Australia dollar and Canadian dollar shined last week on strong rally in commodities and strength in global stocks (a replay on Carry-Trade coming in vogue again?)
Dollar was lower following dovish FOMC minutes as well as disappointing job report.
Rally in crude oil and rebound in gold also put some pressure on the greenback. But after all, the weakness against European currencies was limited so far.
Japanese yen was generally lower as new Finance Minister Kan expressed his position on a weaker yen. Japanese yen would remain soft in near term too at least until selling momentum on Yen diminishes.
Although the Fed upgraded forecasts of 4Q09 and 2010 growth outlook, the minutes revealed that policymakers remained concerned about the vulnerability of recovery by removal of stimulus.
(a) While announcing the asset purchase programs will end by 1Q10, the Fed did not rule out the possibility of increasing and extending the program should economy weaken, (b) A few members noted that 'resource slack was expected to diminish only slowly and observed that it might become desirable at some point in the future to provide more policy stimulus by expanding the planned scale of the Committee's large-scale asset purchases and continuing them beyond the first quarter, especially if the outlook for economic growth were to weaken, or if mortgage market were to deteriorate', (c) More in FOMC Minutes – December: Cautious Policymakers Did Not Rule Out Further Asset Purchases.
The highly anticipated non-farm payroll report from US was a disappointment for investors looking for sustained sign of recovery. Non-Farm Payrolls showed -85k contraction in December versus expectation of 0k. Nevertheless, November's data was revised up to 4k, which was the first expansion since Jan 2008. Unemployment rate was unchanged at 10.0%.
Job market data from some countries were also released last week: (i) Eurozone unemployment rate rose to 10% in December -at 11 year high, (ii) Swiss unemployment rate also climbed to a 12-year high of 4.2%, (iii) Canadian unemployment rate was unchanged at 8.5% but the economy lost -2.6 jobs in December.
ISM reports released last week was encouraging suggesting that the economy is still growing mildly: (i) ISM manufacturing index rose more than expected to 55.9 in December, while (ii) ISM services also climbed above 50 to 50.1.
Naoko Kan was named new finance minister of Japan as Hirohisa Fujii stepped down on health reason. Kan called for a weaker currency and said he would cooperate with BoJ to guide yen exchange rate to appropriate levels. He even mentioned that such appropriate level in terms trade would be around 95 in USD/JPY. The comments are in sharp contrast to his predecessor, Hirohisa Fujii, who openly said that a strong yen is in Japan's interest. Nevertheless, Kan later moderated his comment by saying that exchange rates should be decided by the markets. Yen was broadly lower last week but selling momentum was so far weak.
BoE left interest rates unchanged at 0.5% and asset purchase program unchanged at GBP 200b as widely expected. No detail was released with the statement and focus will turn to meeting minutes to be published on Jan 20 as well as the Quarterly Inflation Report to be published on Feb 10.
Commodities and Energy were noticeably strong last week with CRB index rose to as high as 293.75. The development provided strong support to Australian dollar and Canadian and limited rebound of the greenback against European majors. Crude oil finally managed to break through 82 high and have the medium term rally from 33.2 resumed. Strength in oil should carry on in near term to upper trend line resistance at 83/84 level, or even further to 90 psychological level before topping.
On the other hand, Gold's corrective rebound from 1075.2 has also expected to as high as 1141 last week. Such rebound is likely still in progress for 61.8% retracement of 1227.5 to 1075.2 at 1169.3.
Development in commodities will continue to pressure the greenback and favor Aussie and Loonie. Nevertheless, as mentioned before, the overall outlook for dollar was not that weak. Indeed, recent price actions in EUR/USD, USD/CHF and GBP/USD are clearly corrective in nature.
Same picture is seen in dollar index. While the consolidation from 78.45 might extend further and another fall to below 77.09 cannot be ruled out. We'd continue to expect downside to be contained by 38.2% retracement of 74.19 to 78.45 at 76.82 and bring rally resumption. Medium term fall from 89.62 should have completed at 74.19 already and we'd expect rise from there to extend to 89.62 and will target 38.2% retracement of 89.62 to 74.19 at 80.08 in the least bullish scenario.
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