Currency Outlook - 11th October 2009

Salam,

It's been a while since my last weekly analysis. Hopefully I can continue to consistently update my blog with the weekly analysis and improve on my performance.

Fundamental Analysis

USD
Greenback strengthened drastically on Friday while at the same time stock markets rose.

Usually, they would move on the opposite way round due to risk appetite with USD considered as a safe haven currency. So now what does it mean?
Has the currency reached a bottom and decoupled as a carry trades’ currency?

I would think it would be too soon to say that USD has decoupled as a carry trade and safe haven currency. The reason the sudden surge on Friday apart from strong data i.e lesser unemployment claims and improving trade balance, was the strong denial from oil-producing nations as well as Japan, Russia about the rumor circulated earlier in the week that they plan to phase the USD out as the primary payment for oil deals.

This week, key data for USD: Retail sales and University of Michigan sentiment reports, CPI statistics and FOMC minutes will tune more directly into interest rate speculation.

An excerpt from www.fx360.com:

“According to the latest CFTC report, forex positioning in the futures market is nearing extreme levels. For example, net short positions in the British pound rose against the dollar to the highest level ever while long positions in the euro rose to the highest since January 2008. Long positions in the Canadian dollar also doubled while long Australian dollar positions remained near 1 year highs.

The only currency that traders trimmed their positions in was USD/JPY, but even then short USD/JPY positions remained near 1 year highs.

This confirms our belief that the short dollar trade has become very overcrowded and because of that, the dollar is setting up for a rally. Next week’s economic reports could provide the necessary catalyst.”

Could we see a continuation of a strong USD next week?

Euro
Signs of a potential double top?
On the daily chart, the price is looking to make a double top but this depends on the performance in the coming week. If the USD continues its Friday’s performance into the coming week, there is an outside chance for this to happen.

European Central Bank’s neutral stance during their recent monthly policy meeting could potentially creates some downside risks for the currency in the near term. ECB President Trichet seems to be somewhat concerned about the appreciation of the euro, as he said that “excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability.”

Still, we must look at the fundamental which support the movement. Looking next week’s data, among the highly-impacted data includes:

On Tuesday, the German ZEW survey – a gauge of investor confidence – is projected to edge up to 58.8 for the month of October, the highest since April 2006, from 57.7.

On Wednesday, the August reading of Euro-zone industrial production is forecasted to rise by 1.2 percent, which would be the first increase in 3 months and the largest rise since January 2008

On Thursday, the final reading of Euro-zone CPI is anticipated to confirm that the annual rate fell to -0.3 percent in September from -0.2 percent.

On Friday, the Euro-zone trade balance is projected to narrow to 2.5 billion euros for the month of August, which would likely reflect a drop in exports but run counter to expectations for a rise in industrial output.

Cable
Signs are still mixed for the UK economy. Industrial output tumbled 2.5 percent in the month of August—far worse than the consensus forecast for a 0.2 percent gain. The figures overshadowed bullish housing data and an effectively GBP-bullish Bank of England rate decision.

This week, highly-impact data includes inflation (Tues) and jobless claims (Wed). Initial concensus estimates are showing that inflation maybe is slowing down (exp. 1.3% y/y compared to 1.6%y/y last mth) while claims and unemployment rate are both expected to increase. With such weak data were to materialize, it would keep pressure on the BoE to maintain record-low interest rates and quantitative easing measures.

Aussie
Australia became the 1st nation among the major countries to raise its interest rates. RBA decided to raise int. rate by 25bps to 3.25%.

Analysts expects that following the bullish statement from RBA, there’ll be another rate hike in the next meeting in Nov. and the benchmark rate could be as high as 5% in mid-2010.

The currency, to me, seems to be the best place to park money for very longer term horizon (3-6months).

Kiwi
Kiwi has been strengthening relentlessly against USD this year, almost following the same pattern as Aussie. However, while RBA unexpectedly raised their rates last week (followed with strong economic data), RBNZ Governor Bollard has explicitly expressed his intentions to keep his nation’s benchmark lending rate unchanged at 2.50 percent until “late” next year. These are glaring discrepancies and they will not hold out forever.

Now, when it will finally correct? Or will it correct?

Looking at the economic data coming out this week: Retail sales, business activity and housing sales will offer a relatively complete picture of the economy.And only then we can see a clearer picture of the economy.


Technical Analysis - Trade what you see..not what you want to see..

Aussie
Possible retracement ahead should it fail to break the channel trendlines (colored light blue).

My preference would be for a possible buy when the price does make a correction as at current level, it would be risky for me to enter any positions.

Cable
Currently is finding its support around the 1.5840 levels, which is almost near my 38.2 Fibo level. Should the price breach this level, I would place a sell order, with a target profit of around 100-200pips. Hopefully bear is still in this pair.