Last week’s developments showed further evidence that investors are moving away from risky assets as Fed is starting to pave the way for exit from stimulus measures. Stock staged a sharp reversal post FOMC with S&P closed the week at 1044, much lower than the intraday week high of 1080. Crude oil finally broke the medium term trend line support and dropped sharply lower to close at 66.02 level while Gold also lost the 1000 mark and closed at 992.4. The Japanese yen resumed prior rally and soared to new high against dollar and sterling, additionally supported by anti-invention comments from Japan. While sterling continued to be the weakest currency this month, canadian dollar is quickly catching up on the back of weakness in crude oil. Dollar staged a strong rebound after hitting new 2009 low and is starting to build up momentum for reversal.
G20 countries pledged in the financial statement to keep the economic stimulus support in place until sustainable recovery is assured. In addition, a framework was launched for acting together to rebalance economic growth, and establish tougher rules governing banks by 2012. Countries with significant deficits in their trade accounts promised to save more, while those with surpluses will strengthen domestic demand. The IMF will help them assess each others’ attempts to meet those objectives. The G20 leaders also agreed to phase out subsidies for fossil fuels in the “medium term,” without setting a deadline.
FOMC was the highlight of last week. Federal fund rates was unchanged at 0-0.25% as widely expected. Fed sounded optimistic on recovery and said the economy has “picked up following its severe downturn.” The committee expects the current fiscal and monetary stimulus to support strengthening of growth and return to higher levels of resource utilization in context of price stability. Inflation is expected to remain subdued for some time. Also, Fed pledged to continue to “employ a wide range of tools” to promote economic recovery and preserve price stability. Rates are ‘warranted” at the current exceptionally low level for an “extended period”. Fed said that it will “gradually slow the pace” of $1.45T purchase of agency mortgage-backed securities and agency debt and expects it to be completed by end of 2010 Q1. Purchases of $300 billion in Treasury securities will be completed by the end of October 2009.
Later in the week, Fed said that it will scale back the emergency lending program and reduce the combined initiatives down from $450b to $100b by January and will evaluate whether to maintain the Term Auction Facility on a permanent basis and put out for public comment a “range of possible structures for a permanent TAF.” Fed Warsh also said in an article in WSJ that policy normalization will likely begin before “it is obvious that it is necessary possibly with greater force than is customary” hinting that Fed might be aggressive in policy reversals. The events raised speculation that Fed is paving the way to exit from current stimulus programs.
Sterling was lifted briefly after BoE minutes revealed that the decision to keep rates unchanged, and more importantly keep the 175b pounds asset purchase program unchanged, was made by unanimous vote. Mervyn King and David Miles joined the unanimous vote after seeking 200b pounds in August and the switch argues that consensus is seen among the committee. The minutes said that “in absence of significant news about the medium term, the case for adjusting the program now was outweighed by the benefits of following through with the program.”
However, later in the week, the pound tumbled sharply a news report saying that BoE is going to host a “crisis meeting” with major economists this Tuesday to discuss the quantitative easing program, raising speculation that a major change to the monetary policy framework would be announced. The news triggered renewed concern that BoE will be cutting the deposit rates. BoE Governor King said to a UK newspaper that Sterling’s depreciation “will be helpful” to rebalance the UK economy to one that focused on exports, giving the green-light to further decline in the pound, in particular versus Euro.
On the data front, US durable goods orders dropped sharply by -2.4% in August. Existing home sales in US unexpectedly dropped to 5.10M annualized rate in August. New home sales rose slightly to 429k from downwardly revised 426k. Jobless claims dropped to 539k level. University of Michigan consumer sentiment was revised up to 73.5 in September. Eurozone PMI was mixed with manufacturing PMI missing expectation and rose to 49 only while service PMI rose slightly more than expected to 50.6 in September. German Ifo business climate rose less than expected to 91.3 in September. Canadian retail sales unexpectedly dropped -0.8% mom in July with ex-auto sales dropped -0.6%. New Zealand dollar was boosted by strong data during the week. Current account balance recorded first surplus in six years of 0.12b NZD. Q2 GDP showed the New Zealand economy unexpectedly got out of recession by growing 0.1% qoq.
Looking from the technical angle, dollar index dropped to new low of 75.83 but drew strong support from mentioned key level of 75.89 and rebound strongly. The case of reversal continued to build up but yet, there is no confirmation of bottoming with 77.09 near term resistance intact. Also, note that EUR/USD and AUD/USD are still holding above 1.4611 and 0.8589 support respectively while USD/CHF is staying below 1.0388 resistance. Reversal is also not confirmed in these pair yet.
Nevertheless, based on our view for further weakness in crude oil, stocks and possibly gold too, more upside in in favor in dollar in near term. As discussed before, the five wave sequence from March high of 89.62 is expected to complete after meeting 75.89 key support. Decisive break of 77.09 resistance will confirm that a short term bottom is at least formed and affirm this view and further break of 78.93 resistance will be the confirmation. We’re treating whole price actions from 88.46 as consolidation to the up trend from 2008 low of 70.70 and break of 78.93 will be the first early signal that such long term up trend is resuming. But whether the long term up trend will resume or not won’t change the view that strong rise should be seen to 81 level (38.2% retracement of 89.62 to 75.83).
The developments in other markets, expectation of some more weakness in crude oil and pull back in gold and stocks, also affirm our view in dollar. Crude oil’s sharp fall last week finally has the medium term trend line support firmly broken. A medium term is at least formed at 75.0 on bearish divergence conditions in daily MACD and RSI. Further decline is anticipated in near term to towards 58.32 key support level. Break there will confirm that whole medium term rebound from 33.2 has completed too.
Gold moved further away from 1033.9 key resistance last week by dropping to 991.6 level. With daily MACD crossed below signal line, a short term top is at least formed and we’re looking at the prospect of further pull back to 982 support or below. It’s too early to judge how important the top at 1025.8 is. But in any case, there is little prospect of taking out 1033.9 key resistance in near term. Hence, the change for sharp selloff in dollar triggered by Gold’s break of 1033.9 is little.
Looking at stocks, S&P 500’s sharp reversal last week also suggests that it has topped out in near term at 1080. Bearish divergence conditions in daily MACD suggests loss of upside momentum and some deeper pull back is in favor to be seen with prospect of retesting 1000 psychological level which is in proximity to 55 days EMA and medium term rising trend line support.
Other than dollar, the development in Japanese yen should also be closely watched in near term. USD/JPY and GBP/JPY have both fallen to new low last week. In particular, GBP/JPY dived through 146.75 key support level and completed a double top reversal pattern. EUR/JPY, AUD/JPY and CAD/JPY are still holding above near term support of 131.00, 76.38 and 78.52 respectively but these levels should be taken out sooner or later. The yen will continue to be supported by further drop in treasury yield as seen with yield on 30 years T-bone dropping to closed at new low of 4.093 last week.
In particularly, note that CAD/JPY was indeed the biggest loser last week. The sharp fall in CAD/JPY sent itself through the medium term rising trend line support and indicates that whole rise from 68.38 has completed after touching 38.2% retracement of 125.52 to 68.38 at 90.20. Further fall is anticipated to have at test on 78.52 key support next and break there will be the first alert that long term down trend from 125.52 is resuming.
Another key development to watch in emerging market stocks, in particular in China. Aussie is so far quite resilient among the major currencies. However, resumed weakness in Chinese stocks will likely give the aussie much pressure which should at least trigger a short term reversal. Shanghai A shares composite’s rebound should have completed at 3219.9 after last week’s steady decline. Whole down trend from 3651 level should be resuming and we’re looking at the prospect of a break of 2770 low in near term. If that happens, the AUD/USD should at least be dragged below 0.85 level while yen cross will tumble further on risk aversions.
The Week Ahead
While initial focus will be on reactions to G20 statements, much volatility is anticipated as the week goes on an economic calendar jam-packed with important data. ISM Manufacturing index, Personal Spending and Non-Farm Payrolls are the usually important events to watch. One thing to note is that expectation on these data are getting higher when markets expect rise in ISM to 54, Personal Spending to grow 1.1% and Non-Farm Payroll to drop below -200k level. That leaves risk in markets reactions more to the downside in case of disappointments. Additional focus will be on speech of Bernanke and other Fed officials on their view and ideas on exiting stimulus policies.
- Tuesday: Japan CPI; UK GDP Final; Eurozone Confidence; US Consumer Confidence
- Wednesday: Japan PMI Manufacturing, Housing Starts; Australia Retail Sales; Germany Unemployment; Eurozone CPI Flash; Swiss KOF; US ADP, Q2 GDP Final, Chicago PMI; Canada GDP
- Thursday: Japan Tankan, Retail Sales; German Retail Sales, Eurozone PMIs Final, Unemployment Rate; Swiss SVME PMI’ UK PMI Manufacturing; US Personal Income and Spending, ISM Manufacturing, Pending Home Sales, Bernanke Testimony
- Friday: Japan Employment; UK Nationwide House Price; Eurozone PPI; US Non-Farm Payroll, Factory Orders