKey Economic Releases
Forex USA
| Day | GMT | Release | Previous | Forecast | Comment |
| Tuesday | 14:00 | May Factory Orders | 0.9% | 3.0% | Manufacturing is picking up with domestic orders lending good support |
| Wednesday | 14:00 | June ISM Non-Manufacturing | 58.5 | 58.0 | Services sector should remain around steady levels |
| Friday | 12:30 | June Non-Farm Payrolls | 78K | 190K | Should rebound to be around a healthy 200 K result. |
| Friday | 19:00 | May Consumer Credit | $1.3Bn | $4.5Bn | Credit to increase due to increased consumer confidence increasing spending. |
Forex Euro-Zone
| Monday | 09:00 | May PPI m/m | 0.4% | -0.1% | Easing in energy and common item prices |
| Tuesday | 08:00 | June PMI Services | 53.5 | 53.4 | Recent pick up in domestic demand should keep the index steady. |
| Tuesday | 09:00 | May Retail Trade m/m | -1.2% | 0.4% | Should rebound as consumer spending has increased |
| Wednesday | 08:00 | June Retail PMI | 50.2 | 50.4 | PMI should follow the retail sales figure but trend looks mixed |
| Thursday | 11:45 | ECB Interest Rate Decision | 2.00% | 2.00% | ECB should remain on hold but a rate cut looks likely by end of the year |
| Friday | 10:00 | May German Industrial Production | 1.3% | -0.4% | Production has projected mixed signals and expected to slip. |
Forex Japan
| Sunday | 23:50 | June Monetary Base | 2.2% | 2.0% | It should stay around recent steady levels |
| Wednesday | 05:00 | May Leading Economic Index | 31.8% | 40.0% | Index should inch higher but still in contraction territory |
| Thursday | 23:50 | June Money Supply | 1.5% | 1.6% | Money and liquidity expected to remain unchanged |
| Friday | 05:00 | May Household Spending y/y | -3.0% | -2.0% | Spending should remain on the weak side. |
Forex U.K.
| Monday | 08:30 | June CIPS Construction PMI | 52.6 | 52.9 | Construction activity has stabilized but trend looks weak |
| Monday | 23:00 | BRC Retail Sales Monitor | -2.4% | 0.8% | Expected to rebound on seasonal factors |
| Tuesday | 08:30 | CIPS Services PMI | 55.1 | 54.6 | Services index should pull down with risk of greater fall than expected |
| Wednesday | 08:30 | May Industrial Production | 0.9% | -0.1% | Manufacturing sector is now feeling the slowdown in the economy |
| Thursday | 11:00 | BoE Interest Rate Decision | 4.75% | 4.75% | Rates expected to stay on hold for now but cut looks likely in coming months |
Forex Australia
| Monday | 01:30 | May Trade Balance | -1325Mn | -1400Mn | Exports have declined while import costs keep rising |
| Tuesday | 23:30 | RBA Interest Rate Decision | 5.5% | 5.5% | Rates should stay on hold for the rest of the year |
| Thursday | 01:30 | June Employment change | 14K | 5K | Employment to stay around steady levels |
FOREX (Foreign Exchange) TechnicalScenario
EUR/USD – The pair finally broke decisively below the crucial 1.1980-95 zone and its losses accelerated. With this sentiment has turned more negative and further losses are likely with break of every key support mark to accelerate losses. Mild support lies in the 1.1875-90 zone which if broken below brings into focus the very crucial support zone at 1.1790-1.1815. Decent buying orders are placed around this region which if broken below should lead the pair to its lowest levels in 2 years and could accelerate its losses. On the upside, the pair is expected to be sold on any mild rallies or profit taking bouts with mild resistance around 1.20 and decent selling interest on any forays above 1.2125. 1.22 holds very strong resistance and any move above that mark should lead to very strong selling interest.
USD/JPY – The pair’s losses accelerated after the break above the 109.75 pivot mark and China dismissing any Yuan revaluation move. It has held back so far from the very strong resistance zone of 111.90-112.15. This region holds decent sized selling orders and a break above would lead the pair to its highest level in a year and could accelerate its losses, with next strong resistance seen around the 113.75 mark with a few mild resistance levels in between. On the downside, mild support lies around 109.75 with decent Dollar buying interest with a break below bringing into focus the 108.75-90 zone which holds strong support. A decisive break below the 108.25 mark could shift the sentiment back in the Yen’s favour,
GBP/USD – The pair has broken below every support level foreseen for the short term and its losses have accelerated as it has slipped below 1.76. Even though it is oversold in the short term the prospect of BoE cutting interest rates is weighing in against it. It is close to the strong support mark of 1.7575 with a break below to lead to the Pound to its lowest level in a year. A break below targets the 1.7515 mark which if decisively broken below could further accelerate its losses. With distant support seen around 1.7425 while on the upside mild rallies are expected to be sold with mild resistance around 1.77. A break above that mark leads to very strong resistance and selling interest around 1.7825.
AUD/USD – The Australian Dollarbroke key support levels as it followed the massive bout of profit taking on key commodities. Sentiment has turned against it with further losses in the pipeline with mild support around 0.7475. A break below leads to strong support zone of 0.7405-20 with decent buying interest around in that region. A decisive break below could accelerate its losses with distant support around 0.7325. On the upside, mild resistance is seen around 0.7590 with a break above leading to resistance around 0.7655 with any break above 0.77 leading to strong selling interest.
Kunal Sharma
Forex Analyst
Forex Analyst
Easy Forex Pty Ltd. (
E-mail: kunal@easy-forex.com
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