Dollar Made a Short Term Bottom? Maybe… But Reversal? Not Yet

Dollar was sharply lower last week after a couple of dollar negative news that intensified fear for recessions in the US. Friday’s disappointing Non-Farm Payroll report should have extended dollar’s weakness further, but it recovered instead. Markets attributed that to Fed’s surprised announcement of increasing size of its Term Auction Facility to improve liquidity. However, note that dollar was sitting on some important support before the recovery, in particular against the Japanese yen. The late recovery in dollar is more likely a technical rebound on profit taking, but not a reversal in the overall dollar bearish sentiments. Hence, while a number of important economic data will be released this week, the major focus will be on the how dollar reaction to the current technical levels.

Currency Heat Map Weekly View

On Friday, Fed announced to increase the size of its Term Auction Facility to improve liquidity in the markets. More importantly, this was viewed as a notion that policy makers will do whatever is necessary to shore up confidence. But after all, after a week of weak economic data, interest rate futures are now fully pricing in a 75bps rate cut from Fed on Mar 18.

US Non-farm payroll dropped another -63k Feb, following downwardly revised -22k in Jan. This is the second consecutive months of contraction in NFP, and the biggest drop since Mar 03. Though the unemployment rate also fell from 4.9% to 4.8%, it’s viewed by part of the market as a sign of shrinking labor force as some people simply gave up looking for employment.

Both ISM indices show further contraction in the economy. After recovery in Jan, the ISM manufacturing index deteriorated again and dive into contraction reading of 48.3 in Feb, lowest reading since Apr 03. ISM non-manufacturing index rebounded strongly from 44.6 to 49.3 in Feb, very close to 50 contraction/expansion level. Factory orders dropped -2.5% in Jan

Construction spending dropped more than expected by -1.7% in Jan. However, pending home sales was flat in Jan at 85.9, better than expectation of -1.0% fall. Q4 productivity at 1.9% vs expectation of 1.9%, labor costs growth at 2.6%, much stronger than expectation of 2.1%.

Fed’s Beige Book was generally pessimistic. Two-thirds of Fed districts reported weakening growth since last report. The slowing in economic activities was broad-based, extending further to manufacturing, retail and non-financial services. More than half of the districted reported retail sales as "below plan, downbeat, weak or having softened". COnditions in non-financial service industries were downgraded to "mixed". Manufacturing was "subdued". Residential real estate was "generally weak". More districts also reported "some loosening" in the labor markets", with "pullbacks in the pace of hiring" and "increased prevalence of layoffs".

ECB rate decision and press conference was the focal point last week. ECB left rates unchanged at 4.00% as widely expected. Trichet maintained the hawkish tone by emphasizing multiple times in the press conference that "price stability" is the ECB’s sole mandate and "the firm anchoring of medium- to long-term inflation expectations is of the highest priority to the Governing Council." Though Trichet did acknowledge that "uncertainty resulting from financial turmoil remains high". The decision to leave rates unchanged today is by unanimous vote with no call for either hike or cut. The updated staff projection showed 2008 GDP growth outlook revised down to 1.3-2.%. On the other hand, CPI projection was raised to 2.6% - 3.2%. M3 money supply growth remains very vigorous.

Eurozone PMI manufacturing was slightly down from 52.8 to 52.3 in Feb. PMI services was unchanged at 52.3. Though noticeable improvement was seen in Germany PMI service which rose from 49.2 to 52.2. HICP flash was unchanged at 3.2%. PPI rose 0.8% mom, 4.9% yoy in Jan. Q4 GDP rose 0.4% qoq, 2.3% yoy. Basically inline with expectation. Retail sales rose 0.4% mom, dropped -0.1% in Jan.

BoE also left rates unchanged at 5.25% today as widely expected. No statement was released and markets will look into meeting minutes to be published on Mar 19. Sterling surges sharply to above 2.000 level after the release. UK PMI manufacturing unexpectedly improved from 50.6 to 51.3 in Feb. PMI Service also improved from 52.5 to 54.0.

BOJ left rates unchanged at 0.50% as widely expected, by unanimous vote. Fukui had his last policy meeting today already. In the monthly report, BoJ left economic assessments unchanged and still see economic recovery continuing. Though the tone was a bit downbeat with the bank cutting its views on industrial production and corporate profits. High energy and raw materials prices are expected to continue to post pressures on prices. The government nominated Deputy Governor Toshiro Muto to succeed Fukui.

Swiss SVME PMI rose to 60.5 in Feb, slightly above expectation 60.4. CPI was unchanged at 2.4% yoy. Though, Q4 GDP rose 3.6% yoy, much stronger than expectation of 2.8%. Unemployment rate was unchanged at 2.7% in Feb.

BoC cut rates by 50bps to 3.50%. The 50bps was a surprise to part of the market which expected a 25bps cut only. Also, this is the sharpest cut since 2001. BoC also suggested it’s prepared for further rate cut down the road as "further monetary stimulus is likely to be required in the near term". In the accompanying statement, BoC acknowledged that there are clear signs that US economy is likely to experience a "deeper and more prolonged slowdown", which "stems from further weakening in the residential housing market." The spillover effect from deterioration in the US economy suggests "important downside risks" to the Canadian economic outlook and are "intensifying". Hence, BoC judged that risks around the Jan projection in the Monetary Policy Report Update has clearly shifted to the "downside" and hence lowering the rates. Markets’ focus will turn to the Monetary Policy Report on Apr 24 for further details in the revised projections.

Data from Canada were conflicting. Q4 GDP grew at merely 0.8% annualized rate, much slower than prior’s 2.9% while expectation was 1.1%. Dec GDP growth turned negative by falling -0.7% mom, much weaker than expectation of -0.2%. Building permits dropped -2.9% in Jan.

However, Canadian job report was much stronger than expected. The report showed net growth of 43.4k in jobs in Feb, much better than expectation of 3k. Unemployment rate also dropped from 5.9% to 5.8%. Ivey PMI also improved sharply from 56.2 to 62.0.

Reserve Bank of Australia raised rates by 25bps to 12 year high of 7.25% overnight as widely expected. However, the accompanying statement described the interest rate hikes since mid 07 as "substantial" and there was "evidence that some moderation in household demand is beginning to occur," even though the extent is uncertain yet. Markets generally perceived the statement as a signal that RBA’s stance is quite balance for the moment and will likely be on hold in Apr.

Australian retail sales in Jan was just flat, much softer than expectation of 0.5% mom growth. Q4 GDP slowed to 3.9% yoy, though slightly above expectation of 3.8%. Trade deficits widened more than expected to -2.7b in Jan, primarily due to much strong imports growth at 5.4% and slower export growth at 1.7%.

RBNZ left the Official Cash Rate unchanged at 8.25% as widely expected. In the accompanying statement, RBNZ noted that there is "more uncertainty than usual" with downside risks to growth and upside risks to inflation. Hence, then bank judges to OCR needs to remain at current level for "a significant time" to ensure inflation remains around target over the medium term.

Suggested Readings:

• Weekly Economic and Financial Commentary
• This Week’s Market Outlook
• The Weekly Bottom Line
• FX Briefing: Euro - Soaring to New Heights
• (FED) Federal Reserve announces two initiatives to address heightened liquidity pressures
• BOJ Cautiously Optimistic about Japanese Economic Prospects, Says Report
• (BOJ) Monthly Report of Recent Economic and Financial Developments March 2008 (The Bank’s View)
• BOJ Stays Put at 0.50% as Fukui Makes His Exit
• ECB: Concerned Over Inflation and Growth
• ECB Downplays Chance of Early Rate Cuts
• ECB’s Trichet Targets Inflation, Fundamentals Sound
• (ECB) Press Conference Introductory Statement 6 March 2008
• Bank of Canada Cuts Half Point to Combat Fallout From U.S. Slump
• Bank of Canada Cuts Policy Rate by 50 Basis Points
• Bank of Canada Slashes Rates By 50bps to 3.50%
• (BOC) Bank of Canada Lowers Overnight Rate Target by 1/2 Percentage Point to 3 1/2 Per cent
• RBA Hikes Interest Rates Again
• (RBA) Monetary Policy Statement by Glenn Stevens, Governor - 4 March 2008
• RBNZ March Monetary Policy Statement: OCR Going Nowhere at 8.25%
• (RBNZ) OCR Unchanged at 8.25 Percent

The Week Ahead

As mentioned above, dollar is sitting at some important support level, in particular against the Japanese yen. Further rebound in the greenback will argue that a short term bottom is already in place. But after all, there is no solid sign of a long term reversal yet. A number of important economic data will be released around the globe this week. But focus will be on the technical movements.

From US, main focus will be on retail sales on Thur and CPI on Fri. Trade Balance, wholesale inventories, business inventories, Fed Budget import prices and U of Michigan consumer sentiment will also be released. From Eurozone, ZEW survey and HICP final will be the main focus. From UK, industrial/manufacturing production, PPI, trade balance will be released. From Japan, focus will be on Q4 QDP and BOJ minutes. SNB is widely expected to leave rates unchanged at 2.75%.

There are also some important economic data for commodity currencies. Canadian housing starts, new housing price index, trade balance will be released. New Zealand retails sales and Australian job report will also be featured.

Suggested Readings:

• Economic Calendar Summary 3/9 - 3/14
• Weekly Focus: Is the Decline in USD Disorderly?
• FX Intervention: Will the BoJ, ECB, & RBNZ Try to Stop the Dollar’s Decline?
• Economic Outlook: Will Consumer Spending Weather the Storm?
• GBP/USD Rally May Continue If UK PPI Highlights BoE’s Inflation Proble
• $ Index, Into Longer Term Support…
• Euro in Final Stage of Blow-off Top against the Dollar
• Australian Dollar Bulls Shouldn’t Give Up Yet
• New Zealand Dollar Long Entry Offers Opportunity to Benefit from High Yield
• Australian & New Zealand Weekly: Credit Crisis - Australia’s Unique Position

USD/JPY Weekly Outlook

USD/JPY dived further to as low as 101.41 last week, finally breached 05 low of 101.65 and met mentioned target of 101.22/65 key support zone. Though, friday’s recovery and break of 102.94 minor resistance indicates that an intraday low is in place at 101.41. Initial bias is neutral this week. More choppy sideway trading could be seen this week above 101.41. But still, as long as 104.17 cluster resistance (38.2% retracement of 108.59 to 101.41 at 104.15) holds, further decline is still expected to 100 psychological support and below after finishing consolidation.

In the bigger picture, note that USD/JPY is now pressing important long term support zone of 101.22/65. It’s not confirmed whether USD/JPY has completed a long term sideway patter that started at 147.68 (98 high) and hence much attention will be paid to any reversal signal. Firstly, break of mentioned 104.17 cluster resistance will at least indicate that fall from 108.59 has completed. This will serve as an alert that whole down trend from 124.13 has completed too. In such case, focus will be back to 108.59 resistance.

Though, below that happens, further decline is still in favor and sustained break of 100 psychological support will indicate that underlying downside momentum in USD/JPY is still strong. Also, this will set the stage for the medium down trend to extend further to next target of 90 psychological support.

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The U.S. dollar has lost a fourth straight week against the European currency (and against the pound and the yen as well) as the whole week was filled with the bad economic news from the United States.

The Friday’s unexpected drop in the non-farm payrolls brought the dollar to a new historical minimum against the euro — at 1.5454 euro/dollar. Surprisingly enough, it was the only day during this week, when the dollar closed higher than the day’s opening price.

The whole dollar anti-rally that can be observed on Forex since the 8th of February is based on the market expectations of the interest rate cut by the Federal Reserve. After the panic cut on the 21st of January and the scheduled cut by 50 basis points on the 30th of January, FOMC is expected to decrease the rates again in March, this time 50 basis points will probably not appear enough.

As the U.S. economy is slowly sinking into the recession, the country’s currency can’t perform well against the other world currencies, that are less touched by the crisis. But if the European Central Bank decides to start cutting interest rates too, it may reverse the current trend on EUR/USD and make the dollar appreciate for some time at least.

The dollar ended this week on Forex at 1.5356 against the euro; USD/JPY closed at 102.67, while GBP/USD broke through the important barrier at 2.0000 and closed at 2.0134 on Friday.