Mid-Day Report: Dollar Weakens as Consolidation Continues, FOMC Minutes Next
Dollar is sharply lower against European majors in early US session as consolidation continues. Technically speaking, as discussed in our technical outlook reports, more upside is still expected in EUR/USD and GBP/USD. Meanwhile, USD/CHF retreats sharply after edging higher to 1.2082 earlier today. Dollar index’s dip below 4 hours 55 EMA argues that some more pull back should be seen before resuming recent rally. Elsewhere, Crude oil, rides on dollar’s retreat and rebounds strongly from intraday low of 53.66 to above 55.6. Focus will now turn to FOMC minutes for inspirations on further volatility. Though, ,markets are pricing in 90% chance of another 50bps cut from Fed on Dec 16 and the minutes will likely have little impact to this view based on current economic and inflation outlook. Read the rest of this entry »

Oil reached our first target of 53.69 (100% projection of 147.27 to 90.51 from 110.45) and continued to trade lower Wednesday. Although oversold condition and loss of momentum might lead to a brief rebound, bearish outlook in short and medium has not changed.
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Daily Report: A Busy Day Featuring BoE and FOMC Minutes

The forex markets are still bounded in tight range in generally as markets are still searching for a theme and direction. Meanwhile, as mentioned before, Swiss Franc remains the weaker one as driven by its pull back in EUR/CHF and GBP/CHF crosses. USD/CHF continues to climb higher. GBP/USD, on the other hand, loses momentum after hitting 1.5080 minor resistance. Dollar index continues to be bounded inside a triangle like consolidation pattern below 87.98. A number important events are scheduled today, including the release of FOMC and BoE minutes as well as US housing and inflation data, which could trigger some volatility in the markets.

BoE MPC minutes are expected to reveal a 9-0 vote for the surprised 150bps cut earlier this month. With core CPI having the steepest drop in at least 11 years and a clear sign of turnaround in inflation trend, markets expect that BoE is now free to have further steep rate cuts from BoE to avoid a prolonged recession in the UK economy. Indeed, markets are pricing in another 100bps cut over the next 12 months. The minutes are expected to affirm this view. But the impact on Sterling might be minimal.

FOMC minutes, on the other hand, is expected to elaborate on the perceived dovish bias of Fed and provide details of the discussions between board members, including those in the intermeeting cut before Oct 29. Markets are pricing in 90% chance of another 50bps cut from Fed on Dec 16 and the minutes will likely have little impact to this view based on current economic and inflation outlook.

Consumer inflation in US has peaked at 5.5% in Jul and is expected to continue the down trend in Oct. Headline CPI in US is expected to moderate drop sharply by -0.8% mom in Oct, with year-over-year rate steeply down from 4.9% to 4.0%. Core CPI is expected to rose 0.2% with year-over-year rate down to 2.4%, after plateau at 2.5% for three consecutive months from Jul to Sep.

NAHB builder confidence surprised the markets yesterday by plummeting sharply from then record low of 14 in Oct to new record low of 9 in Nov. Such pessimism is expected to be reflected in today’s new residential construction data too. Housing starts is expected to continue the down trend and drop from 0.82m to 0.78m annualized rate. Building permits is also expected to drop from 0.81m to 0.78m annualized rate.

In addition to the routine economic data release, a couple of developments worth much attention this week.

Firstly, regardless of the different ways to interpret the structure of the consolidation pattern in DOW that started at 7884, be it in form of a triangle or an a-b-c flat sideway consolidation, such consolidation should be near to completion. A breakout is anticipated within the coming one or two weeks and break of 7884 low will likely trigger another round of dollar and yen buying which sees Euro and Aussie breaking out of recent ranges.

Secondly, as mentioned during the week, recent development has no conflict to the view that dollar index has completed triangle consolidation at 85.06. Hence, while some pull more pull back could be seen, downside of the dollar index should be contained above this 85.06 support and then bring up trend resumption that push the index to new high again. However, a break below this 85.06 level will open up a few bearish scenarios which should at least push for a retest of 83.11 support.
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Action Insight Daily Report
While the stock market crash continues all over the world, the forex markets are relatively steady so far. Yen edges higher against dollar, euro and sterling but remains in range so far. Dollar continues to retreat against most major currencies. The biggest loser today is indeed the Aussie which dives to as low as 0.6746 against dollar and 67.26 against the yen. The weakness in the Aussie is some what a delayed reaction to yesterday’s unexpected 100bps rate cut from RBA as well as carry trade unwinding. The Aussie is additionally pressured after data showed consumer confidence plummeted by -11% in Oct.

Both Bernanke’s speech and FOMC minutes yesterday hinted that Fed is ready to cut rates. Interest rates futures continue to show full probability of 50bps cut from Fed on Oct 29. Though the odds for 75bps cut was down slightly from 40% to 32%. Nevertheless, the firm expectation for rate cut provided no support to US stock markets. Down recovered briefly to above 10,000 level but reversed and extended decline to close over 500pts down to 9,447. Fed’s new measure to buy commercial paper to help corporations offered little relief to investor confidence.

Nikkei was also hit hard today, dropping over 9% and hit the lowest intraday level of 9,159 in five years. Research report showed the number of corporate defaults in Japan accelerated in Sep. Bankruptcies rate rose sharply to 34.4% annualized rate. Total debt from bankruptcies in Japan grew to 5.36T yen.

UK government announced a plan to invest about 50b pounds to prevent collapse of the UK banking system. The government will buy preference shares and BoE will make 200b or above available for banks to borrow under the special liquidity plan. UK government will also provide a guarantee of 250b pounds to help refinance debts.

On the data front, Nationwide consumer confidence in UK dropped less than expected to 50 in Sep. Japanese Economic watch DI dropped slightly to 28 in Sep. Eurozone Q2 GDP final, Germany industrial production, Canadian housing starts and US pending home sales will be released later today.

By ActionForex

Dollar and yen regained their medium term strength last week. Dollar index finally took out 80.38 high and confirmed that medium term rally from 71.31 has resumed. This is also reflected with EUR/USD and AUD/USD breaking prior lows and USD/CAD bring key 1.08 medium term resistance. Similar situation was seen in the Japanese yen with EUR/JPY and AUD/JPY resuming medium term down trend. Hence, on of the focuses this week is on how these trends are continuing to development.

In addition, RBA is widely expected to cut rates again this week and the questions are firstly how much and what’s next. Most economists expect a 50bps cut in the OCR to 6.50%. Further Aussie selling could be seen if RBA hints there will be more policy easing down the road.

GBP/USD and GBP/JPY are still holding above prior low but remain vulnerable. Another main focus will be BoE rate decision this week. BoE is expected to cut by 25bps to 4.75%. And should the bank deviate from markets’ expectation, the Pound will most likely be rocked.

Another major focus is FOMC minutes and Bernanke’s speech on Tuesday. Markets are pricing in over 80% chance of a “50bps” cut from Fed on Oct 29. The rest of the odds are for a 75bps cut!. Bernanke’s words will be heavily scrutinized for confirming such expectation.

Other events include the release of US pending home sales, wholesale inventories trade balance; Eurozone Q2 GDP; BoJ rate decision and minutes; UK industrial and manufacturing production, nationwide consumer confidence, trade balance; Canadian Ivey PMI , building permits, housing starts, trade balance and job report; Australian job report.
By ActionForex