FOREX – Weekly Market Review Oct 12, 09
Rate Decisions Spark Further Buying
Global equity markets rallied significantly last week, as optimism about global growth returned to the markets. The Dow Industrial average finished the week at 9864 reaching a 52 week high, two years after reaching an all time high of 14,198 points.
The S&P 500 Index (the broader market) rallied 46 points or 4.6% to settle the week at 1,071. Optimism began early in the week after the Institute for Supply Management reported that its index of nonmanufacturing activity jumped last month to 50.9, from 48.4 in August, while its business activity/production index hit 55.1, from 51.3. These positive results pushed the S&P 500 up 15 points or 1.5% at the start of the week, showing investors that the U.S economy is slowly crawling out of its recession. One must note that a number above 50 is classed as a positive sign and will often point to expansion.
Positive news continued to grip the market at the beginning of the week as the Reserve Bank of Australia increased its benchmark interest rate to 3.25% from 3.00%. The surprising news pushed the US equity markets and Dollar counterparts higher, with DJIA and S&P rising 1.4% and 1.4%, respectively. On the Forex market the Australian Dollar soared higher reaching a weekly high of $0.9098. European markets rose too, as DJ Euro Stoxx 50 ended up 2.7%.
On Wednesday night and Thursday the US markets received two surprises as Alcoa announced positive earnings and Jobless claims declined. Net third-quarter profit for the aluminum giant was $77 million, or 8 cents a share, compare to expectations of a loss of 9 cents a share. On Thursday jobless claims decreased by 33,000 to 521,000. Economists were expecting a decrease of only 11,000.
Positive Economic News is Bad for the Dollar
The dollar continued to trade on the defensive side, as currency traders were forced to digest a wave of economic news. Following the RBA rate hike, the Australia dollar showed significant gains against the greenback. This was compounded on Thursday after the Australian Economy also showed extremely strong gains in employment. From a technical point of view the Australian Dollar has presented a phenomenal come back, breaking all Fibonacci levels, heading higher. Even though a pullback could take place, the current angle of the trend is signaling that this pair could be headed for its previous high.
The Canadian dollar set a new high for the year around C$1.0565 against the US dollar, using the unexpectedly strong Ivey PMI as a catalyst. At 61.7 (vs. 56.2 exp), the Sep PMI report, showed the strongest result since July 2008.Despite the positive number one must note that the index is not seasonally adjusted and September tends to be a strong month regardless of economic conditions.
On Thursday after Canadian employment grew by 30,000 jobs, the Canadian dollar made new highs for the week. The CAD/USD broke through recent tight range of 1.0630 – 1.1125, and is now presenting enough momentum to test the parity level.
Over in the Euro-zone, ECB President Trichet’s post-meeting press conference left little doubt that the ECB will leave both conventional and non-traditional policy measures unchanged well into 2010. To date the bank wants to ensure that the euro zone’s economy returns to a healthy state, characterized by proper economic growth. Even though Trichet stressed on the importance of the U.S Dollar following the ECB’s rate decision, his comments eventually led to a euro relief rally, as it became apparent that the ECB remains on a very low rung of the intervention ladder. While the euro has since pulled back below $1.4740 with further support around $1.4680, the fundamental picture has not changed with new euro buyers likely to emerge on the pullback.
Gold and silver lead the charge this week in the commodity markets. Gold hit a new all time high at $1067, while silver also hit a 2009 high at $17.91. A strong technical breakout along with the growing demand for an inflationary hedge, pushed precious metals higher during the course of the week. The moves gained momentum after the RBA increased its central bank rate, especially as gold and silver are known to be the best instruments to use as an inflationary hedge.
The Week Ahead
This week a wave of global economic data will be released, some of which traders will need to keep an eye on. After a bank holiday on Monday in the US, Tuesday will start off with National Australia Bank’s Business Conditions (Sep), Consumer Price Index, Retail Sales in the UK, and the Zew survey of economic sentiment in the EMU. On Wednesday eyes will turn to retail sales in the U.S and EMU Industrial Production. Europe and the U.S will take center stage on Thursday as both are expected to release inflation data. The week will end with Canada in the spot light, scheduled to release its Consumer Price Index.
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