More Consolidations In Near-Term After Failed Breakout

Financial markets attempted a breakout last week but failed. The Dow jumped to as high as 13588.73 but reversed ahead of 13661.87 resistance and dropped sharply to close the week at 13343.51. The Dollar Index recovered ahead of 78.60 support to close at 79.62.

The overall outlook in the currency markets are quite mixed. EUR/USD failed to break out 1.3171 resistance and retreated. GBP/USD was limited at 1.6177, well below recent high of 1.6309. However, USD/CHF did breached 0.9238 support to resume recent decline. AUD/USD's rebound to 1.0410 was stronger than expected by again, there was no follow through buying.

Meanwhile Canadian dollar was indeed the weakest one last week on dovish comments from officials and weak inflation data. EUR/JPY breached 103.86 resistance to resume recent rally but momentum isn't too convincing. Meanwhile, GBP/JPY on the other hand, even failed 128.82 resistance.

After all, firstly, we'd expect commodity currencies, in particular Canadian dollar, to stay weak this week, considering risk of deeper pull backs in stocks and commodities. Secondly, while dollar may attempt to extend it's rebound against European majors, the power should be relatively weak and strength shouldn't be sustainable. Thirdly, the outlook in euro and swissy should remain bullish for the moment and thus, even though some decline could be seen this week, we'd expect these to to pick some strength again towards to end of the week. Comparing the European majors, sterling will likely lag behind, as it did against dollar and yen last week. So we'd look for opportunities to get EUR/CAD and EUR/AUD long in the near-term.

While failing to increase confident over the eurozone outlook, the EU summit held last week raised confusion over whether the banking union would begin operation early next year. EU President Herman Van Rompuy stated that the regulatory system would "probably be effectively operational" in as soon as 2013. However, German Chancellor Angela Merkel's tone appeared less certain.

She said that "there are complicated questions to clarify and we'll see in December if we complete it or not…For now, the political will is there" Merkel added that the gold is "banking supervision that's worthy of the name, because we want to create something that's better than what we currently have." Moreover, there were few updates from Spain. Prime Minister Rajoy said that "there hasn't been any pressure, there have only been opinions" on the bailout. Rajoy said that "opinions are one thing and decisions are another" and no decisions have been made.

In Greece, it's expected the next tranche would be granted as the troika appeared to be satisfied with the country's fiscal consolidation progress. In the EU post-meeting statement, the leaders welcomed "the determination of the Greek government to deliver on its commitments and we commend the remarkable efforts by the Greek people" and "good progress has been made to bring the adjustment program back on track."

In UK, the October BOE minutes indicated that the 9 members voted unanimously to leave the Bank rate unchanged at 0.5% and the asset purchase program at 375B pound at the meeting. The minutes also unveiled that policymakers were divided regarding whether asset purchases should be extended after its completion by the MPC meeting in November. Members were also split on the effectiveness of the program on the country's economy. Therefore, the month's minutes omitted the language that policymakers "felt that additional stimulus was more likely than not to be needed."

The Canadian dollar was the weakest currency last week. BoC governor Carney warned the "synchronous slowdown under way in the global economy" could spill over into Canada. And, BoC's revised forecast next week "will take into account the impact of the uncertainty." BoC had been somewhat hawkish as it mentioned in its last statement that "some modest withdrawal of the present considerable monetary policy stimulus may become appropriate." However, Carney's comment sounded like the central bank will retreat itself from this tightening bias and turn neutral instead. Finance Minister Jim Flaherty said that while Canada is "still on track," the economists have told them to "anticipate moderate growth" and the economic forecasts may have to be revised downwards. Deeper selloff was see after lower than expected core inflation reading.

The RBA minutes for the October unveiled reasons for the surprising rate cut of -25 bps. The decline in bulk commodity prices, slowdown in the job market, persistent strength in Australian dollar and weakening domestic growth outlook were key factors leading to the rate cut earlier in the month. Overall, the RBA saw easing in the growth outlook and the minutes was dovish. The chance of further rate cuts later this year cannot be ruled out.

China's latest set of economic data showed some positive signs in the growth outlook. 3Q12 GDP expanded +7.4% from the same period last year and +2.2% from the previous quarter. Premier Wen Jiabao indicated that "growth has started to stabilize amid positive changes in the third quarter," signaling a bottom might have been seen in the last quarter.

Other data such as retail sales, industrial production and fixed asset investment also showed acceleration in growth in September. In our opinion, the improvement in Chinese economic data should delay the next round of monetary easing as policymakers would prefer to take a "wait-and-see” mode and gauge the impacts of previous reverse repos operations.