Weekly Review and Outlook
Markets Indecisive after a Handful of Events
The markets had every reason to extend the trend last week after another round of massive rate cut from four of the world’s major central banks. ECB, SNB, RBA cut by 50bps and more impressively, the BoE cut by 150bps. There were extremely poor economic data out of US. But after all, there was no noticeable breakout and the currency pairs as well as the stock markets are still bounded in range. Yes, volatility was high considering almost 3.0 (83.9 to 86.89) swing in the dollar index and over 1000 pts (8673 - 9653) swing in the DOW. But as we’ve pointed out before, the scale of the prior trend needs to be taken into perspective when looking at the scale of the consolidation itself. And looking at the rally from 75.89 to 86.89 in dollar index from Sep and the sharp fall from 11450 to 7884 in DOW since Aug, the above mentioned range is indeed pretty normal.
The lack of breakout can be attributed to the fact that “the worst” has possibly been priced in by the markets already. More rate cuts are expected from major central banks around the world that could eventually bring everyone into the range of 0-2%. Economic data are expected to continue to reflect recession has started in major economies. Hence, the news are indeed not news. And with the lack of breakout, traders continue to lighten up their positions to lock in profits. That also helped stabilize the markets.
But after fall, recent developments continue to support the view that markets are merely in consolidation. In other words, the trend is not over yet. There are some points to note though. Firstly, the developments in dollar index, EUR/USD as well as Dow argue that the current consolidation might be in form of triangles and choppy sideway trading might continue further for a while before completion. Secondly, the move following triangles are usually exhaustive. Based on the current indecisiveness in the markets as well as the lack of negative surprises that could exceed current market pessimism, markets could set a sizeable turnaround after the next move. Thirdly, note that commodity currencies are relatively firm even though crude oil breached below $60 level last week, the next rebound could indeed be led by them. Fourthly, Sterling is taking over the weakest currency spot as markets expect BoE to cut faster than others and with much chance of adopting the Zero Interest Rate Policy. The pound will likely remain the weaker one.
By ActionForex
