Market was in a tight range this last week as investors waited for outcomes of three major releases: FOMC Rate Decision, ECB Rate Decision, and July’s US Nonfarm Payroll Report. Needless to say, the first two events have the potential to change market trends for the rest of year as traders had high hopes for further easing from the Feds and bond market intervention by the ECB, especially considering recent disappointing economic data in the U.S. and ECB Chief Draghi’s strong words in London late last week…
However, both central banks decided not to yield to the mounting pressures and held off from making policy changing announcements. The FOMC offered very little changes but tweaked its statement from “planning to formulate a plan of action” to “having a plan of action“, which essentially means that they are not going to do anything now, although most analysts agree that the probability for QE3 is more likely after this FOMC meeting compared to the last… The ECB, on the other hand, disappointed the market by not launching another round of bond buying, which essentially boxed Draghi in a corner as traders thought ECB was unable to deliver what it promised…
After a few hours of punitive sell-offs on the Euro, reports began to hit the press as some analysts thought that Draghi’s comments were misunderstood. Draghi stated that the ECB could launch a bond buying program in the future with a condition that individual euro zone governments must ask the EFSF/ESM bailout funds for help first. At first glance, it seems that ECB is trying to renege from the “whatever it takes” pledge, but here’s what I wrote in my fundamentalforexoutlook blog on Friday:
…and if we follow the above logic, it makes sense for the Euro to recover as fears of Spain or Italy being too big to be bailed out no longer apply with ECB’s involvement, and what of the condition on making formal bailout requests? Well, I think it’s only fair and not necessarily a deterrent for countries (Spain *wink *wink) that need bailouts… I guess only time will tell, but as of the end of the week and prior to the NPF release on Friday morning, market was already being optimistic and traded the EURUSD around the 1.2230 level, paring off the lows of 1.2130…
On Friday, the U.S. Nonfarm Payroll ended up being the catalyst for risk appetite as the surprise 163K of positive employment added demand for risk. For a detailed analysis on the NFP, please make sure to read my post. The NFP release not only diminished speculation for QE3, but also helped to drive USD weaker as traders dumped their safe-haven currencies (USD and JPY) and bought risk currencies (EUR, AUD, CAD, etc…) The week ended with major rallies, but I believe these rallies may not be sustainable, so use caution and take profit as we get ready to start a new week.
Elsewhere in the world, reports suggested economic situations were worsening starting with German unemployment rise for the fourth straight month, EMU unemployment rate at (record high) 11.2%, China’s official July manufacturing PMI came in at an 8-month low of 50.1 vs 50.5 expected, UK’s Manufacturing PMI at 45.4 versus the 48.4 expected, and U.S. ISM Manufacturing PMI at 49.8, or the first contraction since last 2009… Global manufacturing showed signs from slower growth to downright contraction, which added pressures for central banks to act.
In Japan, Finance Minister Azumi reiterated that Japan would take decisive steps if needed to deal with one-sided yen moves that clearly did not reflect fundamentals. The Bank of Japan meeting next week will feature two new board members who recently took a vocal stance in support of further policy accommodation. But according to my previous analysis, I believe Japan is probably all talks.
In the commodity space, CAD strengthened beyond the parity level for the first time since May against the USD and AUD traded above $1.0550, its best level since March. AUD also hit fresh record highs against the euro, as the Aussie is well supported by interests from China FX regulator SAFE. Recent economic data from was also more bullish, with June trade balance printing its first surplus in 6 months and retail sales rising to 3-month highs. The only negative comment this week for the AUD came from former RBA member Pagan who said that the AUD was overvalued at the current level, but the market mostly ignored his comments.
In conclusion, I believe that EUR should strengthen on the back of ECB’s comments, or at least the fear of the inadequacy of ESM and EFSF on handling larger member states should subside, and that would be a huge boost of confidence for the Euro… I would be looking to buy on dips, especially if we don’t get any more negative comments from EU. GBP should be under pressure, although the currency should follow EUR’s lead against USD, but I believe the tide has turned and EURGBP should be heading north back above the 0.85 level soon. JPY should remain weak as risk appetite is once again driving the market, and it is my opinion to SELL JPY on any rallies, or buy EURJPY, USDJPY, etc… CAD should remain resilient, although I believe it is not sustainable for USDCAD to remain below parity for long-term. The play is to BUY USDCAD, especially considering that QE3 is now less possible after the stellar NFP release on Friday. AUD and NZD are both overvalued, but I understand the market could be driven by emotion of risk appetite and these two currencies could remain strong in demand, I’ll just recommend to use caution and use tight take profit targets and even tighter stop loss orders when you buy on dips, as that’s the direction for now. CHF could consolidate recent losses against USD, and I believe with EUR’s likely recovery, USDCHF could drop to the 0.9100 level, thus a SELL on rally play. USD should remain under selling pressure for now, but its fundamentals have improved somewhat, which leads me to believe that USD should gain against some (CAD, JPY) while lose against others (EUR, CHF, AUD)…
We’ve got 5 releases that are tradable this week, and they are:
Forex Market Review And Upcoming News Calendar August 6 ~ 10, 2012
August 4, 2012 by 2 Comments