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WEEKLY FOREX REPORT 01-12-04 By Kathy Lien and Patrick Dyess
TECHNICAL OUTLOOK (Based upon weekly charts)
EUR/USD Weekly
It has been a one-way market for over two months now ? keeping in-line with the theme of the past 4 years more or less. Following three weeks of fresh all time highs, the pair seems to have run out of steam as it butts against the upper band of the 4-year old regression trendline. Intraweek studies support the inference; however it is unwise to attempt to pick tops in a trends like this one.
As we noted two weeks ago, ??the top of the regression channel should provide solid resistance in the event of a break above Jan- Feb levels?.? And a break did ensue, and as we noted above, we do appear to be in a holding pattern at these respective levels. Contrarily, the regression centerline, coupled with the near confluence of the 52 and 26- week SMA should provide considerable support in the unlikely even of a 700- pip retracement. Though, a move to the previous all time high seems plausible, and may be supportive. Interestingly, The RSI is just now reached the ?overbought? reading as Stochs? appear to be loosing steam in the region. But, a similar indication took place mid-?03 when the pair reached then all time highs only to gather more ?buy on the dip? momentum later still.
All in all, one should be weary of a retracement but not convinced of an end to the overt trend in the event of such. Thus, buy on the dip is favorable strategy for those not committed and those already positioned long should expect a few down downs before a resumption of the trend. Moves below the 100-day moving average however, should call this inference in to question.
USD/JPY Weekly The H&S formation spanning early ?01 to early ?03 seems to be encouraging macro traders to take the pair lower, adding up on Yen holdings. Techs? beyond the formation have been mixed providing little direction as of late. However, the pair trades well below the negatively sloping 26-week SMA and flat 52-week. Stochs have found a base at deeply depressed levels, but the indicator seems rather useless in respect to its worth when applied to the EUR or CHF.
Historical support (off this chart) comes in just above parity and from the looks of recent price action the pair may be heading for that region sooner than later; although, local support comes in at these levels down to parity. Solid resistance comes in overhead at the 110.00 echelon, with a descending resistance created by the regression trend centerline.
GBP/USD Weekly
This chart really does say it all, with the pair making fresh 12-year highs at the moment we captured this image. The patterns are obvious, double bottom and intraweek pennant all add up to a virile bid; though counter trend players see this as a pot of gold. The pair is well above the upper limits of the aging trend as the commonly watched oscillators clearly indicate ?overbought?. However, very few are willing to jump in front of a moving train, thus a top candle formation will be next in the order before anyone is going to start applying pressure to these bulls.
The first level of sizable resistance, if not right here is rather difficult to gauge as we have recently moved into uncharted territory. Nevertheless we have chosen to lean on the pivot levels for a S/R. On a monthly range, the closest pivot falls below present pricing at 1.8842. The pivot R1 comes in overhead at 1.9386 with the R2 coming into play at 1.9675.
As we noted two weeks ago, ??The overall outlook as rather bullish for the cross as the trend clearly indicates?.? and naturally we must reaffirm given the recent one-sided price action. Nevertheless, traders must remain aware of the fact that a doji, shooting star, hanging man or any variation of such could be followed by a fierce sell-off.
USD/CHF Weekly
Not unlike any of the other major currency pairs?, the slow toiling demise of the USD is no more apparent than when compared to the single ?safe-haven? currency of the swiss franc. Leading the pack in a sense, the synthetic moved below Jan-Feb support, providing a leading indicator to what has recently taken place in the EUR.
The drop into the support was rather ferocious though, as the pair fell over 6% in recent months. However, like the EUR, the RSI is indicating ?oversold? as Stochs? make a dead-cat bounce at deeply depressed regions.
Retracements are likely to be short lived, as there is little or no reason for the pair to rise. Solid support has been eyed at 1.1300/50 with the base of the trend regression lines well below that level. Nevertheless, one should pay close attention to the daily oscillators and the ability for them to move higher. If the studies do so dramatically, the continuation is likely; contrarily, if they mirror the larger time frame watch for the ladder
Week Ahead
The euro continues to hold onto its gains even as personal consumption picks up in the US, driving growth higher by 3.9% in the third quarter. The market had expected Q3 GDP growth to remain unrevised at 3.7% and should have been pleasantly surprised by the improvement. Although some can say that the dollar rally was tempered by a weaker Chicago PMI and consumer confidence, the market?s reaction to the 8:30 EST following yesterday?s GDP release was muted at best. This leaves Friday?s non-farm payrolls release the next possible catalyst for a meaningful correction in the euro. According to a report released a few years ago, GDP has fallen in importance because most of its components are known before the actual release. The significance of non-farm payrolls on the other hand is growing in importance, especially with the market tying future growth in consumption to rebounding employment. The outlook for the US dollar remains uncertain with the market struggling to decide which is more important ? strong growth or the deficits. The Institute for International Economics was the latest to chime in and say that the dollar needs to correct in order to close the current account gap. On the growth end, although the US data released yesterday was mixed, the underlying tone still paints a positive picture for the outlook of the US economy. Not only did GDP growth surprise on the upside, personal consumption also increased to the strongest level since December 2001. Although personal spending still outpaced personal income in October, the gap is narrowing. Inventories also fell which suggests that activity could be robust in the last quarter of the year, as companies restock to meet holiday demand. Manufacturing activity in the Chicago region expanded for the 19th consecutive month. There was particularly strong growth in the employment component, which leads in well to Friday?s non-farm payrolls release.
KEY EVENTS LAST WEEK:
? Euro Continues To Make Highs Over Thanksgiving Day Holiday ? Yen Stalls On Data Without Help From Central Bankers ? Pound Breaks 1.90 After Economic Uncertainty
Euro Continues To Make Highs Over Thanksgiving Day Holiday
The unwavering uptrend in the euro persisted into the Thanksgiving Day holiday in the US. Prior to the holiday, the ECB said that EU banks may have cut dollar holdings in the first half of this year in order to reduce foreign exchange risk. This is becoming quite the popular action to take with net sales of dollar denominated assets by the Japanese and Russia recently suggesting that a further decline in the dollar could prompt them to adjust their reserve allocations. Meanwhile, European exporters are also suffering greatly from the rise in the euro. However, many companies, including DaimlerChrysler and BMW remain unhedged or only partially hedged against currency exposure. Any further rise in the euro could hurt earnings as well as force many exporters to hedge last minute, which could lend additional support to the euro. On Monday, the dollar strengthened against the euro ahead of a busy US and Eurozone economic calendar. The risk this week is for a modest correction in the EURUSD. US economic data is expected to reflect the fact that the stronger euro and weaker dollar is benefiting the US at the expense of Europe. Although the longer-term outlook still calls for a further dollar decline to correct the current account imbalances, the significance of the data expected this week should shift market forces temporarily. Meanwhile, the euro continues to remain relatively immune to verbal intervention from ECB officials. ECB President Trichet and council member Caruana reiterated their displeasure with the "brutal" moves in the euro. More speeches are in store for later this week, none of which are expected to have much impact on the euro.
Yen Stalls On Data Without Help From Central Bankers
Last week, the dollar continued to slide against the Japanese yen on better than expected tertiary activity data and news that winter bonuses are expected to increase by 3.45%. However losses remained limited as the threat of intervention looms in the market. Friday saw quite a bit of volatility in USDJPY from false allegations that China was considering joining the party in reducing their US Treasury holdings, but this was over as soon as Chinese officials denied the statement. Helping to fuel further gains in the yen was news that Japan saw the biggest net equity inflow since March over the past week. The open of trade this week saw the dollar?s modest rise against the Japanese yen for the second consecutive trading day. Meanwhile, a weaker than expected retail sales report for the month of October gave the dollar further reason to rally against the yen. Retail sales fell -1.4% yoy in October against expectations for a more modest 0.4% decline. The following day, not only did the jobless rate increase and workers spending rise by less than expected, industrial production was negative for the second consecutive month while small business confidence retreated. There is an article in the Nihon Keizai Shimbun that says that the way the Japanese government manages uncertainty risk from the US and China will dictate whether they are able to avert an outright economic downturn. The Ministry of Finance has been relatively patient at this point. This is partially because speculative positioning is only half that of the extreme levels that we saw in February of last year. Also, many firms are expected to be properly hedged which reduces intervention pressures. Nevertheless, in the context of slowing growth, we continue to caution about intervention risks.
Pound Breaks 1.90 After Economic Uncertainty
The British pound continued to soar last week and stopped short of 1.90 right before the weekend. Friday?s UK GDP report showed quarterly GDP growth being left unrevised at 0.4%, while annualized growth was revised upwards to 3.1% from 3.0%. This however, was still a slowdown from the 0.9% quarterly and 3.6% annualized growth that was seen in the second quarter. Rising interest rates and higher oil prices were likely to have slowed manufacturing and brought down consumer spending. Also, due to the rate hikes, housing prices have declined since August and economists have lowered their expectations for growth based on concerns that the end of the 5-year boom in the housing market will weigh more heavily on consumer spending in the future. Data released Thursday confirmed the deteriorating outlook in the UK economy. Mortgage lending continued to decline while the CBI issued a downbeat assessment of the economy. The CBI industrial trends index also took a sharp dive from -12 to -16 while the export orders index fell from -21 to -11. Weak demand in the UK and abroad continues to hurt the outlook for the UK economy. Although the Gfk consumer confidence index increased to -4 from -6 in the month of November, the index is still negative and does not change the overall slower pace of growth. The disappointing domestic data and expectations for stronger US data this week made the 1.90 barrier seem difficult to break. This all changed on Tuesday when encouraging words from BoE Governor King triggered a 1% surged against the dollar as it broke above the psychological 1.90 level. According to King, the slowdown in the UK economy is temporary and data for the fourth quarter has been stronger than expected, and therefore it may be an ?exaggeration? that a ?serious slowdown? may be occurring. This came on a day when retail sales increased to the highest level since July and house prices increased 1.0% m/m. Although this is a quite refreshing change from the weaker data reported over the past few weeks, it does not shift the outlook for the UK economy, which is that a continued slowdown is in store
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