Make Money Investment » Blog Archive » Weekly Outlook: Yen Volatility to Increase

Weekly Outlook: Yen Volatility to Increase

Action Insight | Written by ActionForex.com | May 19 07 18:55 GMT |
Forex Weekly Review and Outlook Yen Volatility to Increase

Dollar generally strengthened last week despite mixed data out of US, except versus the stella performance Canadian dollar which broke 30 year high on a string of strong data. Sterling continued to be pressured after disappointing inflation and retail sales. Meanwhile, the Japanese yen were pressured by continuous carry trade until Friday’s PBoC announcements triggered some brief recovery. Economic calendar is rather light this week but nevertheless still feature some heavy weight data that could trigger move the majors. Meanwhile, the chinese stock market’s reaction to PBoC on Monday’s open will also be closely watched which could spark some volatility in the yen.
Prev Week’s High Prev Week’s Low Prev Week’s Close Last Week’s High Last Week’s Low Last Week’s Close Change (pips) Change (%)
EURUSD 1.3627 1.3462 1.3524 1.3609 1.3464 1.3507 -17 -0.13%
GBPUSD 1.9997 1.9759 1.9811 1.9873 1.9699 1.9745 -66 -0.33%
USDCHF 1.2221 1.2080 1.2187 1.2281 1.2124 1.2272 85 0.70%
USDJPY 120.53 119.46 120.17 121.38 120.02 121.12 95 0.79%
USDCAD 1.1168 1.1005 1.1105 1.1124 1.0873 1.0886 -219 -1.97%
AUDUSD 0.8334 0.8203 0.8312 0.8349 0.8201 0.8233 -79 -0.95%
NZDUSD 0.7401 0.7249 0.7338 0.7403 0.7264 0.7303 -35 -0.48%
EURJPY 163.40 161.05 162.54 163.87 162.50 163.60 106 0.65%
EURGBP 0.6828 0.6781 0.6826 0.6856 0.6821 0.6839 13 0.19%
EURCHF 1.6505 1.6413 1.6485 1.6581 1.6478 1.6578 93 0.56%
GBPJPY 239.75 236.41 238.14 239.85 237.72 239.13 99 0.42%
GBPCHF 2.4309 2.4088 2.4151 2.4243 2.4059 2.4230 79 0.33%
AUDJPY 100.32 98.50 99.90 100.42 99.12 99.67 -23 -0.23%

Dollar managed to extend rebound against majors despite mixed data last week. On the positive side, both regional Fed survey from NY State and Philadelphia came in above expectation. Industrial production rose 0.7% in Apr, also beat expectation of 0.3%. These are consistent with the strength in ISM manufacturing index with suggest that the worst could be over and more expansion would be seen in Q2 and beyond. Initial jobless claims defied expectation again and fell to a four month low of 293k from revised 298k. This was the second consecutive weeks that initial claims stayed below 300k and suggests that job markets in US is still solid. In turn, resilient job market could probably counter that negative effect of slowdown of housing sector on consumer spending.

On the negative side, consumer inflation moderated more than expected in Apr. Headline CPI slowed from 2.8% yoy to 2.6% yoy, below consensus of 2.7%. Meanwhile, core CPI also slowed from 2.5% yoy to 2.3% yoy, below expectation of 2.4%. Moderation in inflation is consistent with the view that the US economy is continuing to grow below its potential. While core inflation remains above Fed’s comfort zone, focus will likely be shifted more towards growth if core CPI could settle below 2.5% in the coming months. But it’s still too early to conclude that Fed will cut rates in 2H yet and will probably need to have persistent deterioration in growth data in Q2 to to convince the FOMC members to consider it. And that is not seen so far in Q2’s data, except in the housing sector. NAHB sentiment index which fell to 30 in Apr, reaching the lowest since 91. Building permits tumbled sharply by 8.9% to 1.43m, lowest in almost a decade. Even though housing starts rose 2.5% to 1.528m in Apr, the data still suggested that weakness in the housing market remains and will likely continue through Q2.

From Eurozone, both Q1 GDP rose solidly by 0.6% qoq, 3.1% yoy, beating expectation of 0.5% qoq, 2.9% yoy. Though it moderated slightly from Q4’s stella 3.3% yoy, it’s still supportive to further rate hikes from ECB beyond June.

Sterling continued to correct lower last week on the reason that prior strong rally was probably due to over reaction to Mar’s strong CPI and over expectation on further tightening from BoE. PPI input rose 0.7% mom only in Apr, dragging yoy rate to -0.2% fall. However, note that PPI input ex food, tobacco and petrol indeed rose 0.2% mom, pushing yoy rate from 2.2% to 2.3% which is still much higher than Jan and Feb’s rate. Also, PPI output rose 0.2% mom, 2.5% yoy, inline with expectation and is still higher than last Q4 and this Q1’s rate. After all, overall pipeline inflation is still strong. However, CPI came in much weaker than expected. CPI moderated from 3.1% yoy to 2.8% yoy in Apr, back below BoE’s tolerance level but still way above the 2% target. Both RPI and core CPI slowed too.

The Quarterly Inflation Report from BoE today as basically consistent with market’s view that BoE is not yet done with May’s hike in the current tightening cycle and another hike will likely be seen in Q3. On balance, the MPC’s assessment of inflation is “similar” to the prior report in Feb that price growth “falls “falls back sharply to below the target” by mid-2008 and rebounds thereafter “to settle around the target” in two years time. Risks are viewed on the upside. Growth expectations are “very similar” to prior report and in line with the 2.8% ten-year average. The most important part of the repost is that the above forecasts are based on the assumption that “Bank Rate follows a path implied by market yields”. With market yield now implying slightly above 5.75% by year end, it’s likely that BOE will have another hike in Q3. However, it seemed that one more hike is not enough to satisfy those ultra-bull of sterling that pushed it to above 2 against dollar and thus Sterling continued to correct lower.

The Japanese yen continued to be pressured last week, in particular after Q1 GDP slowed more than expected to 0.6% qoq, 2.4% annualized versus consensus of 0.7% qoq, 2.7% annualized. Prior quarter’s growth was also revised down from 1.3% qoq, 5.5 % annualized to 1.2% qoq, 5.0% annualized. The biggest disappointment was the slump in capital expenditure with unexpectedly dropped -0.9% comparing to estimate of 0.5% rise and prior quarter’s 2.3% rise. BoJ kept rate unchanged at 0.5%. Economic assessment was kept unchanged which expected moderate expansion in the economy. BoJ reiterated that CPI should continue to hover around zero in the near-term but trend higher over time. From data’s point of view, there is little chance BoJ will change the tightening pace any time soon and rate gap with Euro will continue to widen than narrow. Thus, EUR/JPY also edged higher to new record high of 163.89 last week.

However, there were some volatility in the yen triggered by a couple of announcements from PBoC. Firstly, the Chinese central bank widened the yuan trading band so that yuan will be allowed to move as much as 0.5% either side of a daily fixing rate against the dollar, up from 0.3%. This means that the yuan is now allowed to appreciate faster. Secondly, benchmark lending rate is raised by 18bps from 6.39% to 6.57% to cool growth while one year deposit rate is raised by 27bps from 2.79% to 3.06%. The 6.57% lending rate is the highest in more than 8 years and this is the first time since 93 that China raised deposit rates more than lending rates. Thirdly, reserve ratio was raised from 11% to 11.5%, which is the fifth increase this year. While faster appreciation of yuan is usually yen positive, PBoC’s act to cool the stock market has triggered further risk aversion carry trade unwinding in the Japanese yen on fear that the Chinese stock market will open with a selloff next week.

Canadian dollar continued to be strong last week and broke 30 years high against dollar on a string of strong data. Headline CPI rose 0.4% mom, 2.2% yoy in Apr comparing to expectation of 0.3%, 2.1%. Core CPI also beats consensus by rising 0.2% mom, 2.5% yoy. Wholesale sales rose strongly by 1.9% in Mar vs consensus of 0.5%. Headline retail sales rising 1.9% mom in Mar, much better than expectation of 0.8%. Meanwhile, ex-auto sales rose 1.1% mom, inline with forecasts. Persistent strength in growth as well as steady rise in core inflation could prompt the BoC to consider to restart the tightening cycle again if the trend persists.

Suggested Readings

- http://www.actionforex.com/forex_analysis_and_forecasts/economic_calendar/summary_5%1021_-_5%1025_2007051821903/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_weekly_reports/weekly_focus%3a_whatever_happened_to_the_stabilisation_in_the_us_housing_market?_2007051821889/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_weekly_reports/economic_outlook%3a_the_investment_puzzle_in_the_us_2007051821874/
- http://www.actionforex.com/forex_analysis_and_forecasts/long_term_forecasts/long_term_analysis_-_usdjpy_and_eurjpy_2007051821848/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_weekly_reports/usd%10chf_-_the_pair_to_short-term_range_trade_2007051821902/
- http://www.actionforex.com/forex_analysis_and_forecasts/forex_fundamental_analysis_reports/new_zealand_rates_hinge_on_the_persistence_of_consumer_spending_2007051821901/ EUR/USD

Despite initial rebound to 1.3609 initially last week, EUR/USD’s upside was limited below mentioned 1.3627 resistance and then weakened to as low 1.3464. With 1.3627 as well as short term rising channel support turned resistance remains intact, short term outlook remains unchanged. Correction from 1.3681 is still in force and further downside should still be seen towards 55 days EMA (now at 1.3435). Friday’s late recovery has turned intraday outlook consolidative and some more recovery could be seen to 4 hours 55 EMA (now at 1.3537) initially this week. But upside is expected to be limited below 1.3609 resistance and bring another fall. break of 1.3609 is needed to indicate correction from 1.3681 has completed and bring retest of this high.

In the bigger picture, risk of 1.3681 being an important medium term top continues to increase. As discussed before, medium term up trend from 1.1639 is interpreted as having first move completed with three waves up to 1.2978, subsequent sideway consolidation completed at 1.2483. Rise from 1.2483 is treated as resumption of the whole up trend from 1.1639. With such interpretation, we’d expect risk of medium term reversal to increase significantly after EUR/USD met resistance zone between 1.3668 and 100% projection of 1.1639 to 1.2978 from 1.2483 at 1.3822. Hence, focus is now on reversal signals.

On the downside, break of the short term rising channel support is already a warning that the rise from 1.2865 has completed. Decisive break of 1.3364 cluster support (38.2% retracement of 1.2865 to 1.3681 at 1.3369) will confirm such case. More importantly, with bearish divergence condition in daily MACD and RSI, this will warn that the whole rally from 1.2483 has also completed, and, so is the whole up trend from 1.1639. Focus will then be back to medium term rising channel support (now at 1.3029).

In the longer term picture, it’s still early to conclude whether medium term rally from 1.1639 represents resumption of multi-year up trend from 0.8223 or just part of a large scale consolidation that started at 1.3668. But, the three wave corrective nature of the rise from 1.1639 to 1.2978 suggest that this whole rally from 1.1639 will be corrective in nature, thus, favoring the latter case. And therefore, as discussed above, focus will be on reversal signal when EUR/USD met resistance zone of 1.3668 (04 high) and 100% projection of 1.1639 to 1.2978 from 1.2483 at 1.3822. But sustained break of this resistance zone will path the way towards 95 high of 1.4523.

GBP/USD

Cable’s initial recovery was limited by 4 hours 55 EMA and fall from 2.0132 then resumed by extending further to as low as 1.9700 last week. Short term outlook remains bearish with 4 hours 55 EMA remains intact. Even though some recovery could be seen initially this week, upside should be limited by 1.9874 resistance and bring another fall. As discussed before, sustained break of 38.2% retracement of 1.9183 to 2.0132 at 1.9769 as well as 55 days EMA at 1.9770 is now encouraging further decline towards next important support zone of medium term rising channel support (now at 1.9544) and 1.9545 cluster support (61.8% retracement of 1.9183 to 2.0132 at 1.9546). On the upside, above 1.9874 is needed to indicate fall from 2.0132 has completed and bring strong rebound.

In the bigger picture, risk of medium term reversal continues to increase. Firstly, the whole up trend from 1.7047 is not clearly impulsive. One interpretation is that rally from 1.7047 ended with three waves up to 1.9024. Subsequent correction ended at 1.8090. Rally from 1.8090 has already met mentioned target of 100% projection of 1.7047 to 1.9024 from 1.8090 at 2.0067. Secondly, regardless of the larger trend, rise from 1.8090 can be interpreted as being a five wave sequence with first wave ended at 1.9142, second at 1.8517, third at 1.9913 and fourth at 1.9183. The channeling property supports this interpretation too. In such case, the fifth wave rally from 1.9183 has also met target of 61.8% projection of 1.8517 to 1.9913 from 1.9183 at 2.0046 too. With bearish divergence condition remains in weekly RSI and Daily MACD and key 2.0106 resistance (92 high) not decisively taken out, 2.0132 could be the important medium term top already.

On the downside, firm break of the medium term rising channel support (now at 1.9544) will indicate that the whole rally from 1.8090 has completed and add much credence to the case that an important medium term top is already formed and put focus to 1.9183 low. However, sustained trading above mentioned 2.0106 resistance will dampen the above interpretation and indicates that underlying bullishness in cable is much stronger then we thought. Further medium term rally should then be seen towards 61.8% projection of 1.3680 (01 low) to 1.9554 (05 high) from 1.7047 (05 low) at 2.0677.

In the longer term picture, previous break above 1.9554 resistance (04 high) is favoring the case that long term up trend from 1.3680 has resumed after correction from 1.9554 was supported by 55 months EMA. However the structure of the medium term rise from 1.7047 is not clearly supporting this yet. And, we’re still skeptical on it. The structure of the fall after finishing the current up trend from 1.7047 should reveal more information. But a strong break of mentioned 2.0106 resistance indicate add much favor to the case that multi year up trend from 1.3680 has resumed and hence should bring rally to next target of 61.8% projection first.

USD/CHF

USD/CHF’s rally from 1.1993 extended sharply higher to 1.2281 last week, just 1 pip below mentioned 1.2282 cluster resistance (50% retracement of 1.2571 to 1.1993 at 1.2282). At this point, further rise is still in favor as long as 1.2194 support holds. Sustained break of 1.2282 will encourage further rally to 61.8% retracement of 1.2571 to 1.1993 at 1.2350 first. Touching of 1.2194 will turn short term outlook consolidative. But a break below 1.2124 support is needed to indicate rebound from 1.1993 has completed. Otherwise, another rise is still in favor after completing brief consolidation.

In the biggest picture. USD/CHF is now at a juncture. Strength of the current rise from 1.1993, with bullish convergence condition in daily MACD and RSI suggest that the fall from 1.2571 has already completed at 1.1993. Firm break of 1.2282 cluster resistance will confirm this case. More importantly, this will increase the chance that USD/CHF is about to complete a medium term head and shoulder bottom formation (ls: 1.1919, h: 1.1878, rs: 1.1993). Sustained break of 61.8% retracement at 1.2350 and neckline resistance (1.2768 to 1.2571, now at 1.2367) will add more weight to this case. Stronger rally should then be seen to 1.2571 first and then 1.2768.

On the other hand, bouncing off from 1.2282 cluster resistance will still keep USD/CHF below 55 weeks EMA (now at 1.2647), thus keeping medium term outlook mildly bearish. In such case, recent choppy price actions could merely be part of a medium term triangle consolidation. And, down trend from 1.3283 should still resume after completing such consolidation. Hence, below 1.2124 will indicate that rebound from 1.1993 has completed and further weakness should then be seen to retest 1.1193 low and then 1.1878. .

USD/JPY

USD/JPY’s rise from 115.13 continued last week by breaking mentioned 78.6% retracement of 122.17 to 115.13 at 120.66 and extended further to as high as 121.39. Friday’s retreat and touching of 120.67 minor support indicates an intraday top is in place at 121.39. Hence initial bias will be mildly on the downside this week and further retreat could be seen to 4 hours 55 EMA (now at 120.46) or lower. However, note that rise from 117.60 should still be in force as long as 119.43 cluster support (50% retracement from 117.60 to 121.39 at 119.50) holds and another rise is still expected to follow. Above 121.39 again will indicate recent rally has resumed for 122.17 high.

In the bigger picture, previous break of medium term rising channel support (108.99, 114.41, 117.87) indicates the whole medium term rally from 108.99 has completed at 122.17. However, current strong rally from 115.13 suggest that price actions from 122.17 is just developing into sideway consolidation to rise from 108.99 only, instead of a sharp reversal. Hence, a retest of 122.17 high is expected be seen. But still, firm break above this resistance is needed to confirm medium term rally from 108.99 has resumed. Otherwise, medium term outlook will be neutral at best and there should still be another fall to retest 115.13 low before completing such consolidation.

On the downside, below 119.43 cluster support will indicate that the rise from 117.60 has finished and thus warn that the whole rebound from 115.13 has completed too. Focus will then be on 117.60 support and firm break will confirm such case. Deeper fall should then be seen to retest this low and probably further towards 114.02/41 support zone (61.8% retracement of 108.99 to 122.17 at 114.02).

In the longer them picture, whether correction from 121.38 has completed with three waves down to 108.99 remains a question. But since up trend from 108.99 is still expected to extend further as long as 114.02/41 support zone remains intact,. favor is in the case that such correction has completed. Hence, decisive break of 122.17 high will path the way towards 100% projection of 101.65 to 121.38 from 108.99 at 128.72. Sustained trading below 114.02/41 support zone will shift favors back to the case that fall from 122.17 is the third leg of a wide range consolidation that started at 121.38 (first leg completed at 108.99, second at 122.17) and should bring deeper decline towards 108.99 low before completion.

EUR/JPY

EUR/JPY edged to new record high of 163.89 last week but upside momentum continues to diminish as it’s approaching 61.8% projection of 137.16 to 159.63 from 150.75 at 164.64. Nevertheless, further rise is still mildly in favor as long as EUR/JPY stays above 162.64 minor support. Break of 162.64 will suggest a short term top is formed and bring deeper correction towards short term rising trend line (now at 161.48).

Also, we’d like to maintain that risk of short term reversal remains high after previous break of the short term rising channel, with bearish divergence condition staying in 4 hours MACD and RSI and with daily MACD remains below signal line. Also, it’s possible that EUR/JPY is now in formation of a diagonal triangle to conclude the rally from 150.75. Hence, upside could be limited by 164.64 on loss of momentum and bring reversal. Break of 161.05 support will add much weight that rise from 150.75 has ended and deeper decline should then follow to 159.60 support first.

In the bigger picture, EUR/JPY’s previous break above medium term rising channel resistance suggests that strength of the rally from 150.75 is stronger than we originally thought. But still, interpretation of rally from 130.60 remains unchanged. First wave up ended at 143.60, subsequent correction ended at 137.167. The third wave up ended at 159.63 while fourth wave correction has ended at 150.75. Rise from there represents the final advance in this structure, targeting 61.8% projection of 137.16 to 159.63 from 150.75 at 164.64 and could terminate there.

On the downside, rise from 150.75 could still resume as long as 119.60 support holds. However, sustained trading below 159.60 will warn that prior break of medium term rising channel resistance was merely a throw-over. Also, this will give a serious warning signal that the whole rise rise from 130.60 has ended. EUR/JPY should set to test the medium channel support (now at 153.51) in such case.

Explore posts in the same categories: Uncategorized

This entry was posted on Saturday, July 7th, 2007 at 2:11 am and is filed under Uncategorized. You can subscribe via RSS 2.0 feed to this post's comments. Responses are currently closed, but you can trackback from your own site.

Comments are closed.