Economic news sees U.S. dollar change direction

  • Making lemonade out of lemons
  • Important Levels to Watch
  • Emergency BOJ meeting may hit the JPY
  • Key data and events to watch next week

Making lemonade out of lemons
The past week saw a continuation of the stream of disappointing data out of the US and elsewhere, but around mid-week markets decided it was no longer a reason to sell risk. New lows were made in USD/JPY and the JPY-crosses early in the week after eye-popping declines in US housing data and a drop in durable goods orders. In Europe , comments from ECB and BOE officials warned of the real risk of a return to recession in the months ahead. European debt spreads continued to widen, with peripheral Eurozone ( Ireland (credit rating cut), Greece , and Portugal ) debt being sold and core Eurozone ( Germany and France) bonds being bought on continuing fears of a sovereign default amid the worsening outlook. US Treasury yields dropped to new lows, with 10-year note yields touching 2.42% at mid-week.

But by the end of the week, it was all good. US weekly jobless claims declined, though they remain at highly elevated levels, and the revision to 2Q GDP was not as bad as feared, though it confirms the meager pace of the US recovery. In a much anticipated speech, Fed Chair Bernanke repeated earlier comments that the Fed stood ready to undertake further unconventional easing measures if the outlook deteriorates more significantly, but was short on specifics about what might actually trigger Fed action. Perhaps most significantly, he did not make a concrete commitment to another round of quantitative easing (buying US Treasury or other debt), which effectively pulled the rug out from under bond prices. Bond markets have been on a moon-shot in recent weeks and the lack of assurances from Bernanke that fresh buying from the Fed would soon materialize sent the longs dashing for the exits, sending 10-year yields up over 16 bps on Friday alone and more than 20bps from their lows. That move inspired further gains in USD/JPY and the JPY-crosses, sending them out with actual gains on the week.

Other risk assets also saw significant bullish reversals on Friday and many posted 'hammers' on the weekly candlestick charts (a bullish reversal pattern after a decline). In addition to USD/JPY and the JPY-crosses, WTI crude oil prices posted a weekly gain and a hammer as well. US 10-year yields similarly exhibited strong indications a near-term low has been seen. Despite our view that incoming data should continue to paint a worsening fundamental global outlook, which would be negative for risk, we now have to reckon with the potential for a technical correction in risk assets (higher) and the USD (lower against all but JPY). Most importantly, the late week rebounds in risk assets have, in most cases, only taken them back to key breakdown levels, meaning Friday's rebound may be the extent of the correction. That it's month-end next week ( and US Labor Day holiday weekend, too) will only exacerbate already choppy price action. Ultimately, however, we would prefer to use any correction higher in USD/JPY or JPY-crosses and other risk assets as a selling opportunity in anticipation of renewed pessimism in the weeks ahead. Next Friday's US Aug. employment report should serve as a prominent reminder of the weak rate of job creation in the US and the improbability of a near-term improvement in the outlook. In the next section, we highlight some key price levels to monitor any potential correction or subsequent relapse.

Important Levels to Watch

  • EURUSD – Numerous hurdles to continued upside. Weekly price action sees EURUSD end slightly higher from the 1.2710 weekly open to a close into the 1.2730 area. Daily momentum reversed higher as the past three days of trading saw the single currency recoup losses from the low 1.26 area into the mid-1.27 area. The move higher has been supported by a rising trendline (extended from the 8/24/10 1.2585 lows) which also happens to be bear flag support around 1.2675. A break below 1.2675, also its 100-hr sma, projects a move into 1.2450(61.8% retracement for the 6/8 – 8/6 ascent). 1.2775/80(38.2% retracement for the 6/8 – 8/6 ascent) and the 100-d sma around 1.2730 are significant hurdles to continued EURUSD upside but a break above may see towards the key 1.2905 horizontal pivot next.
  • AUDJPY – Trading within daily triangle consolidation pattern. The end of week risk rally saw AUDJPY recoup heavy losses and trade from a low around 73.60 to a current print of 76.70. Daily charts reveal a triangle consolidation pattern in formation with topside resistance into the 78.00/05 area and support into the 74.00 figure. Downside bias remains while below the daily Ichimoku cloud base around 76.75/80 initially towards its significant 200-hr sma which has provided staunch resistance for the pair on its most recent leg lower, currently around 75.75. Above may see a test of triangle resistance into the aforementioned 78.00/05 zone.
  • USDJPY – Upside may be capped into 21-d sma & daily Kijun line. The dollar’s descent against the yen has been defended by declining trendline resistance (extended from 92.88 June 4, 2010 high) along with its 21-d sma which currently converge into 85.50 providing considerable resistance to further yen weakness. Additional downside bias remains while beneath 85.50 and the daily Ichimoku Kijun line around 85.85/90, with potential towards the recent 83.62 lows. Above may see dollar strength towards 86.25 key daily horizontal pivot and 87.50 it’s 55-d sma next.
  • S&P 500 - Key resistance into 1065 and 1075. The past three days of trading saw mostly range bound conditions from 1040 to 1060 for the benchmark equity index but, Friday’s close is seeing into the upper end of the range. A break above the 1060 level sees a test of steeply declining trendline resistance into 1065 initially and 1075 daily Ichimoku cloud base as the next resistance. A sustained break below last week's 1040-area lows will open potential lower to 1000/10.
  • XAUUSD – Daily trendline resistance keeping pressure on the yellow metal. 1240 daily closes have been elusive for the yellow metal as it has failed on the past three daily attempts above it. Additionally, daily trendline resistance into the key 1240 level (extended from the 6/21 1265 highs) has capped moves higher on the precious metal with downside potential into 1230 (200-hr sma). A break above 1240 may see a run for 1250 initially ahead of the 1265 record highs.

Emergency BOJ meeting may hit the JPY
The Japanese Yen pulled back from its highest levels against the Euro and U.S. Dollar earlier in the week due to growing speculation that Japanese policymakers will soon take action to curb the Yen’s advance. Late on Friday, news reports (citing the usual unidentified sources) indicated the BOJ would hold an emergency meeting early next week, though no date was specified. The expectation is that the BOJ will boost the bank lending facility that provides three-month funding at 0.1% to 30 trillion yen (from 20 trillion currently) and extending the funding period to six months. There is some potential they may opt for another round of QE, buying Japanese government bonds to push rates even lower. However, the BOJ seems averse to lowering the policy rate from 0.1% or increasing their purchases of government bonds outright. The key will be if they expressly announce that the measures are being taken to combat JPY strength. If so, it may signal a larger, coordinated effort between the government and the BOJ to weaken the JPY, potentially entailing market intervention alongside the BOJ measures. Additional BOJ easing measures may see further JPY weakness to 87/88 in USD/JPY.

Key data and events to watch next week
The data stream for the U.S. kicks off on Monday with U.S. July personal income and spending, PCE numbers, and the August Dallas Fed manufacturing report. Tuesday sees the June S&P/Case Shiller home price index, August Chicago purchasing manager report, Conference Board consumer confidence, and the release of the minutes of the August 10 FOMC meeting . On deck for Wednesday is the August ADP employment change, ISM manufacturing and prices paid, and July construction spending. Thursday’s data flow includes 2Q final nonfarm productivity, weekly jobless claims, July factory orders and pending home sales. Friday rounds out the week with the August employment report, ISM non-manufacturing composite and a speech on the economy by the Fed’s Dennis Lockhart.

The Eurozone starts the action off with Monday’s business climate indicator for August as well as August Eurozone confidence numbers. Tuesday sees German August unemployment change and rate, July Eurozone unemployment rate, and the August Eurozone CPI estimate. Wednesday’s data includes Germany ’s July retail sales followed by German, French, and Eurozone August final manufacturing PMI. Set for release on Thursday is July EZ PPI, 2Q preliminary EZ GDP, and the ECB rate announcement. Friday wraps up the week with August final services PMI numbers for Germany , France , and the EZ, July EZ retail sales, and a speech by the EU’s Olli Rehn.

U.K. data kicks off on Monday with the August GfK Consumer Confidence survey. Tuesday's data includes July final M4 money supply, July mortgage approvals, net lending and consumer credit. Set for release on Wednesday is August manufacturing PMI while Thursday sees August nationwide house prices, construction PMI and a speech from the BOE’s Andy Haldane. Released sometime between Wednesday through Saturday is the Halifax House Prices number. Friday will close the week out with August services PMI, changes in the official reserves in August, and a speech by the BOE’s Paul Tucker.

In Japan on Monday we will hear from the BOJ Deputy Governor Yamaguchi as he speaks in Tokyo and see the release of July preliminary industrial production, July retail trade and large retailers’ sales. Due out on Tuesday is July labor cash earnings, vehicle production, housing starts, construction orders, and August small business confidence. Wednesday’s releases include August vehicle sales and monetary base. Thursday finishes the week for data in Japan with 2Q capital spending numbers.

Canada’s short week of data begins on Monday with 2Q current account, July industrial product price and raw materials price index. Tuesday wraps up the data stream with June GDP and 2Q quarterly GDP annualized.

The data down under starts on Monday with New Zealand ’s July trade balance. Se

for release on Tuesday is Australia July HIA new home sales, 2Q inventories and company operating profit while New Zealand posts August NBNZ Business confidence and activity outlook numbers, July M3 money supply, and July building permits. Wednesday sees July Australian private sector credit, retail sales, building approvals, and 2Q current account balance. Due out on Thursday is Australia ’s 2Q GDP, August AiG Performance of manufacturing index and New Zealand ANZ commodity price reading. Friday closes out the week with Australian July trade balance and the August Performance of service index.

Be on the lookout for important China data as well. Wednesday will see manufacturing PMI and HSBC manufacturing PMI. Set for release on Friday is the non-manufacturing PMI and HSBC services PMI.

Brian Dolan is chief currency strategist at www.FOREX.com.

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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