Highlights
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Has the Euro peaked? |
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US housing, confidence data to keep the focus on the negative |
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Eurozone sentiment indicators will be key |
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JPY-crosses (carry trade) setting up potential for a further drop |
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Commentary
Brian Dolan, Chief Currency Strategist
Thanksgiving week saw the USD take another dive, giving up further ground to the JPY as overall market volatility continued to make life difficult for carry trade positioning. In last week's update, I suggested that a daily/weekly close below the 108.70 level in USD/JPY would likely signify another 'ratcheting down' of the USD/JPY rate, with additional potential to the 105/106 area. We got the daily/weekly close below that level and that keeps the focus on the downside while it holds as resistance. Only a recovery past the 109.70/80 area would signal that the downmove is stalling and possibly reversing. The relatively sharp bounce seen on Friday generated a 'hammer' on the daily candlesticks, frequently an indication of an upside recovery after a decline, so Monday's price action will be critical. If we see only minimal strength in USD/JPY at the beginning of the week, it will serve as confirmation that the downside remains alive and Friday's bounce was nothing more than acute short-covering in a holiday-thinned market.
EUR/USD made a very short-lived surge to test the vicinity of the 1.50 psychological resistance area, only to be rejected in dramatic fashion. The move to the 1.4970 level in the current upmove achieved equality with the Aug.-Sept. wave up from approximately 1.3360 to 1.4280, so the high seen represented significant Elliott Wave resistance. The sharp rejection from that level reinforces that resistance, and on the daily candles resulted in a 'long-legged doji' formation, which may suggest that the upmove is in danger of reversal. In the continued environment of financial market uncertainty and heightened risk aversion, JPY-crosses (carry trade), such as EUR/JPY or GBP/JPY, are likely to remain under pressure. If USD/JPY is ratcheting lower as I suspect, continued JPY-cross selling pressure will likely spill over into non-JPY dollar pairs, leading to outright selling in EUR/USD and GBP/USD, for example. The 1.4750/80 area represents the key near-term support and drop back through that level will greatly increase the likelihood that EUR/USD has made a multi-week high. While I don't expect the environment for the USD to improve anytime soon, EUR/USD looks most likely to transition into a consolidation period at the minimum over the next few weeks.
Data coming out of the US next week is very likely to keep markets focused on the downside risks to the US growth outlook, and with it the prospects for lower US interest rates. The bad news begins on Tuesday with the release of the Sept. and 3Q S&P/Case-Shiller home price index, which is expected to show further declines in US housing prices, one of the primary sources of anxiety over the health of US consumption. Tuesday will also see the Nov. consumer confidence index, which is forecast to fall sharply from 95.6 to 91.0 according to market consensus estimates. Wednesday sees Oct. durable goods orders and Oct. existing home sales, followed by the release of the Fed's Beige Book in the afternoon. If the Beige Book fails to depict the doom-and-gloom scenario that markets currently fear and instead paints a picture of a still solid, though slower, broader economy outside of housing, market expectations of lower Fed rates at the Dec. 11 FOMC meeting are likely to be revised sharply, with positive USD implications. Thursday will see the first revision to 3Q GDP and the expectation is for a revised headline reading of 4.9% , up from the preliminary 3.9% estimate. Thursday also sees Weekly jobless claims and Oct. new home sales. Friday finishes out with Oct personal income and spending, PCE-core inflation readings, and the Nov. Chicago PMI, which is forecast to recover to above the 50 boom/bust line. There are multiple Fed speakers on the economic outlook next week: Philadelphia Fed's Plosser and Chicago Fed's Evans separately on Tuesday; Vice Chair Kohn on Wednesday followed by Dallas Fed's Fisher; Gov. Mishkin on Thursday; and St Louis Fed's Poole on Friday afternoon. Fed Chair Bernanke is slated to deliver remarks on the southeast regional economy on Friday, but he's not expected to comment on the overall Fed outlook.
Business and consumer confidence reports will dominate the data releases from the Eurozone next week. Sentiment gauges in Europe have come off sharply in recent months and the outlook is for further softening in the reports, which may take some of the shine off of the outlook for the Eurozone, with consequent negative implications for the EUR. Eurozone data next week starts in earnest on Tuesday with French Nov. business confidence and German Nov. IFO business climate readings. Wednesday sees the Dec. GfK consumer confidence index as the main highlight. Thursday sees Nov. French consumer confidence and Nov. German unemployment. Friday concludes with Oct. German retail sales, Nov. and 3Q Eurozone CPI, preliminary 3Q Eurozone GDP, and Nov. Eurozone consumer and corporate confidence indicators. The EU is also holding a summit with Chinese leaders in China early in the week, and exhortations for the Yuan to appreciate are likely to be heard yet again.
Japanese data begins with the Oct. corporate services price index on Tuesday morning in Tokyo, followed by the release of the Cabinet Office's monthly economic assessment. Wednesday morning sees Oct. large retailers' sales and Oct. overall retail trade reports. Thursday morning sees preliminary Oct. industrial production, which is forecast to post a sharp rebound from prior months' declines, followed by Nov. small business confidence in the Tokyo-afternoon. Friday sees a slew of reports starting with the Nov. Nomura/JMMA manufacturing PMI, Oct. employment data, Oct. household spending, and Oct. CPI in the morning, followed by Oct. housing starts and construction orders in the afternoon. BOJ Gov. Fukui and Dep. Gov. Iwata are scheduled to speak separately on Tuesday.
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