Weekly Outlook – 06.06.2005
This week saw the Dollar break key barriers on most majors as it seized the initiative. Even a much lower than expected Payrolls outcome didn’t affect the Dollar thanks to the immense uncertainty surrounding the Euro. When the mere existence of the entity i.e. Euro is being questioned with fears, be it unfounded at this stage, of the dismantling of the Euro, then does it really matter if the world’s largest economy created around 50K jobs less than what economists had estimated. However the market is very long on the Greenback and risks of profit taking persist, it has some weak factors around it which are discussed further down.
If the Euro had feelings then it would have covered its face in embarrassment, touted as a replacement and a credible alternative to the mighty Dollar, it now faces voices of dissent from within its ranks in a region which probably has the most poor growth outlook among the developed & emerging nations. However, there is no doubt the inability of the government’s of the three largest economies of the Euro bloc namely Germany, France and Italy to keep the unemployment rate down and failure to spur growth has led to the general populace venting their frustration on the EU. When things look a bit shaking it is natural to look for a scapegoat and this was certainly the case in regards to the comments by Italian minister to readopt the lira.
A few worrying factors have also emerged for the U.S., oil prices for one refuse to back down and crept back above $55 pb. Speculators as well as big funds are pouncing on oil contracts on any move down to $45 and are looking to crack the $60 mark once more and with U.S. driving season underway supply concerns are likely to exacerbate. The Manufacturing sector has become sluggish as the weakness in regional surveys from NY, Philly Fed & Chicago led to the National index slipping. Energy prices have remained high and the steady resolve of many manufacturers at the start of the year, in hope of prices easing back, might be declining. Also the sudden appreciation in the Greenback would no doubt have affected export orders. Another factor has been the below par Jobs data which has brought back the ‘slowing economy’ fear into focus. However one month does not reflect a trend and overall the employment sector remains steady.
Now that the Fed has increased rates 8 consecutive times which currently stands at 3%, the debate is intensifying as to when exactly the Fed will pause. The jury is out there and the market would be all ears to a couple of speeches by Greenspan this week. The comments of Dallas Fed President Fisher that the Fed is in its eighth inning of tightening have led many in the market to believe that there would be another hike and a pause. Some believe that they would pause after another hike in July at 3.5%. Either way the attention shifts to data outcomes to predict the Fed’s future stance. They might well pause but could increase rates late in the year and the Dollar’s yield advantage over the Euro should remain, especially in an environment where pressure is put on the ECB to cut rates. The Trade balance data on Friday is the big test for the Greenback with deficit expected to stay below $60 Bn and the widening of deficit could lead to broad based profit taking.
Key Economic Releases
USA
| Day | GMT | Release | Previous | Forecast | Comment |
| Tuesday | 19:00 | April Consumer Credit | $5.5Bn | $7.0Bn | Demand fro Credit remains high as consumer spending remains robust. |
| Wednesday | 14:00 | April Wholesale Sales |
0.2% | 1.1% | Sales expected to increase as inventory overturn remains steady. |
| Friday | 12:30 | April Trade Balance | -$55.0Bn | -$58.0Bn | Continuing from last month deficit should remain below $60 Bn. |
| Friday | 18:00 | May Monthly Budget statement | -$62.5Bn | -$45.0Bn | Expected to slip below $50 Bn on higher tax receipts. |
Euro-Zone
| Monday | 08:00 | May Retail PMI | 48.7 | 47.5 | Uncertainty around the Euro is curbing spending. |
| Monday | 10:00 | German Factory Orders | 2.1% | -0.8% | Domestic demand has weakened further leading to lower orders |
| Tuesday | 10:00 | German Industrial Production | -0.3% | 0.5% | Easing in oil prices last month should help push production higher. |
| Friday | 06:50 | French Industrial Production | -0.5% | -0.1% | Like Germany Production expected to inch higher. |
| Friday | 09:00 | Q1 Current Account | 14.3Bn | 4.8Bn | Higher import costs should reduce surplus |
Japan
| Tuesday | 05:00 | April Household Spending | 0.00% | -2.0% | Should decline but conditions have improved from May |
| Wednesday | 05:00 | April Leading Economic Index | 36.4% | 25.0% | High oil prices in April should keep index low. |
| Wednesday | 23:50 | April Trade Balance | Y1226.2B | Y1130.0B | Surplus expected to reduce slightly as imports have increased |
| Thursday | 05:00 | May Consumer Confidence | 47.4 | 47.9 | Recent pick up in labour market should help confidence inch higher |
U.K.
| Monday | 23:00 | BRC Retail Sales Monitor | -4.7% | 0.5% | After last month’s sharp fall, sales expected to rebound on cyclical factors |
| Wednesday | 10:00 | May FT House Prices m/m | 0.2% | 0.1% | House prices should continue on its steady decline. |
| Thursday | 08:30 | April Industrial Production m/m | -1.2% | 0.2% | Easing in oil prices in April should help increase production |
| Thursday | 08:30 | April Trade Balance | -4412Mn | -4725Mn | Deficit expected to widen further on decline in exports. |
| Thursday | 11:00 | BoE Interest Rate Decision | 4.75% | 4.75% | Rates should remain on hold as current conditions don’t warrant a hike. |
Australia
| Tuesday | 23:30 | RBA Interest Rate Decision | 5.5% | 5.5% | Rates should stay on hold as consumer spending has slowed down |
| Wednesday | 01:30 | April Housing Finance | 1.2% | 2.3% | Housing market has stabilized but lending could decline after mid year. |
| Thursday | 01:30 | May Unemployment Rate | 5.1% | 5.2% | Expected to inch higher from record low levels. |
| Thursday | 01:30 | May Employment Change | 6.9K | -5.0K | Job conditions have softened from first quarter and should decline accordingly. |
Technical Scenario
EUR/USD – The pair finally broke below the key 1.25 region and its losses subsequently accelerated. The only strong support was found in the 1.2150-75 zone while bottom pickers are coming up on any move below 1.22. A break below the support zone should bring in strong buying interest in the 1.2090-1.2115 zone. On the upside, mild resistance exists in the 1.2340-55 zone followed by decent selling interest on any move above 1.2425. The pair has mixed technical interest in the 1.22 region and could remain range bound if it hasn’t pushed decisively in either direction.
USD/JPY – Recent strong data from Japan has helped it remain firm against the Greenback and has rallied strongly on its crosses. Dollar has mild bids in the 107.40-55 zone with very buying interest on any break below 107. 106.50-65 holds good support and buyers should come up on that level. On the upside, resistance lies in the 108.15-25 zone followed by very strong resistance and selling interest around 108.75. The focus is on Japanese data to maintain its good results.
GBP/USD – The pair has taken cue from the Euro and fallen as well, data outcomes have deteriorated sharply and for now its support is seen in the 1.8075-90 zone with bottom pickers helping it stay above 1.81. A break below brings into focus the support in the 1.7990-1.8015 zone which is very strong and profit taking should ensure it being pushed back above 1.80. On the upside resistance continues in the 1.8240-55 zone followed by decent selling interest on any move above 1.83. The pair has mixed technical interest in the 1.81 region and could remain range bound on failure to break decisively in either direction.
AUD/USD – The pair finally went towards its lowest level for this year after it threatened to do so the last few weeks by breaking below 0.75. However strong support exists around 0.7475 with mild support in the 0.7525-40 zone, any break below 0.75 should bring in decent buying interest but a decisive break below 0.7450 could accelerate losses for the Aussie. On the upside resistance is strong in the 0.7625-40 region with decent selling interest around 0.7675.
Kunal Sharma
Forex Analyst
E-mail: kunal@easy-forex.com
Australian Financial Services License 246566
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