Speculations on interest rates and monetary policy were the main drivers in the forex markets last week. Aussie and Euro were the two weakest major currencies. There were talk that RBA would eventually cut the benchmark rate to counter the recent move by banks that lifted interest rates. Also, RBA noted in a report there was some cool down in the property markets. Eurozone inflation turned negative again, intensifying the talk the ECB needs to extend or even expand the quantitative easing program eventually. Meanwhile, dollar closely followed as one of the weakest and market pare back bets on 2015 rate hike by Fed. As of Friday, fed fund futures were only pricing in 30% chance of a December hike. Indeed, the odds for rate hike by March is only 52%, notably lower than 62% chance priced in a month ago.
On the other hand, New Zealand dollar ended up as the strongest one as markets now start to believe that the conditions are in place for RBNZ to pause the loosening cycle and assess the impact of the prior rate cuts. Sterling was the second strongest in spite of mixed data. But strength in sterling was probably mainly due to weakness in Euro and dollar. According to Sonia data, markets are only pricing in a full 25bps hike by BoE after December 2016. Swiss Franc only benefited from flows from Euro and ended as the third strongest one.
Expectations of a delay in Fed's hike lifted stocks too. DJIA weathered the intra-week and closed higher at 17215.97. The regain in momentum now raised the chance of retesting historical high of 18351.36. Initial focus will be on 61.8% retracement of 18351.36 to 15370.33 at 17212.60 this week. Sustained break there will pace the way for 18351.36. We'd maintain that 18351.36 is a medium term top and thus strong resistance is anticipated there to limit upside. Such development would limit strength in yen and probably provide some support to dollar. Meanwhile, below 16887.67 will turn near term outlook bearish for 15370.33 again.
Dollar index recovers mildly after dipping to 94.06 but that was mainly due to weakness in Euro. The index is still expected to head back towards 92.62 support as another leg inside the consolidation pattern from 100.39. We'd continue to expect strong support around 38.2% retracement of 78.90 to 100.39 at 92.18 to contain downside and bring rebound. Above 96.70 could bring a test on 100.39. But range trading will continue until the Fed's rate hike is confirmed.
AUD/NZD ended last week as the biggest mover and the technical development is worth some attention. The sharp decline confirmed that rebound from 1.0015 has completed at 1.1638 already after failing to sustain above 38.2% retracement of 1.3793 to 1.0016 at 1.1638. Deeper fall would be seen back to 1.0016 in short term medium term. We'll hold on to this bearish view as long as 1.0981 resistance holds.
Regarding trading strategy, we're still holding on to the EUR/GBP long position. The cross did surged to 0.7492 last week but reversed since then. Our stop of 0.7330 wasn't hit yet but we'd prefer to exit first. Upside momentum in EUR/GBP is just very unconvincing and risk of near term reversal is high. We'll turn the strategy to AUD/NZD and just sell it at market this week for 1.0016 low or until loss of momentum. Stop is placed at 1.1000.