Weekly FX Market Analysis

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 |  Includes: ERO, FXA, FXY, GBB
by: FX Banko

In this article we present what happened last week in the macro picture for Europe, US, Australia and Japan, followed in the second part by what events are to come and what are the technical levels that can affect EURUSD and AUDUSD in the next week. In the end we are focusing on our own view (without indicating any trading directions) calling for fundamental facts that weights on both pair sides (EUR/AUD and AUD/USD).

What happened last week (03.12-07.12):

EUR$: As we mentioned in our Daily Update 06.12 EUR$ saw plenty fundamental flows this week, first starting with Europe PMIs and later on Monday we saw the US one, slightly deteriorating. The trend was bullish until Wednesday based on Greece's optimism and stronger Spanish Unemployment with 1.3126 the top before it reversed in a bearish trend in expectations for ECB on Thursday. The main reason for this strong downside move was due to Draghi's announcement of taking as a possible solution even negative interest rates. From the dollar point of view the main focus was on the fiscal cliff evolution and less on the data excepting the NFP and unemployment announcement on Friday. Technically EUR dropped three figures from its 1.31256 weekly high established Wednesday down to 1.2875 (1.2879 last week low) before it closed in 1.2924 (previous close was 1.2981).

GBP$: This week we had the Manufacturing PMI (on Monday), Construction PMI (on Tuesday), Services PMI (on Wednesday), Asset Purchase Facility plus Official bank rate (on Thursday) and in the end the Manufacturing Production plus a rumor that Fitch is looking to downgrade UK's triple A rating coming Friday on late NY session. More concise, UK cuts its growth outlook with more chances of seeing BoE starting to increase the asset purchase. Technically Cable seen an upside move initially from 1.6015 (last Friday close) up to 1.6130 on Tuesday and then a range move until Thursday with 1.6081-1.6130 the extremes followed by profit taking, going down to 1.6001.

AUD$: The main event for Aussie this week was the rate cut by 25bps from 3.25% to 3.00% (analysts were expecting for this move). Market looked like was already had priced-in the move and after a 16pts downside spike to 1.0408 from 1.0424 it retraced back up to 1.0457 and from that point AUD was kept in a bullish trend, helped Thursday by the strong release of Employment and Unemployment that took it up to 1.0470 in the next 30 min after the release. Overall this week for AUD was that one where the negative flows just didn't matter too much and that could make Aussie a top runner until the end of this year in G10.

$JPY: Overall the Yen weakness still persists ahead of the elections. More important solely for this week was Friday, with NFP and Unemployment strong data release, with $JPY popping up initially and testing 82.82 couple of times (right below previous monthly high, 82.83) before it dropped back to 82.22, close to Thursday low in 82.19. From the technical point we could affirm that JPYcouldn't manage to close on the 4h chart above the 78.6% Fibonacci retracement level (H84.17 /L 77.11). On the 4h chart $JPY formed a "flag" with 82.83 and 81.68 the extremes.

What is to come:

EUR:

  • The latest Commitments of Traders (NYSE:COT) report shows a EUR net short position at 33K versus the 67K reading seen last week, as speculators covered short EUR FX wagers - which does not reflect the bearish price action over the back end of the week. (source: forex-fx-4x.com)
  • German Trade Balance: to be released Monday at 07:00am Ldn time (expected 15.9B, previous 17.0B).
  • French Industrial Production month/month: to be released Monday at 07:45am Ldn time (expected 0.4%, previous -2.7%).
  • Italian Industrial Production m/m: to be released Monday at 07:45am Ldn time (expected -0.2%, previous -1.5%).
  • German ZEW Economic Sentiment: to be released Tuesday at 10:00am Ldn time (expected -11.4, previous -15.7).
  • Industrial Production m/m: to be released Wednesday at 10:00am Ldn time (expected 0.3%, previous -2.5%).
  • EU Economic Summit: to start Thursday in Ldn session.
  • Eurogroup Meetings: to start Thursday, all day. Looking for possible signs of a rate cut message that would keep adding pressure on EUR.
  • French Flash Manufacturing PMI: to be released Friday at 08:00am Ldm time (expected 44.9, previous 44.5).
  • French Flash Services PMI: to be released Friday at 08:00am Ldn time (expected 45.8, previous 45.8).
  • German Flash Manufacturing PMI: to be released Friday at 08:30am Ldn time (previous 46.8).
  • German Flash Services PMI: to be released Friday at 08:30am Ldn time (expected 50.0, previous 49.7).
  • EU Flash Manufacturing PMI: to be released Friday at 09:00am Ldn time (expected 46.6, previous 46.2).
  • EU Flash Services PMI: to be released Friday at 09:00am Ldn time (expected 47.0, previous 46.7).
  • EU Economic Summit: to start Friday in Ldn session (second day).
  • EU CPI y/y: to be released Friday at 10:00am Ldn time (expected 2.2%, previous 2.2%).
  • EU Core CPI y/y: to be released Friday at 10:00am Ldn time (expected 1.5%, previous 1.5%).

USD:

  • Fiscal Cliff: Political deadlock in Washington may start to spook the market as we get closer to the fiscal cliff that the US will hit on 31st December unless a deal between Republicans and Democrats is reached soon. If $600bn of tax hikes and spending cuts hits the economy early next year then the US is expected to plunge into recession. However, discussions have stopped in recent days and there are no signs that either side is willing to give up enough ground to reach a deal. (source)
  • After three consecutive weeks of betting on a stronger USD, speculative traders on the Chicago Mercantile Exchange jumped into an anti-USD wager again, data from the Commodity Futures Trading Commission (CFTC) showed on Friday. Traders shifted from a total of $6.5 billion in net USD long position as of last week into a total of $818 million in net USD short position as of Tuesday. (source)
  • Trade Balance: to be released Tuesday at 13:30 Ldn time (expected -42.4B, previous -41.5B).
  • FOMC Statement: to be released Wednesday at 17:30 Ldn time.
  • Federal Funds Rate: to be released Wednesday at 17:30 Ldn time (no changes expected, previous 0.25%).
  • FOMC Economic Projections: to be released Wednesday at 19:00 Ldn time.
  • Federal Budget Balance: to be released Wednesday at 19:00 Ldn time (previous -120.0B).
  • FOMC Press Conference: to be released Wednesday at 19:15 Ldn time. Weak growth combined with fiscal cliff should keep the FOMC meeting results decidedly dovish this week. The consensus view is that the FOMC will expand QE3 to make up for the expiration of Operation Twist as of the year's end. The market expects new purchases of app$25-45 bln per month (the Fed might even opt for a larger expansion of monthly purchases, especially if a fiscal cliff deal seems unlikely and it wants to counter the bearish effects of that added drag on the economy). (source)
  • Core Retail Sales m/m: to be released Thursday at 13:30 Ldn time (expected -0.1%, previous 0.0%).
  • Producer Price Index (PPI) m/m: to be released Thursday at 13:30 Ldn time (expected -0.4%, previous -0.2%).
  • Retail Sales m/m: to be released Thursday at 13:30 Ldn time (expected 0.4%, previous -0.3%).
  • Unemployment Claims: to be released Thursday at 13:30 Ldn time (expected 370k, previous 370k).
  • Core PPI m/m: to be released Thursday at 13:30 Ldn time (expected 0.2%, previous -0.2%).
  • Core CPI m/m: to be released Friday at 13:30 Ldn time (expected 0.2%, previous 0.2%).
  • CPI m/m: to be released Friday at 13:30 Ldn time (expected -0.1%, previous 0.1%).
  • Flash Manufacturing PMI: to be released Friday at 14:00 Ldn time (expected 52.6, previous 52.8).
  • Industrial Production m/m: to be released Friday at 14:15 Ldn time (expected 0.3%, previous -0.4%).

GBP:

  • BOE Gov. King Speaks: to start Monday at 17:15 Ldn time.
  • Claimant Count Change: to be released Wednesday at 09:30am Ldn time (expected 5.1k, previous 10.1k).
  • Unemployment Rate: to be released Wednesday at 09:30am Ldn time (expected 7.9%, previous 7.8%).

AUD:

  • CNY CPI year/year: we had a weak release, 2.0% result vs. 2.1% expected, still better than previous 1.7% and we can see already a bottom in CPI's evolution.
  • CNY PPI year/year: came -2.2% vs. -2.0% expected, previous -2.8%. On the PPI y/y chart we can see a retracement from its lows -3.6% reported on 15.Oct
  • CNY Trade Balance: to be released Monday around 01:30am Ldn time (expected 26.7B, previous 32.0B).
  • RBA Gov. Stevens Speaks: expected to start at 04:30am Ldn time.
  • CNY HSBC Manufacturing PMI: to be released Friday at 01:45am Ldn time (previous 50.5).

Technicals:

EUR$: Downside we have a rejection area between 1.2877/1.2893 representing the 26.10 low, 07.11 high, 28.11 low, 07.12 low, and the 50% Fibonacci ret. lvl. (L 1.2661/ H 1.3126). Further we have the 61.8% Fibonacci ret. lvl. coming in 1.2839, followed by 1.2760 as the 78.6%.

Upside we have first resistance coming in 1.2972 representing the 38.2% Fibo. ret. lvl. (H 1.3126/ L 1.2877), further we have 1.3002/00 as 50% Fibo. ret. lvl. and as a psychological level, plus 1.3031 as the 61.8% Fibo. ret. lvl.

Click to enlarge

Fig. 1 EUR$ 4h chart (Meta Trader 5 charting source)

AUD$: Upside we have major resistance in 1.0515/1.0523 representing last week high, 21.09 high, and the 78.6% Fibo. ret. lvl. (H 1.0624/ L 1.0149), further we have 1.0600 and 1.0624, the high from 14.09.

Downside we have first support coming in 1.0428 as the 38.2% Fibo. ret. lvl. (L 1.0287/ H 1.0515), followed by 1.0400 representing the 50% Fibo. ret. lvl. and a psychological lvl. plus couple of points lower the 03/02.12 low.

Click to enlarge

Fig. 2 AUD$ 4h chart (Meta Trader 5 charting source)

Our view:

EUR/AUD: On one side more pressure comes from ECB regarding further possible rate cuts into negative territory and on the other side China's signs of stabilization, this makes EUR/AUD possible bearish until the end of this year and probably even further. Even though the market is looking for RBA to continue easing, we saw last week that the 25bps rate cut didn't made nothing more than a 20 pts downside spike before it got into a strong bullish trend, on the other side only some indicative signs from Draghi of easing and EUR moved from 1.31 down into 1.28-1.29 territory. Our strategy is to sell at 07:00am London time with a weekly target basis (watch Daily Updates for any changes, otherwise close this trade at the end of this week). We are looking to keep a Stop Loss in 1.2506.

AUD$: looking to stay long as the US $ is coming under more pressure with fiscal cliff escalating and high changes of continuing the QE3 at this Wednesday FOMC meeting and probably even a dovish tone from FOMC conference. Our strategy is to stay long starting with Ldn morning session at 07:00am, using a SL in 1.0368, and to cover it in front of the FOMC.

We avoid trading EUR$ on a fundamental basis as both sides are into continuously easing steps plus extra problems with Spain and Greece on one side and Fiscal Cliff on the other. For any changes in our view, please watch our Daily Updates.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.