Weekly Review and Outlook: Euro Broadly Lower as Debt Worries Resurfaced, Dollar Rebound Halted …

Euro was broadly weaker last week as worries on peripheral countries’ ability to raise funds in the markets resurfaced. The common currency broke through 1.3 psychologically level against the greenback, breaches 0.83 against Sterling and is back pressing record low against Aussie. Investors are particularly cautious ahead of this week’s bond sales by Portugal, Spain and Italy. Before this week’s target sales of EUR 1.25b of five and ten-year debts on Wednesday, Portugal’s’ 10 year yield topped 7.25% on Friday, well above the level where Greece and Ireland accepted bailout. Spain and Italy are also holding bond auctions this week and markets will continue to watch the developments in yields.

Portugal is widely expected to be the next peripheral nation to seek bailout from EU/IMF. A German magazine reported that Germany and France believe that Portugal will soon be unable to finance its debt at reasonable rates and are urging Portugal to accept a bailout. Note that Portuguese government has indicated that 7% is the threshold at which it would consider taking a bailout. Considering that yield in the secondary markets has already surpassed this level, markets would start to price in a bailout out aggressively should the results of the bond auction prove unsatisfactory.

Dollar rebounded sharply last week on a couple of factors. Firstly, positive economic data boosted the hope of sustainable economic recovery in the US. ISM Manufacturing index improved slightly to 57 in December, meeting expectations. ISM non-manufacturing index rose strongly to 57.1 in December. ADP private employment report, which showed 297k expansion, nearly triple of expectation, raised the hope of a strong Non-Farm Payroll number. Though, the final piece of data, the NFP, was a mixed one. Job growth in December was below expectation at 103k even though prior month’s figure was revised up to 71k. Unemployment rate, however, dropped sharply from 9.8% to 9.4%. Dollar’s rebound somewhat halted after the release.

The greenback was also lifted by the sharp selloff in commodities last week. Speculators seemed busy liquidating long positions they established late last year. Gold was sharply off the 1424.4 high registered right before new year and closed at 1368.9. Crude oil was also way off the pre-new year high of 92.58 and closed at 88.48. CRB commodities index also dropped sharply from 335 to close at 324. We’d like to point out that commodities are vulnerable for further correction. In particular, if gold would eventually break through and sustain below 1350 level, we should see even stronger rally in the greenback.

The rebound in longer term treasury yield also helped take USD/JPY higher last week. We’ve seen 30 year yield rose to as high as 4.60 on Friday but was limited below recent high of 4.624 and pulled back. The jump in yield sent USD/JPY to as high as 83.67 even though it’s also way off recent high of 84.49. It looks as yield would likely consolidate further and that would also limit USD/JPY’s upside. Though, eventually, we’d still favor upside breakout in yield and USD/JPY.

Meanwhile, note that while dollar was strong last week, Canadian dollar was even stronger in spite of selloff’s in commodities. It’s believed that Canadian dollar is benefited from its much healthier fiscal positions. Employment data from Canada was solid, even though not spectacular. We’re still favoring more upside in the Loonie, especially in crosses. But there are risks that the Loonie could finally be dragged down by deeper selloff in commodities, or in case of poor economic data.

Technical Highlights

Dollar index’s strong rise last week suggests that consolidation from 81.44 is finished with three waves to 78.78. Rebound from 75.63 should be resuming for 61.8% projection of 75.63 to 81.44 from 78.78 at 82.37 first. Break will raise the possibility for further rise through 83.56 resistance towards upper trend line above 88 level.

EUR/GBP’s sharp fall and break of 0.8333 last week confirms that whole decline from 0.8940 has resumed. Initial bias remains on the downside this week for 61.8% projection of 0.8940 to 0.8333 from 0.8646 at 0.8271 first. Break will target 0.8067 low and below to 100% projection at 0.8039, which is very close to 0.8 psychological level. On the upside, above 0.8353 minor resistance will turn intraday bias neutral and bring consolidations first before staging another fall.

In the bigger picture, whole decline from 2008 high of 0.9799 should still be in progress. Such choppy fall is treated as a correction to the larger up trend and would likely target a new low below 0.8067. In that case, we’ll be looking at reversal signal between 0.7693/8186 as we’d expect such correction to conclude there. On the upside, break of 0.8646 resistance is needed to be the first signal that fall from 0.9799 is finished and break of 0.8940 is needed to confirm. Otherwise, we’ll stay bearish.

In the long term picture, long term up trend from 2000 low of 0.5680 shouldn’t be over yet and the choppy fall from 2008 high of 0.9799 should be a correction only. We’d expect such correction to be contained by 0.7963/0.8186 support zone and bring up trend resumption. Rise from 0.5680 is still expected to extend beyond 0.9799 high eventually.

Subscribe to our daily and mid-day newsletter to get this report delivered to your mail box