Weekly Review and Outlook

Top 5	Current	Last	Change (Pips)	Change (%)
GBPAUD	1.7525	1.8422	-897	-5.12%
AUDUSD	0.9036	0.8651	+385	+4.26%
AUDJPY	81.04	77.67	+337	+4.16%
GBPCAD	1.6526	1.7211	-685	-4.14%
USDCAD	1.0434	1.0795	-361	-3.46%
Dollar
EURUSD	1.4725	1.4575	+150	+1.02%
USDJPY	89.73	89.79	-6	-0.07%
GBPUSD	1.5841	1.5942	-101	-0.64%
USDCHF	1.0315	1.0348	-33	-0.32%
USDCAD	1.0434	1.0795	-361	-3.46%
Euro
EURUSD	1.4725	1.4575	+150	+1.02%
EURGBP	0.9296	0.9140	+156	+1.68%
EURCHF	1.5191	1.5090	+101	+0.66%
EURJPY	132.14	130.87	+127	+0.96%
EURCAD	1.5359	1.5753	-394	-2.57%
Yen
USDJPY	89.73	89.79	-6	-0.07%
EURJPY	132.14	130.87	+127	+0.96%
GBPJPY	142.14	143.15	-101	-0.71%
AUDJPY	81.04	77.67	+337	+4.16%
NZDJPY	65.86	64.36	+150	+2.28%
Sterling
GBPUSD	1.5841	1.5942	-101	-0.64%
EURGBP	0.9296	0.9140	+156	+1.68%
GBPCHF	1.6337	1.6501	-164	-1.00%
GBPJPY	142.14	143.15	-101	-0.71%
GBPCAD	1.6526	1.7211	-685	-4.14%

Last week's headlines were dominated by the strength in commodity currencies and weakness in dollar. The greenback was sold off for most of as G7 disappointed the markets by giving no explicit support to the dollar. Further pressure was seen on speculation of secret talk by Gulf States and other countries to price oil in a basket of currencies including Gold even though that was later denied. Nevertheless, weakness in the greenback was seen mainly against commodity currencies. Dollar was pretty much in range against European majors and comments from Bernanke helped the greenback to recover mildly towards the end of the week. Dollar index also managed to hold on to recent support of 75.83 despite a brief breach. Australian dollar was the star performer, boosted by unexpected rate hike from RBA, record high in Gold, and solid employment data. Canadian dollar caught up later in the weak with support from rebound in crude oil as well as a good job report. Euro was firm after a rather non-eventful ECB meeting. Sterling, on the other hand, was the weakest currency on speculation of further stimulus measures from BoE even though everything was left unchanged in the meeting last week.

RBA surprised the markets by raising interest rate by 25bps to 3.25% last week as global economic growth has resumed, market sentiment has improved while concerns on unemployment has not been as worrisome as previously anticipated. In the accompanying statement, the RBA said that 'the recovery will likely continue during 2010 and forecasts are being revised higher…Economic conditions in Australia have been stronger than expected and measures of confidence have recovered…Medium-term prospects for investment appear, moreover, to be strengthening. Higher dwelling activity and public infrastructure spending is also starting to provide more support to spending. Overall, growth through 2010 looks likely to be close to trend'. Aussie further strengthened across the board, with support from solid employment report, which showed the job market expanded by 40.6k and unemployment rate dropped to 5.7%. AUD/USD breached 0.9 psychological level and remains firm.

The ECB left its main refinancing rate at 1% and as in previous meeting, President Trichet said the current interest rate is 'appropriate'. Concerning macro-economic outlook, policymakers acknowledged improvement but did not want tighten policy until recovery proved to be self-sustaining. According to the press conference statement, economic activities have continued to stabilize after sharp contraction earlier in the year. 'The Eurozone should 'benefit from a recovery in exports, the significant macroeconomic stimulus under way and the measures taken to restore the functioning of the financial system… the inventory cycle is expected to contribute positively to real GDP growth in the second half of the year. BOE also announced to keep its policy rate unchanged at 0.5% as well as to maintain the asset purchase program, which will end in a month, at 175B pound. As expected the accompanying was short and discussed nothing about the economic outlook.

While dollar has been pressured across the board for most of the week, it found some footing after Fed Bernanke said "as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road." Though, at this moment, "accommodative policies will likely be warranted for an extended period." Nevertheless, the comment raised some speculation that Fed officials has shortened the time frame of policy reversal and gave the greenback some support.

Elsewhere, Canadian dollar was boosted sharply higher on stronger than expected employment report which showed 30.6k expansion in September. Unemployment rate also dropped sharply from 8.7% to 8.4%.

Let's look at the dollar index chart before looking at other markets. The dollar index dropped to a marginal low of 75.78 last week but drew support from 75.83 and recovered towards the end of the week. The development raised the possibility of a double bottom formation even though it's still far from being confirmed. Nevertheless, initial bias is neutral this week. A break above 76.64 minor resistance will indicate that fall form 77.47 has completed and strong rebound should be seen towards 77.47 resistance. Break there will confirm the case of bottoming.

In the bigger picture, we're still treading the current fall in dollar index as the fifth wave in the five wave sequence from March high of 89.62. Such decline from 89.62 is expected to conclude after hitting 75.89 key resistance. Break of 77.47 resistance is the first solid sign of reversal while further break of 78.93 will confirm. The least bullish case will bring rebound to 38.2% retracement level at around 81. However, note that sustained break of 75.89 will invalidate our view and will open up the case for a retest of 2007 low of 70.70 in medium term.

Gold soared to new record high of 1062.7 last week and remains firm so far. The strong break of 1033.9 indicate that long term up trend is resuming and further rise would be seen to next near term target of 61.8% projection of 681 to 1007.7 from 931.3 at 1133.2 first. One thing to note is that Gold's strength is mainly translated into strength in commodity currencies but not that much in weakness in dollar. That is, we're note seeing equivalent strength in European majors. Hence, further rally in gold might not trigger sharp rally in EUR/USD or fall in USD/CHF. But strength in gold would likely limit recovery in the greenback.

Another major development to note was the weakness in Japanese yen towards the end of the week, with risk appetite as a major driving force. The strong rebound in DOW last week suggests it's not topped out yet and the medium term rebound from 6467 is possibly still in progress to 50% retracement of 14198 to 6467 at 10334 before completion.

In addition, Treasury yield rebound strongly last week and the sharp rally on Friday is particularly impressive. The development argues that yield on 10 year note has possibly bottomed out at 3.106 after completing the three wave fall from 4.014. Further rise in yield would possibly be seen in near term which pressure the yen. The most interest part to look at is whether rebound in USD/JPY would outpace other yen crosses which gives the greenback some additional support.

The Week Ahead

Main focus this week will be on whether to extend the current recovery to a meaningful rebound. 75 in the dollar index is an import level to defend the view that it's bottoming. Strong CPI and retail sales are needed to give the greenback a lift in the rebound. Also, traders will look into Fed minutes for any discussion on exit strategies. On the other hand, Sterling is vulnerable to another sharp fall in case of disappointments in the next round of data including CPI and job report. Canadian dollar traders will also look into this week's CPI report on readjusting their view on the timing of policy reversal by BoC. In addition, New Zealand retail sales and CPI will also be closely watched and markets will see if strength in the Kiwi would help push Aussie to another new higher together.

• Monday: New Zealand Retail sales
• Tuesday: UK RICS House Price Balance, CPI; German ZEW Economic Sentiment;
• Wednesday: BoJ Rate Decision; UK Employment Report; US Retail Sales, FOMC Minutes
• Thursday: New Zealand CPI; Swiss ZEW Economic Expectations; Eurozone CPI, US CPI, Empire State Manufacturing
• Friday: Canadian CPI; US TIC Capital Flow, Industrial Production

GBP/USD Weekly Outlook

GBP/USD continued to engage in sideway consolidation between 1.5769 and 1.6119 last week. Nevertheless, Friday's sharp fall argues that such consolidation might have completed at 1.6119 after touching inner trend line resistance. Initial bias is cautiously on the downside this week and break of 1.5806 minor support will affirm this case. On resumption , decline from 1.6740 should target 161.8% projection of 1.7043 to 1.6111 from 1.6740 at 1.5232 next. On the upside, above 1.5937 minor resistance will delay this bearish view and indicate that some more consolidation should be seen first.

In the bigger picture, bearish outlook remains unchanged. Decisive break of 1.6111 support confirmed the case that GBP/USD has topped out in medium term by completing a head and shoulder top reversal pattern (ls: 1.6742, h: 1.7043, rs: 1.6740). Also, note that medium term rise from 1.3503 is treated as a correction in the long term decline from 2.1161 and should have completed too. Medium term outlook is turned bearish and the current fall from 1.7043 is tentatively treated as resumption of the long term down trend, which should target a new low below 1.3503 eventually. On the upside, break of 1.6740 resistance is needed to invalidate this bearish view.

In the longer term picture, the corrective nature of the multi-decade advance from 1.0463 (85 low) to 2.1161 as well as the impulsive nature of the fall from there suggests that GBP/USD is now in an early stage of a long term down trend. Rebound from 1.3503, which is treated as correction in the larger down trend, has likely completed and fall from 1.7043 is tentatively treated and resumption of such down trend that will send GBP/USD through 1.3503 low eventually.