Dollar surged broadly last week as driven up by dovish actions from Eurozone's ECB, Canada's BoC and China's PBoC. The dollar index is building up momentum for a take on 100 handle again. Euro ended the week sharply lower as ECB hinted at the possibility of additional stimulus in December meeting. Canadian dollar followed next to Swiss Franc as BoC revised down growth projections. Meanwhile, equities were given a strong boost as PBoC cut interest rate again. DJIA and S&P 500 could now be heading back to historical highs of 18351 and 2134.7 respectively. Thanks to strength in the greenback, both crude oil and gold ended the week lower.
Here is a recap of some central banks. ECB left the main refinancing rate unchanged at 0.05%. The marginal lending rate also stayed unchanged at 0.3% and the deposit rate at -0.2%. At the press conference, President Mario Draghi acknowledged that the QE program has been "proceeding smoothly" and would "continue to have a favorable impact". Yet, he indicated that the decline in commodity prices and concerns about slowdown in emerging markets would prolong deflation. As such, the central bank would re-examine its bond buying program in December. This is interpreted as a dovish message and EURUSD fell below 1.12 for the first time since early October after Draghi's comment. The market is quickly pricing in further easing in coming months. More in ECB's Draghi Signaled to Discuss Further QE in December.
The BOC meeting turned out to be more dovish than expected. While leaving the overnight rate at 0.5%, the central bank trimmed its growth forecast for 2016 and 2017, and pushed backward the timing of the economy's expected return to full capacity to mid-2017. Domestically, the BOC acknowledged that the economy has rebounded as projected in July. However, weakened dynamics in global growth should affect the country's economic expansion which highly reliant on exports. More in BOC Trimmed Economic Outlook, As Decline In Commodity Prices Deteriorates Growth.
China's central bank PBoC announced to cut benchmark one-year lending rate by 25bps to 4.35% effective Saturday. The one-year deposit rate was also lowered by the same amount to 1.75%. In addition, reserve requirement ratio for all banks were cut by 5-bps and there will be extra 50bps cut for some institution. That's the sixth rate cut since last November and the most aggressive policy easing cycle since the global financial crisis back in 2008. And, it's seen as a desperate move to save the economy from sharper slowdown.
The RBA minutes for the October meeting indicated that policymakers turned more upbeat over the domestic economic developments, although the rally in property market prices remained a concern. The appeared confident that low interest rates and low exchange rate were stimulating growth. Meanwhile, the central bank judged that growth slowdown in China and Fed's rate hike schedule are still the major uncertainties in the global economic outlook. We retain the view that the RBA would maintain the cash rate unchanged at 2% for the rest of the year. More in Members More Upbeat Over Domestic Growth And Employment Outlook, RBA Minutes Suggested. .
Dollar index's break of 96.70 resistance confirmed resumption of whole rebound from 92.62. More importantly, the development further confirmed strong support above 38.2% retracement of 78.90 to 100.39 at 92.18. The long term up trend remains intact. Further rise should now be seen to 98.33/100.39 resistance zone next. Nonetheless, we'll be cautious on strong resistance from there to bring near term reversal to extend the medium term consolidation pattern.
The strong rebound rise last week further confirmed that pull back from 18351.36 was merely a correction. The long term up trend form 6469.95 is still intact. Further rally would be seen in near term to retest 18351.36 high. However, as the fourth wave of the five wave sequence from 6469.96, price actions from 18351.36 might extend further to form a sideway consolidation pattern. Thus, we'll be cautious on strong resistance around 18351.36 to limit upside and bring near term reversal.
Regarding trading strategy, we sold AUD/NZD last week. The cross did dip little but movement was limited as markets' focus was in elsewhere. We'll hold on to the short position first and lower the stop to 1.0850. Meanwhile, we'll try to sell EUR/USD on recovery to 1.1140 this week, and target 1.0807 and 1.0461 as targets.