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| Action Insight Weekly Report | Markets Snapshot |
Defining Week for Dollar ahead, Would Trend Line Support Hold?Dollar and yen were broadly lower last week as stocks rebounded strongly on hope for solid earning reports. S&P 500 posted the biggest weekly gain in a year and rose 5.4% over the week. DOW also jumped 5.2% to close above 10,000 again at 10198. Dollar index dropped to as low as 83.62 before closing at 83.94. Commodity currencies were the biggest winners with Aussie and Loonie additionally boosted by strong employment data. There are a few important points to note. Firstly, volume in last week's stock rally was much less than impressive. Fewer than 6.7 billion shares were traded on US exchanges on Friday, lowest volume in 2010, suggesting that investors were indeed cautious ahead of the earning announcements this week. Secondly, both DOW and S&P 500 are trading well below 55 days EMA, suggesting the current rebound could still turn out to be a correction. Thirdly, rebound in treasury yield was unimpressive too with 10 year yield kept well below recent support turned resistance of 3.1%. We'd skeptical about the sustainability of the risk rally. |    |
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EUR/USD Weekly OutlookEUR/USD edged higher to 1.2721 last week but lost momentum ahead of medium term falling trend line resistance and retreated. Intraday bias is neutral initially this week. As noted before, we expect strong resistance at the medium term falling trend line to conclude the whole recovery from 1.1875 and bring down trend resumption. Break of 1.2479 support will flip intraday bias back to the downside. Further break of 1.2149 will confirm that such recovery is finished and medium term fall is resuming for another low below 1.1875. Nevertheless, note that sustained trading above the trend line (now at 1.2716) will invalidate our view and bring stronger rally towards 1.3266 resistance instead. |
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ECB Left Policy Rates Unchanged, Feeling no Surprise on Money Market Rate HikesThe ECB announced to keep the main refinancing rate at 1% in July. At the accompanying statement, President Trichet reiterated that the current key ECB interest rates as 'appropriate' while the risks to the economic outlook are 'broadly balanced', in an environment of high uncertainty. Austere Fiscal Policies Supporting The Pound Will Weigh On It LaterThe emergency Budget released on June 22 demonstrated the new UK government's commitments to reduce the country's huge deficits. The aggressive fiscal policy has reduced the risk premium of sterling and is a key factor for the currency's strength against the dollar and, to a greater extent, the euro. While GBP may remain firm in the near-term, risk aversion and lower growth expectations should weigh on the currency in the medium-term. Yet, although the pound may weaken against the dollar in coming months, it should stay relatively strong against the euro. Regarding monetary policy, the BOE is at a dilemma in making rate decisions as austere fiscal measures are poised to affect growth but increase inflationary pressure through VAT hike. While the debate on whether to hike or not will continue in coming BOE meetings we expect policymakers will leave rates unchanged for the rest of the year. This should also limit upside of GBPUSD. RBA Monetary Policy Likely To Pause Until 4Q10. Aussie To Fall Further As Growth Affected By ChinaAfter the sharp -8.44% selloff against USD (and -7.21% for the trade-weighted index), Australian dollar's decline stabilized in June but huge volatility remained. Risk appetite has been the main driver of movement in Aussie, as well as other risk-sensitive assets, recently. Given concerns over global economic slowdown, slowdown in FX reserve accumulations and beginning of tightening in other countries while the RBA should leave the policy rate unchanged until the 4th quarter, we expect Aussie to weaken further for the rest of the year and in 2011. |
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The Week in Review and Preview |
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