Weekly FOREX Report

Posted: October 28, 2005

The Week Ahead

The next few days should be much more interesting with a busy US economic calendar that includes durable goods, new home sales, and the final third quarter GDP figures. Yet in addition to a barrage of data, politics could also shake up the dollar. Special Counsel Patrick Fitzgerald is expected to announce a series of indictments against some of the top officials in the US government over the leaking of information that led to the disclosure of an undercover CIA agent.

There is growing fear that the Vice President may also be implicated, which if it becomes the case, could be very bearish for the US dollar. Taking a walk through history back to Nixon’s era, in the month that the Senate established a committee to investigate the Watergate scandal (February 1973), the dollar fell 10 percent against the Deutschemark. Over the next five months, the dollar depreciated by a total of 30 percent. The dollar recuperated some of its losses in the following year, but once Nixon announced his resignation in August 1974, the dollar took a nosedive once again, falling another 15 percent over the next six months.

Although it is far too premature to speculate that the current probe into the CIA leak could unfold into something as grave as Watergate, any whiff of political uncertainty could give dollars bulls (who have made tremendous amount of profits this year) a good reason to bail out early.

Technical Outlook

EUR/USD

Market Recap. Euro broke above the large downward sloping channel’s upper boundary with the latest swing to the upside testing the offers above the 1.2100 handle.

Short-Term. Euro broke above the large downward sloping channel’s upper boundary with the latest swing to the upside testing the offers above the 1.2100 handle. A further move to the upside will most likely see the pair break above the 1.2200 figure and take on the greenback offers at 1.2249, 23.6 Fib of the 1.3479-1.1869 USD rally. Stochastic is neutral at 56.29. ATR is rising as volatility increased. Momentum indicator is above the zero line thus lending support to the euro longs.

Long-Term. A move toward the 1.2249 will most likely see the pair reverse direction and target the 1.2000 figure.

GBP/USD

Market Recap. Cable broke above the downward sloping channel’s upper boundary that dominated the price action since the beginning of September with the latest swing to the upside breaking above 1.7733, a 23.6 Fib of the 1.9223-1.7284 USD.

Short-Term. Pound broke above the downward sloping channel’s upper boundary that dominated the price action since the beginning of September with the latest swing to the upside breaking above 1.7733, a 23.6 Fib of the 1.9223-1.7284 USD. A further break to the upside seeing the pound longs take on the greenback offers around the psychologically important 1.8000 figure, a level which is further defended by the 38.2 Fib of the 1.9223-1.7284 USD at 1.8016, with a further move to the upside taking on the greenback longs around 1.8150.

Stochastic is oversold at 82.05. ATR is rising as volatility increased. Momentum indicator is climbing above the zero line, thus lending support to the pound bulls.

Long-Term. A move toward the 1.8150 mark will most likely see the pair reverse direction and head back toward the 1.7500 figure.

USD/CHF.

Market Recap. Swiss Franc broke below the large wedge's lower boundary that dominated the price action since September, with the latest swing to the downside breaking below the 1.2763, a 23.6 Fib of the 1.1741-1.3076 USD rally

Short-Term. Swiss Franc broke below the large wedge's lower boundary that dominated the price action since September, with the latest swing to the downside breaking below the 1.2763, a 23.6 Fib of the 1.1741-1.3076 USD rally. A further move to the downside will most likely see the pair head toward the psychologically important 1.2500 handle, a level that is currently defended by the 1.2567, a key 38.2 Fib of the 1.1741-1.3076 USD rally. Stochastic is neutral at 32.99. ATR is rising, pointing to a rise in volatility. Momentum indicator is above the zero like continuing to favor dollar longs.

Long-Term. A retrace toward the 1.2567, a 38.2 Fib will most likely see the dollar bulls take over the price action and push the pair back toward the 2005 High.

USD/JPY

Market Recap. Japanese Yen remains confined in an upward sloping channel, with the latest swing to the upside testing the offers above the 116.00 handle.

Short-Term. Yen remains confined in an upward sloping channel, with the latest swing to the upside establishing a fresh 2005 high at 116.24. A move to the downside will most likely see the Japanese Yen longs break below the channels lower boundary and push the pair toward the 112.82, a level marked by the 23.6 Fib of the 101.74-116.24 USD rally. Indicators are mixed. Stochastic remains overbought at 77.34. ATR is indicating a rise in volatility. Momentum indicator is above the zero line thus adding support to the greenback bulls.

Long-Term. A move toward the 111.00 handle will most likely see the pair reverse direction as greenback bull takeover the price action and push the pair back toward the 2005 High.

Key Events Last Week

• Bernanke Appointed As Greenspan¡¦s Successor
• Positive Data Help The Euro Emerge From Its Recent Lows
• Bank of England - Staying Put At 4.50%?

Bernanke Appointed As Greenspan’s Successor

The big news today was the much-awaited appointment of the next Fed Chairman. President Bush announced today that Ben Bernanke will be replacing Greenspan next year as the Chairman of the Federal Reserve. Any hopes of Greenspan extending his term and staying on longer than expected is now out of question. Ben Bernanke was probably the safest pick for Chairman given his experience within the Federal Reserve working with Greenspan along with his academic expertise and the fact that he does hold some credibility within the international markets.

Bernanke’s speeches are essentially the second most analyzed by Fed watchers after Greenspan’s. His most well-known stances include an unwavering devotion to inflation-targeting, which Greenspan opposes. He is also known as “printing-press” Ben, a title that he has been criticized for, because it means that he has explicitly promised to print money as a manner of increasing liquidity to generate inflation, if necessary. Bernanke has been credited with shaping the policy debate on deflation and helping to spur the decision of lowering interest rates to 45 year lows of 1%.

Having Bernanke as Fed Chairman would mean that we would probably be moving to an inflation targeting policy similar to the ones followed by the European Central Bank and the Bank of England. He may also want to prove early on that he is a staunch inflation fighter which could mean more rate hikes to come. This would be more restrictive and less flexible than the current policy, but having Bernanke as Chairman could also bring about greater disclosure to the public and hopefully the credibility to the Fed. However, judging from the write-ups in the press, it seems that the market still does not have its hands completely around Bernanke and his policies.

Some are pointing to his past saying that he will be a big proponent against deflation while others are saying that he will not accept runaway inflation, especially since he has been a long-time advocate of inflation targeting. For now, it seems that the international market has not taken the news that the Fed Chairman has been picked by the current President all that well, even though we think he was probably the safest choice.

Positive Data Help The Euro Emerge From Its Recent Lows

Since hitting a fifteen-week low against the dollar the week before, this past week has seen a good deal of euro strength bolstered by several pieces of positive news. The first string of inflation data out of Germany confirmed the European Central Bank’s fears that inflation may be stronger than expected. Prices in both German state Hesse and Bavaria ticked higher as higher home energy prices offset lower gasoline prices. This brought nationwide consumer price inflation to a higher-than-expected 2.4%, which reflects an unexpected increase of 0.1% in September.

Import price numbers in Germany rose in September as well, up 0.5 percent from August and 5.1 percent from a year earlier, considerably higher than expected. ECB President Trichet took this opportunity to reiterate that inflation risks have increased but the central bank’s policy remains unchanged.

It is clear that the ECB has an on hold policy at the moment but climbing inflation supports the fact that their bias is clearly to the upside. More good news came out of Germany with the German IFO business climate survey producing sharp improvements in both the current sentiment and expectation components for the month of October.

The survey is now at its highest level in five years even amidst the political confusion currently running through the country. These figures affirm that the Euro-zone’s largest economy is indeed recovering more strongly and bolster expectations that the ECB will raise rates toward the beginning of 2006.

Bank of England — Staying Put At 4.50%?

After much speculation of another BoE rate cut before year-end, the market is now finding reason to believe that this may not be the case as inflation rises and the housing market begins to recover. The UK economic calendar was quite sparse, but there was still some support early in the week for a 4.50% benchmark rate going into 2006.

First, the Hometrack house price survey reported that prices have fallen to the lowest level in 2 years. Hometrack economist Wrigglesworth said that inventory was increasing and that further declines in prices would be inevitable over the next few months. This should be supportive of a more accommodative monetary policy, but with oil prices continuing to rise, the BoE finds itself facing the same problems as their international counterparts. The UK is generally a mild net oil exporter, but they have recently found themselves importing oil.

Interconnector, the owner of reversible gas pipelines between Belgium and England announced today that they would have to start importing gas to account for falling supply ahead of the winter season when energy usage tends to hit its peak.

Next up was UK car production, which on a seasonally adjusted basis, was shown to have risen in the three months leading into September by 5.6 percent after dropping a revised 1 percent in August. This rise was due to a sharp increase in demand for exports, making up for the decline in domestic demand. The recovery in auto production after hitting a low in June, could be signaling a slight recovery in the British economy. As inflationary pressures mount, the Bank of England has its hands somewhat tied as far as lowering the interest rates to spur growth. However, after dropping rates in August, there have been one or two sparkles of hope that the economy could be improving itself. If production figures continue to be released in the same fashion as auto production, a recovery may be looming and if this happens soon enough, the Bank of England will not have to cut rates after all.

By: ADVFN

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