Hang Seng Index (correction or bust?)

Hang Seng Index became the third major index to slip into a bear market by definition after Nikkei Index and Shanghai Composite Index(falling more than 20% off its high). A break from the descending triangle support line sent the index down testing its major support at 24,000, which is the 61.80% Fib level drawn from the October high in 2007. Perhaps a more important support under pressure is the 200-day moving average. Why is it significant? The index has never stayed below the 200-day moving average for more than 1 week since September 2004. An interesting week, indeed.

No love for the loonie yet

As a country which relies heavily on exports to the US, its officials have responded to loonie's strength by cutting 25 basis points in December. As we are seeing now, USD/CAD continues to appreciate despite broad USD weakness. For the downtrend started in December 2006, USD/CAD looks like it is in a corrective phase. Wave 3 is underway and resistance is expected at 1.0250, which is the high formed in December 2007. Pullback should find support at 1.0100-1.0120. My bias is that we should see a test of its key resistance at 1.0480-1.0500 before we can further decide the direction of this pair.

The little giant (NZDUSD)

NZDUSD has been trading inside a well-defined uptrend channel in the past 3 months. Along with its neighbour, we have seen the breach of NZDUSD's resistance at 0.7780-0.7800. A hold above this area will argue for a test towards 0.7900-0.7920. The next key support lies in the 0.7620-0.7650 region. The yield for the kiwi is very attractive, but we have seen intervention by the RBNZ last year. Any rapid strengthening of the kiwi should hence be treated with extra caution, especially if it rises above 0.8000.

Commodity currencies to shine again? (AUDUSD)

Stock market weakness had caused investors to temporarily abandon commodity currencies, resulting in their lag behind gold and oil for some time. Yesterday, we finally witnessed a decisive break of AUDUSD's downtrend line drawn since November. Its previous resistance at 0.8900-0.8920 now acts as short-term support. A failure to hold that level will impose a test on the 0.8830-0.8850 level, while I will certainly consider adding positions to any pullback to this level. Barring serious shocks from the stock market, we should see a push to at least 0.9100-0.9150.

Can Bernanke be the market saviour?

Following are excerpts taken from Bernanke's speech on 10 Jan.

"Recently, however, incoming information has suggested that the baseline outlook for real activity in 2008 has worsened and the downside risks to growth have become more pronounced. In addition, a number of factors, including higher oil prices, lower equity prices, and softening home values, seem likely to weigh on consumer spending as we move into 2008.

A second consequential risk to the growth outlook concerns the performance of the labor market. Should the labor market deteriorate, the risks to consumer spending would rise.

Thus far, inflation expectations appear to have remained reasonably well anchored, and pressures on resource utilization have diminished a bit.

We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks. Financial and economic conditions can change quickly. Consequently, the Committee must remain exceptionally alert and flexible, prepared to act in a decisive and timely manner and, in particular, to counter any adverse dynamics that might threaten economic or financial stability."


I believe many people including me, are interpreting his speech as proning to a 50 basis point cut. As Mr. Bernanke has highlighted the downside risks to consumer spending, next week's retail sales figure is going to be very crucial.

Should the Fed cut rates by only 25 basis points this time, how would the equity markets react?

EURGBP a never ending rally?

Since breaching its key level at 0.7245, the action of this pair has been fast and furious. Pausing just below the psychological 0.75 level, one must be wondering how much further can it go? Immediate support is seen at 0.7370-0.7380, but the risk of a bounce in Cable should not be ignored as we are running into event risk (interest rate statement) this week. Our stochastic indicator is also delivering a warning signal. If it runs through the immediate support level, we should be eyeing the 23.60% Fib level at 0.7300-0.7320.

Looking to long EURGBP around 0.7320 with stop around 0.7260.

Weekly recap (12/31/07 - 1/4/07)

Not a very good start for the equities market. S&P 500 tumbled 4.52% for the week to close at 1411.63 while Nikkei Index shedded more than 600 points on its first trading day of 2008. Meanwhile, Asian equities market held up relatively well led by commodity shares after oil and gold powered through the roof despite heightened concerns of a US recession. Oil reached $100.09 per barrel on Thursday while gold climbed above $860/oz.

In the US, the December ISM Manufacturing Index showed a relatively large one-month drop, falling from 50.8 in November to below the neutral 50 reading at 47.7 in December, suggesting signs that business conditions have already deteriorated. NFP release showed that only 18,000 jobs were created in December versus 115,000 in the previous month while unemployment rate climbed to 5.0% from 4.8% in November. No signs of a bottom yet in the economy.

In the forex market, the spotlight is on the dollar, albeit not positively. Dollar was being sold off across the board with the major gainers being CHF and JPY as risk aversion stepped in. On Saturday, European Central Bank President Trichet has again retained its hawkish stance in fighting inflation, while indicating that financial market tension is receding. This is likely to give EURUSD another solid boost. On the other hand, market is mixed on the chances of another BoE rate cut on Thursday as the recent sharp fall in Cable and skyrocketing oil price are likely to keep inflation at worrying levels. As we are also having Cable at critical support level, I do not discount the possibility of a sharp but short rebound if the BoE decides to put rates on hold. Any sharp rebound can then be seen as a further opportunity to short GBP vs USD or long EUR vs GBP. The latter is my preferable choice.

Going into next week, I am more negative on the JPY and CHF seeing their recent gains and the fact that the S&P 500 is currently testing its critical support area.

Classic read for the weekend

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Will EURCHF suffer the same fate as GBPJPY?

We should be able to see an eerily similar head and shoulders pattern forming in EURCHF on a weekly chart. Currently it is hovering just above its trendline support drawn since May 2006. A move back above 1.65 is needed to alleviate the downward pressure, while a break below trendline support will definitely exert further pressure on its previous low at 1.6300-1.6310, which also coincides with the 38% Fib level. For now, I retain a bullish bias for this pair.

Looking to long EURCHF at around 1.6400 and 1.6300.

Looking to build stops at around 1.6250 and 1.6150.

USDJPY collapsing?

While last week I highlighted a test towards its pivot zone at 109.65-110, I certainly did not expect it to occur at such an abrupt pace. As we are getting closer to our critical support area at 107.10-107.30, price action into the next few weeks should provide clues about whether USDJPY is going to base build around 107-109. Alternatively, a decisive break below 107.10-107.30 would be bearish for this pair as this would confirm a fifth wave decline with a potential target of 101-102 before bottoming out.