The strong, broad based rally in the Japanese yen left investors wondering whether financial markets are turning around. Yen's strength was impressive considering a) the head and shoulder top in USD/JPY, b) single week reversals and outside bars in EUR/JPY, AUD/JPY, NZD/JPY and CAD/JPY as well as c) the fact that yen crosses has given up earlier gains this month. It should be very highly that yen crosses have seen this month's highs already and should be spending the time head making the monthly bars' lows. But the main question is, are they reversing? Is it the start of a new down trend? Or it is just a pull back?
Stocks in US were sent lower by banks' stock offerings after the stress test results, including Wells Fargo, Morgan Stanley, BB&T, Capital One, US Bancorp and Key Corp, to raise over $19b of capital. . In addition to banks, Ford planed to raise $1.6b by selling 300m common shares. Investors are also concerned with massive US auto dealership closures and the potential bankruptcy of the top US automaker. Stock markets also responded negatively to news that both headline and ex-auto retail sales in US unexpectedly dropped for the second consecutive months in Apr.
News elsewhere was not positive at all. Quarterly Inflation Report released from BoE last week was rather dovish. Governor Mervyn King said that the economy will probably face a "slow" and "protracted" recovery. GDP is expected to trough at -4.5% in Q2 before resuming growth in early 2010, and hit around 2.5% growth in two years' time. But the outlook of growth is "unusually uncertain." Inflation will probably trough at around 0.5% in Q4 of 2009 but stay below the 2% target before 2012.
The Eurozone's GDP contracted -2.5% qoq in 1Q09, the largest decline in 15 year, after dropping -1.6% in the previous quarter. The reading was worse than consensus of -2% as companies reduced output and jobs amid the deepest recession since World War II. Economies in both Germany and Italy reached record low during the quarter. On annual basis, the gauge declined -4.6%, also worse than market expectation of -4.1% and -1.4% in 4Q08. On the other hand, headline CPI, gaining +0.6% yoy in April, was inline with market estimate while core reading rose +1.7% on annual basis, compared with +1.6% in consensus and the downwardly revised +1.4% in March.
So coming back to the question, was investors' optimism about recovery fading and have stocks topped? Is it the start of another round of risk aversion trades in the forex markets too? Looking at DOW, while it did drop over 300pts to 8268 last week, it is still staying inside a near term rising channel. In addition, it's trying to draw support from the 4 hours 55 EMA, which has been holding well since March. It's a pre-mature to conclude that stocks has topped. Also, consider that, the credit market continued to be unfreeze with Libor for three-month loans in dollar dropped further to new low of 0.83 while TED spread dropped to the lowest level since Aug 07 at 67bps. Some more rally in stocks might still be seen.
Nevertheless, note bearish divergence condition in the 4 hours MACD in DOW which indicates diminishing upside momentum. A break of this month's open/last month's close at 8167/68 will also have the near term channel taken out. Such development will strongly suggest that the rebound since early March has topped out and will turn outlook bearish in stocks.
Outlook in yes crosses are similar. With the except of USD/JPY, which completed a head and shoulder top, AUD/JPY, NZD/JPY, CAD/JPY and even GBP/JPY are all still holding above near term trendline support and thus, there is no confirmation of reversal yet. Though, upside momentum is clearly diminishing and the trend looks vulnerable. This week might prove the pivotal week to determine the larger trend and close attention will be paid to these levels in yen crosses as well as development in stocks.
While dollar tumbled against yen, it benefited from even deeper fall in other yen crosses and climbed against most major currencies last week. Dollar index also recovered impressively to as high as 83.09 to close the week strongly. Nevertheless, we're still expecting some strong resistance in between 83.50 and 84.46 resistance zone and bring another fall. However, a strong break above 84.46 will be an important indication that fall from 86.87 has completed and whole decline from 89.62 has completed and will have short term outlook turned bullish.
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The Week Ahead
Main focus will be on whether stocks will complete the 'correction' or will it extend last week's decline. Another focus will be on any follow up reactions on Swiss Franc after the spike low on news SNB intervention.
Calendar in US is relatively light this week with focus on FOMC minutes, NAHB Housing Market Index and new residential construction as well as Philly Fed index and leading indicators. Attention will also be paid to speeches from Treasury Geithner and Fed Bernanke.
From Eurozone, Main focus will be on German ZEW, and Eurozone PMIs. Trade balance will also be released.
Calendar in Japan is busy with a string of economic data including Q1 GDP, consumer confidence, industrial production, Tertiary industry index, leading indicator and BoJ rate decision (which is expected to be on hold at 0.1%).
It will be another important week in UK with CPI, retail sales and Q1 GDP featured in addition to BoE Minutes.
Other economic data include Swiss ZEW, RBA minutes, Canadian CPI and retail sales, and New Zealand PPI.
USD/JPY Weekly Outlook
USD/JPY's steep decline last week and break of 95.61 support affirmed our view that whole rise from 87.12 has completed with a head and shoulder top reversal pattern (ls: 99.67, h: 101.43, rs: 99.71). Initial bias remains on the downside this week for 61.8% retracement of 87.12 to 101.43 at 92.58 and break will target 87.12. On the upside, above 96.16 will suggests that a short term bottom might be in place and bring consolidation. But upside should be limited below 97.83 resistance and bring fall resumption.
In the bigger picture, medium term outlook in USD/JPY remains bearish as USD/JPY is still limited well below trend line resistance (124.13 to 101.65) as well as 55 weeks EMA. Rise from 87.12, which is treated as a correction in the down trend from 124.13, should have completed with bearish divergence condition in daily MACD and RSI, with a head and shoulder top pattern. Further decline should now be seen to retest 87.12 low first. Break there will confirm down trend resumption for next key support level at 79.75 (95 low). On the upside, though, above 87.83 will argue that price actions from 99.67 might be forming a triangle consolidation only and rise from 87.12 has not completed yet.
In the long term picture, price actions that started from 79.75 (95 low) has completed in form of a triangle that ended with five waves to 124.13. In other words fall from 124.13 is just part of an even larger scale down trend. Such fall from 124.13 is expected extend to retest 79.75 low at least. Break of 110.66 is needed to invalidate the long term bearish view.
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