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- European leaders agreed to set up the permanent rescue fund (or ESM) and replace it with the temporary rescue fund (or EFSF), which is likely to take effect in H2 2012.
- Portuguese 10-yr yield rose to Euro era high of 17.39% but managed to ease below 15% by the end of week, supported by considerable ease in stresses across the EU credit markets.
- PMI reports from China, Germany, UK and US showed expansion in manufacturing activities, thereby helping to ease fears of global recession during H1 2012.
- RBI Deputy Governor Gokarn stated that the central bank will cut interest rates if inflation starts to slow down.
- Euro was met with strong upside barrier at 1.32 levels as traders remained reluctant in pushing the currency higher noting lack of progress on Greece PSI talks.
- Yen inched closer towards the psychological 76.00 levels, which in turn prompted Japanese officials to issue strong verbal intervention threats.
- Rupee advanced to 3-month high of 48.67 against the Dollar, supported by strong inflows into domestic equities.
- This week focus will turn towards the ECB policy meeting on Thursday in which it is likely to leave rates on hold at 1.00% but give downbeat outlook on Euro area.
- BOE is likely to increase the size of its asset purchases and leave rates on hold at 0.50% during the policy meeting this Thursday.
- Stronger labour report from the US is likely to reduce hopes of QE3 in the near-term, which in turn is likely to support the Dollar against its G7 basket.
Sentiment: Positive
Last week: O –79.02 H – 79.57 L – 78.62 C – 78.94 Expected range: 78.00 – 80.00
After being hammered for 2 weeks in succession, the downside in Dollar was quite limited last week as traders found refuge in the US currency noting lack of progress on Greece PSI talks. Nevertheless, the upside in Dollar remained quite limited as stronger than expected manufacturing PMI data from across the world limited demand for safe haven assets such as US treasuries and Dollar. After beginning trading at 79.02, the DXY Index traded with a modest upside bias, rising to a high of 79.57 on Wednesday. However, with China, Germany, UK and US showing expansion in manufacturing activity in January, expectations grew that the global economy is likely to avoid recession in H1 2012, which in turn eased defensive bids for the Dollar, thereby sending the DXY Index to a 7-week low of 78.62 by the end of trading hours on Wednesday. However, with lingering uncertainties surrounding Greece, the Dollar retraced half of its losses to rise back towards the 79 handle on Thursday. Meanwhile, in a testimony to House Budget Committee, Fed Chairman Ben Bernanke said that the US remains quite prone to global shocks but he also added that the economy has shown modest signs of improvement since the past few months. Elsewhere, amongst the major economic releases from US, unemployment rate surprisingly fell to a 3-year low of 8.3% in January as compared with the forecast of 8.5%. Also, NFP jumped to 243k last month, which was well above the market expectations of 150k. Amongst other key economic reports, CB consumer confidence improved to 61.1 last month well below the forecast of 68.2, ADP payrolls rose to 170k while the December figure was revised down to 192k, whereas ISM manufacturing PMI rose to 54.1 as against a reading of 53.9 in December.
Movement in the Dollar is likely to be driven on the back of news flows coming out of the Euro zone. Should there be any fears of sovereign default within the 17-member area, the Dollar is likely to attract strong defensive bids against its high-beta counterparts, which in turn would send the DXY soaring higher towards the psychological 80.00 handle. However, comments from Federal Reserve officials will remain crucial for movements in the Dollar. Most of the Fed members have increased their dovish stance regarding the state of US economy, with some directly stating that more stimulus may be warranted in order to revive the economic recovery. Should such dovish stance continue to prevail, the Dollar is likely to continue its recent bearish momentum, in turn pressurizing the DXY to slide towards the 78.00 handle. There are very few economic releases that are scheduled for release this week from the US. As such, movements in Dollar will be largely driven on the back of international events, primarily from the Euro zone. Overall, we would remain neutral to slightly bullish on Dollar this week and expect global uncertainties to push the DXY index back towards the psychological 80 levels. Meanwhile, technical indicators are pointing at strong support at 78.00 levels. As long as it holds, near-term bias will continue remaining on the upside and the recent slide in DXY would be considered as correction rather than a reversal.This Week Key Events/Developments:- Thursday: Unemployment Claims; Friday: Trade Balance, Prelim UoM Consumer Sentiment.
Technical Perspective: DXY Index managed to hold above its 21-weekly EMA support of 78.65. With the weekly MACD line staying above its signal line coupled with RSI hovering above the equilibrium zone, a move towards 79.43 (200-weekly EMA) followed by 80.11 (23.6% retracement of 74.72 to 81.78) can be expected this week. However, break and stability below 21-weekly EMA will negate this view and turn bias lower for a possible move towards 78.18 (100-weekly EMA).
Sentiment: Negative
Last week: O – 1.3207 H – 1.3218 L – 1.3026 C – 1.3143 Expected range: 1.2850 – 1.3450
The Euro was unable to stabilize beyond its January 2012 peak as the currency was continued to be met with strong technical barrier at 1.3200 noting lack of outcome on Greece PSI talks for most parts of the week. As we speak, the European currency broadly consolidated most of its prior month advance against the Dollar. During the 1st couple of sessions, the Euro was subject to heavy profit booking as traders dragged down the unit to as low as 1.3026 on Wednesday. However, the Euro bounced back off its weekly lows to rise to as high as 1.3218 on Wednesday, being bolstered by strong manufacturing data from Germany as well as on the back of comments from China’s Premier Wen Jiabao that his nation are willing to increase its participation in the ESM. Nevertheless, gains in Euro were rather short-lived as the currency yet again nosedived back towards 1.3150/30 levels, which was partly in reaction to comments from EU member Junker that Greece PSI talks have been extremely difficult, while further adding that measures taken during the recent EU summit to tackle the ongoing crisis have been quite inadequate. Meanwhile, in the EU Economic Summit held on Tuesday, there were two key steps that were implemented in order to curb EU crisis. This included – (1) Agreement to set up the permanent European Stability Mechanism (ESM) and replace it with the current European Financial Stability Mechanism (EFSF). The ESM, which has a total lending capacity of EUR 500 billion, is likely to become operative from H2 2012. (2) Sanctioning a treaty on deficit control which is aimed at preventing a similar crisis from happening in future by ensuring that member nations do not spend excessively. This treaty is set to be signed up in March by 25 EU nations, including the 17 Euro zone members.
Near-term outlook on Euro remains quite uncertain at present. Though the currency has managed a strong start to 2012, it has been unable to rally and stabilize past the 1.3200 handle, despite of significant ease in stresses amongst major European bond markets. Should yields on European bonds continue to slide further (most notably Italy, Spain & Portugal), the downside in Euro is likely to be contained at the psychological 1.30 handle. However, any fresh negative development in Europe is likely to pressurize yields to move higher, which in turn would limit the rally in Euro to 1.3200 – 1.3300 band. On the data front, there are few noteworthy economic reports scheduled for release from Euro zone this week which includes German factory orders/industrial production. However, the major event this week will be the ECB policy meeting scheduled on Thursday. With inflationary pressures likely to fall across the 17-member area in the coming months, there will be pressure on ECB to consider lowering interest rates even further from the current 1.00% levels in order to support peripheral Euro area economies. However, the chances of a rate cut this week looks least likely and we expect the ECB to keep rates unchanged, but issue dovish comments regarding the outlook of Euro area. Overall, the Euro is likely to remain more prone to downside this week and may slide back towards the 1.30 psychological levels especially if there are any negative developments across Euro area. Meanwhile, technical indicators are pointing at strong resistance at 1.3245, which if continues to hold, would likely imply that a near-term top is in place.
This Week Key Events/Developments:
- Thursday: ECB Minimum Bid Rate, ECB Press Conference.
Technical Perspective: EURUSD was met with strong resistance at around 1.3245 (38.2% retracement of 1.4247 to 1.2625). The weekly stochastic line has managed to stay above its signal (%D) line. However, the MACD line is below its signal line while RSI has continued to remain below the equilibrium zone. Based on this, as long as the pair stays below 1.3245, immediate bias will remain lower for a possible move towards psychological 1.3000. However, break and stability above 1.3245 will negate this turn and turn immediate bias to the upside, with targets then seen at 1.3340 (21-weekly EMA).
Sentiment: Positive
Last week: O – 49.30 H – 49.80 L – 48.67 C – 48.69 Expected range: 48.00 – 49.35
The Rupee continued to appreciate against the Dollar for a 5th consecutive week, extending its rally to fresh 3-month high of underneath 49 levels. The Rupee was initially seen under pressure on Monday, falling from its weekly opening of 49.30 to as low as 49.80, being weighed down by strong month-end related demand for Dollar. However, the Rupee erased most of its slide since then, in fact tumbling to a 3-month high of 48.67 on Friday. Such strength in Rupee was largely driven on the back of broad-based weakness in US Dollar against the basket of major and Asian currencies. Besides this, strength amongst domestic indices coupled with an upbeat HSBC manufacturing PMI data also benefited Rupee to trade with a firm bias against the Dollar. Speaking of domestic indices, the benchmark BSE Sensex stabilized well above the psychological 17k mark while the broader NSE Nifty closed above the key 5200 technical resistance. Elsewhere, bonds continue to outperform during the prior week, with the benchmark 10-yr government bond yield falling to a 9-month low of 8.07% supported by continuing OMOs by the RBI.
The immediate outlook on Rupee will continue to depend based on how risk sentiments prevail globally. Positive global risk appetite witnessed since the beginning of January has been one of the key reason that has supported Rupee to strengthen against the Dollar. Should the same scenario prevail, Rupee is likely to extend its advance towards 48.18 technical support. However, any negative events particularly from Euro zone is likely to increase demand for US Dollar globally, which in turn would pressurize Rupee to inch closer towards prior weekly low of 49.80. Overall, we would remain cautiously bullish on Rupee this week and expect the currency to inch closer towards 48.18 resistance. However, any negative cues globally is likely to limit further rally in Rupee and bring modest correction up to 49.80. Meanwhile, weekly technical oscillators are continuing to point at bearishness in the pair for a possible move towards 48.18.
Technical Perspective: USDINR ended the week below the pivotal 49.08 support (50% retracement of 43.8550 to 54.3050). On the daily chart, the pair is seen trading very close to the 200-EMA of 48.67. With the weekly MACD and RSI showing strong bearish momentum, break and stability below 48.67 is likely to extend slide towards 48.18 (daily lower Bollinger band). However, if this support manages to hold, a modest pullback, possibly towards 49.08 resistance can be expected.
Sentiment: Negative
Last week: O –1.5722 H – 1.5882 L – 1.5654 C – 1.5798 Expected range: 1.5500 – 1.6100
The Pound Sterling defied weak US fundamentals and instead extended its advance for 3rd consecutive week against the Dollar bolstered by positive cues from global indices. The Sterling began trading at 1.5722 on Monday and was seen under modest pressure initially, sliding to a low of 1.5654. However, the UK unit reversed sharply since Monday, moving to a high of 1.5882 on Wednesday, which was its strongest reading since the past 10-weeks. Such a sharp surge in the Sterling was partly on the back of strength amongst global equities and partly due to an upbeat UK manufacturing PMI report, which surprisingly expanded (52.1) in January as compared with a contraction in December (49.7). However, with UK construction PMI disappointing on the downside (A: 51.4; F: 52.8; P: 53.2), the Sterling retreated from its 10-week high to inch back towards 1.58 levels on Thursday. Meanwhile, amongst other major economic releases from the UK, services PMI surprisingly rose to a 10-month high of 56.0 in January compared with prior month reading of 54.0.
After having hammered down an to 18-month low by the end of last year, the Sterling has rebounded quite strongly since then to inch back closer towards the psychological 1.60 levels. However, the upcoming week will be a key test which will determine whether or not the Sterling could actually breach the 1.60 levels. The BOE monetary policy meeting is due later this week, in which the central bank is all but certain to leave rates unchanged at 0.50%. However, more importance would be laid on whether or not the BOE would consider additional quantitative easing in order to support the UK economy. Should the central bank increase the size of its asset purchases (which is quite likely) during the next policy meeting, the Sterling is likely to pare its recent gains and tumble back towards 1.56 levels. On the data front, manufacturing production is the only notable report scheduled to be released from UK this week. Overall, we would neutral to slightly bearish on Sterling this week and expect rally to be contained below the 1.6000 handle. On the downside, move towards 1.5600 can be expected. Meanwhile, technical indicators are pointing at strong resistance at 1.5945, which if holds, a pullback towards 1.5720 is likely.This Week Key Events/Developments:- Thursday: Manufacturing Production m/m, Asset Purchase Facility, Official Bank Rate, MPC Rate Statement; Friday: PPI Input m/m.
Technical Perspective: GBPUSD was met with strong resistance at the 55-weekly EMA of 1.5852. The weekly RSI has risen towards the equilibrium zone whereas the MACD line has just crossed above its signal line. Besides this, the weekly stochastic line has stayed above its signal (%D) line as well as equilibrium zone. Based on all this, break and stability above 1.5852 is likely to extend advance towards the psychological 1.6000 levels. However, as long as 1.5852 holds, we expect modest correction in the pair for a possible move towards 1.5625 (55-daily EMA).
Sentiment: Neutral
Last week: O – 76.74 H – 76.77 L – 76.02 C – 76.44 Expected range: 75.75 – 77.75
The Japanese Yen strengthened against the Dollar for a 2nd week in succession, rising to its highest reading since the intervention conducted in October last year. The rise in JPY against the USD was broadly on the back of weaker-than-expected data releases from the US coupled with expectations that the Federal Reserve could introduce more stimulus in the coming months in order to bolster the US economy. This in turn led to JPY appreciating from its early weekly opening low of 76.77 to move to as high as 76.02 on Wednesday. However, traders remained quite reluctant in pushing the JPY below the 76.00 handle amid fears that BOJ could step into the markets and intervene to curb further strength in Yen. Meanwhile, data releases from Japan were quite positive last week which was seen as another key factor that supported strength in Yen. This included prelim industrial production rising 4.0% in December compared with a fall of 2.7% in October, while household spending increased by 0.5% in January as compared with expectations of a 0.1% fall.
With the Fed hinting at QE3 and pledging to keep rates on hold till 2014, the Dollar is likely to continue remaining under pressure against its major traded counterparts in the coming sessions. Besides this, any fresh trigger regarding the Euro zone worries is likely to increase the appeal for safe haven currencies. Both these factors in turn are likely to keep the Yen in an appreciative mode. However, 76.00 will be the key level to keep an eye on. Any dip in the pair below this level could be met with strong intervention from BOJ, which in turn could send the pair soaring higher towards 78.00. On the data front, there are a host of economic reports scheduled to be released from Japan this week but none are likely to have any major impact on the currency. Overall, we would remain neutral on Yen this week. We expect further appreciation in the currency to be strongly contained in the 76.00 area, whereas weakness in JPY (barring BOJ intervention) is likely to be contained at around 77.00 levels given the dovish stance by the Fed on the health of US economy. Meanwhile, technical indicators are pointing out at strong support at 75.75 levels, from where a pull-back towards 78.00 can be expected.
Technical Perspective: USDJPY was unable to move past the 5-weekly EMA resistance of 76.83 last week. With the weekly RSI continuing to remain below its neutrality zone, immediate bias will continue remaining on the downside for a possible retest of 76.00 levels. However, with the weekly stochastic hovering below oversold area, stability above 5-weekly EMA will ease the downside bias and bring further gains in the pair, possibly towards 77.33 (21-weekly EMA).
Sentiment: Neutral
Last week: O –0.9133 H – 0.9250 L – 0.9114 C – 0.9157 Expected range: 0.8900 – 0.9400
The Swiss Franc hovered in a relatively narrow band during the previous week as movements in the currency remained quite subdued amid lingering fears that the SNB could intervene in the forex markets against Euro. On an intraday basis, the Franc hovered in a band of 0.9250 on the downside and 0.9114 on the upside, the entire move taking place on Wednesday itself before it consolidated for the remainder of the week. Meanwhile, the major focus last week remained on movements in EURCHF, which fell to as low as 1.2031. However, traders remained extremely reluctant in pushing the pair further lower towards the pivotal 1.20 floor. Economic releases from Switzerland during the prior week were quite disappointing. The Swiss retail sales rose 0.6% during December 2011, which was well below its prior reading of a 1.8% rise. SVME PMI unexpectedly posted a contraction of 47.3 in January as compared with the expectations of 51.7. Elsewhere, trade balance surplus narrowed down modestly to CHF 2.07 billion in December compared with prior month reading of CHF 2.95 billion.
Movements in USDCHF during the coming sessions will be closely impacted based on how EURCHF moves. Should EURCHF touch 1.20, it could be met with massive Franc-selling intervention by the SNB which could weaken the Swiss unit considerably from the current levels (against both Euro and Franc). However, should EURCHF continue to remain above the 1.20 band, further consolidations can be expected against the Dollar. On the data front, consumer climate and headline consumer inflation are the only noteworthy economic reports scheduled for release later this week from Switzerland. Overall, we would remain neutral on Franc this week and expect movement in the currency to largely depend on whether or not the SNB would intervene in the forex markets to curb CHF strength against EUR. Meanwhile, technical indicators are pointing at bearish momentum with possible targets seen at 0.9000, should USDCHF manage to break below 0.9105.This Week Key Events/Developments:Technical Perspective: USDCHF managed to stay above the pivotal 0.9105 levels, where both 21-weekly as well as 55-weekly EMAs are seen converging. With the weekly RSI bouncing off the neutrality zone, strong support is expected at 0.9105, which if holds, a rally towards 0.9267 (5-weekly EMA) followed by 0.9421 (100-weekly EMA) can be expected. However, break below this support will negate this week and flip near-term bias to the downside, for a possible move towards 0.8990 (23.6% retracement of 0.7066 to 0.9584).
Sentiment: Neutral
Commodity currencies continued their bullish momentum for 4th consecutive week against the US Dollar, being boosted by strong cues from global indices. Most of the rally seen during the course of past few sessions has been broadly on the back of strong manufacturing PMI reports especially from China and Germany, both of which surprisingly showed an expansion in manufacturing activity. This in turn eased worries of recession during H1 2012, thereby increasing the appetite for high-beta currencies. On a weekly basis, the Australian$ advanced over 2% from Monday’s low of 1.0526 to a high of 1.0756 on Thursday, which was its strongest reading since the past 5-months. The New Zealand$ too followed suit as it gained approximately 2.5% from its Monday’s low of 0.8155 to a 5-month high of 0.8356 on Wednesday. Meanwhile, the Canadian$ advanced over a percent from 1.0070 to 0.9963. The relative underperformance in Loonie was partly on the back of weakness in Crude oil and disappointing economic releases from the US. Meanwhile, amongst the key economic reports released last week, the Australian trade balance surprisingly posted a surplus of $1.71 billion in December, which was well above the prior reading of $1.22 billion.
With risk appetite rebounding quite strongly since the turn of the year, commodity currencies have managed to outperform most of its other major traded counterparts. Should risk appetite continue to remain strong, we expect these units to gain further ground against the US Dollar in the coming days, which could in turn send the Aussie towards 1.10, Kiwi towards 0.85 and Loonie towards 0.9700. Meanwhile, the key event to keep an eye on this week includes the RBA monetary policy meeting, in which the central bank is widely expected to cut its benchmark cash rate by 25 bps to 4.00%. Should this turn out to be true, the upside in Australian Dollar is likely to be contained below 1.10 as it would limit the demand for AUD due to narrowing yield differentials with the US. Besides this, focus will also remain on Chinese headline consumer inflation data. Should it show signs of slowing inflation in the world’s fastest growing economy, speculation of rate cuts in China is likely to mount, which in turn would increase demand for high-beta currencies. Overall, with no signs of reversal as of yet, we would remain cautiously bullish on the outlook of commodity currencies in the coming days. However, with near-term oscillators hovering near overbought areas, sharp rally from current levels look unlikely.
This Week Key Events/Developments:
- Monday: AUD Retail Sales m/m, CAD Ivey PMI; Tuesday: NZD Labor Cost Index q/q, AUD Cash Rate, AUD RBA Rate Statement, CAD Building Permits m/m; Thursday: NZD Employment Change q/q, NZD Unemployment Rate, CNY CPI y/y; Friday: AUD RBA Monetary Policy Statement, CNY Trade Balance, CAD Trade Balance.
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