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Wednesday July 7, 2004 - 07:26:15 GMT
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Forex Trading Strategies - July 7th 2004

AUD/USD tests .7200 crucial swing level; a breakout will switch focus to .7500 objectives

Australia kept interest rates unchanged for seventh month as the housing market slows and the inflation rate at a four-year low. RBA Gov. Macfarlane left the overnight cash rate target at 5.25 pct.


- Australia's central bank kept interest rates unchanged for a seventh month amid signs the housing market has slowed and as the inflation rate is at a four-year low. Reserve Bank of Australia Governor Ian Macfarlane and his board left the overnight cash rate target at 5.25 percent, as forecast by all 23 economists surveyed. The bank has kept rates unchanged this year as reports showed house prices fell and fewer homes are being sold after borrowing costs increased a half percentage point last year. Still, signs the economy is rebounding from its slowest growth in a year have prompted some economists to forecast a rate increase by December.

- Australian employment probably rebounded in June, keeping the jobless rate at a 23-year low and adding to signs the economy is recovering after growing at its slowest pace in a year. The economy probably added 25,000 jobs last month following the loss of 41,100 positions in May, according to the median forecast of 23 economists surveyed. The jobless rate probably stayed at 5.5 percent as more people sought work. The report will be released tomorrow at 11:30 a.m. in Sydney. Figures the past two weeks have shown exports rose to a 16- month high in May, retail sales rebounded and credit is growing at its fastest annual pace in more than 14 years. A pickup in growth may support some economists' expectations the Reserve Bank of Australia will raise interest rates this year.

- A measure of the U.S. service economy fell more than expected in June, suggesting the pace of the expansion may be cooling, and indexes for prices and employment rose to records. The Institute for Supply Management's index of financial services, construction, retail and other non-manufacturing industries dropped to 59.9, the lowest since December, from 65.2 in May. The drop of 5.3 points is the largest since October 2001, in the aftermath of terrorist attacks on New York and Washington. The services report follows figures last week that showed job gains and auto sales were less than expected in June. The index still has been above 50, showing expansion, for 15 straight months.

May ISM Services:

The May ISM services index dropped 5.3 points to 59.9 in June, the first reading below 60 in six months. But the components did not change much from Mays level. Indeed, the new orders and new export orders indices were up during the month, even as the backlog index retreated. The employment index rose to 57.4 from Mays 56.3; this is the highest level in the seven-year history of this series and signals a very upbeat hiring outlook. And inventory sentiment was also essentially unchanged from May.

All this suggests that the decline in the headline services index may be sending a misleading signal regarding the magnitude of the deceleration -- the decline in both the manufacturing and services index does suggest some deceleration. The recent surge in energy prices is likely acting as a restraint with the usual lags. Higher interest rates and the winding down of the tax stimulus are also having an impact.

At any rate, a slowdown from the torrid pace of the prior few months was inevitable as both the manufacturing and services expansion transitioned to a sustainable pace. This is not a development one should lose sleep on.

FX Market Summary

The yen strengthened for the first day in three in Asia after newspapers reported Japan will raise its economic outlook for the first time in six months. The Cabinet Office in a monthly report to be released July 13 will say a recovery among companies is spreading to consumers, the Yomiuri and Nihon Keizai papers said, without saying where they got the information. The yen fell yesterday to a three-week low as Japanese stocks dropped and on concern the ruling Liberal Democratic Party will lose seats in an election Sunday. Against the dollar, the yen rose to 108.95 at 12:17 p.m. in Tokyo, from 109.51 late yesterday in New York. It also rose to 134.13 per euro, from 134.51. Japan's currency yesterday traded as low as 109.73, its weakest since June 17.

The dollar fared mostly well late Tuesday. The greenback gained 0.3% against the Japanese yen, edged up 0.1% vs. the Canadian dollar, and traded flat against the euro. Sterling gathered in modest gains following the release of Mays industrial production data: the larger-than-expected 0.5% m/m rise in activity pushed the British pound upward vis--vis both the U.S. dollar and the euro, adding 0.5% and 0.7%, respectively. The euro rose against the greenback in morning trading, in spite of soft retail sales data; however, the U.S. dollar has recovered in the afternoon and the single currency went back to flat for the day. The Swiss franc was broadly unchanged vis--vis the majors today and is currently trading around 1.5195 per euro.

Forex Technicals:

EUR/USD - the theme which indicates that the brief consolidation may have ended at 1.2270 is even more compelling now -- a +triple bottom+ may be in place -- and the currency gets set to renew the uptrend soon and validate the short-term and medium-term views. The current should challenge the 1.2350 top shortly, and should push through even higher, perhaps 1.2500 the next time around.

GBP/USD - the currency is heading higher again and should make a clean break through 1.8460 later in the day. Good fundamentals continue to underpin the currency pair. The uptrend should accelerate further from here. The positive scenario stands out, with further fundamental developments to push the currency forward -- the 1.8480 area still the next objective. A rally further than 1.8500 reinstates the 1.9100 targets much further out.

USD/JPY - the currency pair consolidates after a retreat from a 109.75 top -- we still feel that the recent upsurge does not bode well for the JPY -- we may see further ascent towards 112.00 later in the week. This is a significant detour, but a rally in a bear market nonetheless. The downtrend should reassert thereafter and have another go at 107.00 trough. The next downside target is 105.70 then 103.50.

USD/CHF - the currency retreated from 1.2380 again -- we still see the possibility of the downtrend resuming from current level. We still expect to see further declines to 1.2270 trough, then to 1.2150 base and through 1.2000 much further out.

USD/CAD -- resistance appeared at 1.3290,and there's no change in the view -- a new test of 1.3200 may finally succeed later in the day. The unit should fall further as the downtrend resumes in earnest. The next downside target may still be the area of 1.3000.

AUD/USD - the uptrend is back on track, after support at .7120 solidified. The rally resumes, and the currency should shortly test the .7200 top. This is a crucial swing level for the currency -- if taken out then the focus will switch to .7500 objectives.

NZD/USD - support appeared at .6480 and is set to go over the .6550 top shortly. The currency should accelerate higher towards the .6800 focus point further out.

EUR/JPY - the short-term scenario makes a substantial detour to the upside -- the current consolidation notwithstanding. The cross might rise to as high as 138.00 before significant resistance appears. The longer-term scenario takes on a large sideways consolidation requring a sell-off from 138.00 potential resistance.

EUR/CHF - no change in view -- the cross may find new support above 1.5150,which should propel the it higher -- we expect a rally to at least 1.5350. The cross is forming a broad bottom -- for the first time in many weeks, the cross shows signs of a longer-lasting reversal. Any rally above 1.5430 suggests that the long bear market is over.

EUR/GBP - the cross did pullback to .6670 and may yet fall to .6650/40 from here. But the cross should eventually resume the uptrend, which has .6820 as next upside focus.


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