It looked as if risk markets started to lose momentum as Greece headed closer to securing the EUR 130b second bailout from EU/IMF. Friday's selloff in stocks could be seen as position squaring ahead of the crucial austerity package vote in Greek parliament. It could also be seen as a sign that investors were indeed looking past and jumping ahead the Greek events and reversing their positions for short term. We'd like to point out that DOW has so far failed to sustain above prior high of 12876 made in 2011 and risk of reversal is starting to build up. CRB commodity index showed sharp fall on Friday and ended the week in red. In currency markets, Euro, Sterling, Swiss Franc and Canadian dollar showed sign of short term topping against dollar. Aussie was less weak but is also vulnerable to deeper fall. The initial reaction this week to the Greek vote should reveal whether markets were just nervous ahead of the weekend, or they're reversing the underlying trend.
After marathon negotiations, Greek political leaders agreed on the austerity deal finally. But even so, EU finance ministers delayed approval of the second bailout and instead requested three more things from Greece. That include firstly pass the austerity package in parliament on Sunday, secondly find extra EUR 325m in savings for 2012, and thirdly give "strong political assurances" for continuing the reform implementation after April's general election. At the time of writing, Greece's cabinet has unanimously approved the austerity measures, which include steep cuts in private sector wages, cutting 15,000 public service jobs and adding EUR 3b of spending cuts in 2012. Greek parliament will vote on the package on Sunday. It's believed that Prime Minister Papademos would easily secure more than half of the 300 vote in parliament considering that the main coalition partners, the Socialists and the conservative New Democracy party, have a combined 236 seat majority. Greece will then submit the whole package, including the PSI debt swap deal, to EU finance ministers on Wednesday.
ECB left the main refinancing rate unchanged at 1%. Policymakers appeared to be more optimistic about the economic outlook. In the policy statement, the term 'substantial' was removed when describing 'downside risks to the economic outlook'. At the press conference, President Draghi said that 'hard' data have provided support the improved economic prospect. He also stated that the central bank was less pessimistic than the IMF's latest projections. The BOE expanded the asset purchase program by +50B pound to 325B pound and left the Bank rate at 0.5%. As mentioned in the policy statement, 'the underlying pace of recovery slowed during 2011, with activity falling slightly during the final quarter. While policymakers noted that 'some recent business surveys have painted a more positive picture and asset prices have risen', the pace of expansion in the country's major exporters 'has also slowed and concerns remain about the indebtedness and competitiveness of some euro-area countries'. More in As Expected, BOE Added More Stimulus while ECB Stood Aside.
RBA unexpectedly left the cash rate unchanged at 4.25% in February, in contrast with consensus of a rate cut by -25 bps. The decision, in spite of growing uncertainty in the sovereign debt crisis in the Eurozone, indicated policymakers' confidence in China's demand and US' economic recovery. More in RBA Unexpectedly Paused After 2 Successive Rate Cuts. Later in the week, RBA lowered 2012 inflation forecast to 3.00%, down from prior projection of 3.25%. Underlying inflation are expected to be at 2.75%, unchanged from prior projection. However, average growth in 2012 are expected to be at 3.5%, sharply lower than prior projection of 4.00%. The forecasts are based on assumption of keeping interest rate on hold at 4.25%. Overall, RBA expect inflation to "remain around the midpoint of the target range for most of the next couple of years" and that provides “scope for easier monetary policy should demand conditions weaken materially."
Two pieces of data from China weighed down on investor's sentiments last week. CPI jumped back to 4.5% yoy. The data might reinforce officials' concern that inflation is not going away yet and could complicate the plan to add stimulus to revive growth, lowering the possibility of policy loosening. Trade surplus widened sharply to $27.3b in January. However, that's due to sharply decline in imports, by -15% to $122.7b. Export dropped -0.5% to $149.9b, continuing it's gradual down trend. Economists viewed steep decline in imports as a sign of extremely weak domestic demand.
Technical Highlights
DOW continued to feel strong resistance from 12876 as it failed to sustain above this resistance level again despite edging higher to 12924.71 last week. It's too early to confirm reversal but the picture is not looking good with bearish divergence condition in daily MACD. We'd expect DOW to be limited below 13000 resistance for some time, with focus now back to 12529 support. Decisive break there will raise the odd that rise from 10404.49 is finished and should being deeper fall through 12284 resistance tuned support to confirm.
CRB commodity index's rally attempt was limited well below 319.35 and Friday's fall was steep. Near term focus is back to 309.37 key near term support level. Break there will confirm completion of rebound from 293.5 on a small head and shoulder top (head at 319.35). In such case, near term outlook will be turn bearish. The next fall could either be resuming the whole decline from 370.70 or as a leg in the pattern fro 292.39. In either case, retest on 292.39/293.5 support zone would be seen.
Dollar index drew strong support above 38.2% retracement of 72.69 to 81.78 at 78.30 and rebounded strongly last week. The development suggests that a short term bottom is likely in place. That is, stronger rise is in favor back towards 80 psychological level and above in near term. However, at this point, we're favoring the case that whole rebound from 72.69 is finished at 81.78 on bearish divergence condition in daily MACD. Hence, we'd expect strong resistance below 81.78 and bring another fall through 78.36 eventually.
The Week Ahead
Greece will remain the focus next week but after all, markets are expecting the second bailout would be eventually approved no matter what and Greece would avoid disorderly default in March. FX markets will be driven by risk sentiments as a whole, which should then be affected by the key economic data to be released this week. That includes GDP from Japan and Eurozone countries.
Monday: Japan GDP; Swiss PPITuesday: UK RICS hour price balance, CPI; BoJ rate decision; German ZEW; US retail salesWednesday: New Zealand retail sales; Eurozone GDP; UK job, BoE inflation report; US empire state manufacturing, TIC capital flow, industrial production, NAHB housing market index, FOMC minutesThursday: Australia employment; US new residential construction, PPI, jobless claims, Philly Fed surveyFriday: UK retail sales; Canada CPI; US CPIUSD/CAD's recovery last week pushed daily MACD back above signal line and suggests that a short term bottom is already in place at 0.9926, ahead of 0.9891 support. Initial bias is neutral this week with focus back on 1.0070 minor resistance. Break there will confirm this case. Also, this will be a signal that whole decline from 1.0522 is finished. That is, another rising leg inside the pattern from 1.0656 could have started then and would turn near term outlook bullish for upper trend line resistance (now at 1.0342). Nonetheless, failure to take out 1.0070, followed by break of 0.9926 will extend the fall from 1.0522 back through 0.9891 support instead.
In the bigger picture, a medium term bottom is in place at 0.9406 and price actions from there could either be consolidation to fall from 1.3063 or the third leg of the whole consolidation pattern from 2007 low of 0.9056. We're favoring neither case for the moment. Firstly, we'd expect 0.9406 to hold for a while at least. Secondly, the eventual pattern of the price actions from 1.0656 would decide whether rebound from 0.9406 is going to extend higher, or USD/CAD is just gyrating in range. We'll stay neutral first until the pattern from 1.0656 finishes.
In the longer term picture, there is no clear indication that the long term down trend from 2002 high of 1.6196 has reversed even though bullish convergence condition was seen in monthly MACD. Current development dampens the case that fall from 1.3063 is resuming the such down trend. But there is no change in the long term bearish view so far. A break of 0.9056 low is still anticipated after all the consolidative price actions complete.
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