FX Trading Australia Market Weekly Outlook – 31/01

Last couple of weeks has seen prices driven more by technicals and comments from officials rather than fundamentals but that could change this week. If most majors don’t break out this week in spite of the wealth of events for it do so, then we could see the same range played out for a few more weeks.

Contradicting comments from the Chinese side were having a yo-yo effect on prices but the broad consensus is for the G7 communiqué to have nothing new in regards to currency changes. Apprehension of the Dollar’s slide by European officials would continue but little effect is seen of it. Bush’s state of the union address is another highlight and a definitive plan to reduce deficits irregardless of the time frame could be another Dollar positive event.

Rate rise of 25 bps is nearly a given mid week and an above 200K number in Payrolls could help the Dollar end the week on a high note. But since deficit concerns persists the Dollar is unlikely to runaway with its gains and no matter how positive the events turn its favour this week, it is unlikely to gain much beyond the recent ranges.

The market is also realizing that a simple solution of the Dollar weakening and the deficits reducing is unlikely to eventuate. The Dollar has been weakening the last 3 years but hasn’t reduced the deficit, of course the interest rates have been low and that is about to change. Still other concrete solutions are required to solve this imbalance; other nations know this and are not happy taking the bullet of a soft Dollar environment as was seen from comments from European and Canadian officials with the appreciation of their respective currencies threatening growth.

Key data for the U.S. starts on Monday with the release of the Personal Income and Spending; both should increase due to holiday bonuses and shopping. New home sales should increase while Chicago PMI is expected to slightly decline. ISM Manufacturing is on Tuesday, fall in orders would lead to a decline. On Wednesday the FOMC would announce their interest rate decision with expectations of a 25 bps point hike. Thursday has Factory orders expected to decline again while Non-manufacturing ISM is estimated to slip lower. Friday has the crucial Non farm Payrolls with expectations of a figure around 200 K.

For the Euro-Zone, key data kicks off from Monday with the zone’s Biz Climate Indicator; expectations are of an increase as domestic demand has picked up recently. Also on tap are the Industrial, Economic, Consumer & Services Confidence survey, a slight rise is expected in all the sectors. Tuesday has PMI Manufacturing from across the Zone with expectation of a slight rise as domestic demand has picked up. Wednesday has German unemployment rate with expectations of an increase. Thursday has PMI services from across the zone, slight increase is expected while the ECB should leave rates unchanged. Friday has Retail Trade expected to increase on good holiday spending while German factory orders should also rise.

For the U.K., Monday has GFK Consumer Confidence survey which is expected to remain low. Mortgage lending figures are on Tuesday with expectations of a decline while PMI Manufacturing is expected to be unchanged. Wednesday has PMI Construction with expectations of a fall. Thursday has PMI services with expectations of a slight increase.

For Japan, Housing starts released on Monday are expected to fall. Tuesday has official reserves with expectations of an increase. Friday has the Leading economic indicators as well as the Coincident index the result is expected to be on the weak side.

For Australia, the Trade Balance figures are on Tuesday with expectations of a decline in deficit. On Wednesday the RBA is expected to keep rates on hold at 5.25%. Friday has Retail sales figures with a rise expected.

The Euro continues to maintain its range with good support around 1.2950 and even stronger around 1.29. Attempts to break above the strong resistance zone of 1.3120-40 have failed leading to range bound trading. A break above this zone could accelerate gains towards 1.33 and beyond.

The Yen has slipped due to comments from China over the weekend, for now good offers exist above 104.25 for the Dollar. A break above that could lead us towards 104.75. On the downside decent Dollar bids have moved up to 103 with stronger ones around 102.50. General Dollar weakness could send the pair into the 101 region but lead would be taken from Yen’s performance on its crosses.

The Pound faces very stiff resistance around 1.8940; a failure to break above it could send it lower towards 1.8775. If Dollar gains broadly on other majors as well then the pair could go down towards the strong support zone of 1.8640-55.

The Aussie faces stiff option barriers above 0.78 while IMM positioning suggest overhang of longs which could work against it. A break above it leads us to 0.7875-0.79 which acts a key resistance zone. Support has moved up to 0.76 and stronger one around 0.7550.