Testing the 1.55 level again

Cable is trotting along the descending channel with early of the week it was rejected by the resistance level at 1.562. It went over the lower channel line after a decisive break of 1.55 level and then bounced off support at 1.538.

The bounce from the resistance was capped by the upper channel line and 100 EMA and ended the week consolidating around 1.55 level.

On intraday basis, GBP/USD look to be pointing downward toward price correction from the uptrend that begin on Tuesday.

A break below 1.55 will meet support at 1.5277. On the up move, resistance is expected first at 1.5617 with the next resistance at 1.5711.

Riggit and Bursa Malaysia going separate way

US Dollar Index formed an inside bar pattern on Wednesday that was followed by two consecutive daily loss. Analysts see this week greenback weak performance more of congestion rather than an exhaustion point. It is believed that the last day of the week greenback performances impressive considering the losses were relatively modest as e compare it to the positive performance of the equities market (the S&P 500 rallied 1.7 percent). These two are generally on opposite ends of the risk spectrum; so a negative correlation is a normal state of being.

US Dollar Index

DJIA

FBM KLCI

MSCI World Index(excluding New York)

For the week, Bursa Malaysia as represented by FBM KLCI was on the bullish mood with a slight fall on Tuesday. Bursa performance was creditable in we compare with equity market performance in New York and the rest of the world(MSCI World Index). Since the second week of August, global equity market has been on the downtrend while the Bursa Malaysia registered an uptrend.

USD/MYR

The ringgit performance this week was move in-line with USD Index rather than the Bursa Malaysia. Compare to SGD, ringgit strength in the last three days was weaker than SGD.

USD index failed to penetrate above 83.45 cluster resistance (38.2% retracement of 88.70 to 80.08 at 83.37). With a short term top formed, some sideway move should be seen in near term.

USD/MYR last week was more at consolidation phase with the open and close for the week at almost same level. The short term bias is still bearish and immediate support at previous low at 3.124. The next support is at 3.115. On the upside, resistance is at 3.152 and 3.163

Support at 1.55

1.5680 level and the 50 EMA was the main barrier for cable to move upward. The 1.55 level was brought to test three times last week and it was temporary broken by Friday during the London/New York session. However by end of the week session, cable managed to recover above 1.55 and find support of 200 EMA.

The short trend is on the downside with support a previous low at 1.547 and below it at 1.538. Resistance is at 1.562.

Easing of Currency Regulation

Ringgit was very bullish last week inspired by two economic announcements:

1. 1. August 18: Malaysia’s economy grew near the fastest pace in a decade in the second quarter with manufacturing industry grew 15.9 percent in the second quarter from a year earlier and exports of goods and services gained 13.8 percent. The economy expanded 8.9 percent in the second quarter, beating the 8.4 percent median forecast in a Bloomberg survey of economists.

2. 2. August 19: Bank Negara Malaysia (BNM) has eased regulations on ringgit transactions for trade settlement. The move was seen as another step towards full liberalization of the Riggit towards a freely traded currency.

Despite such impressive GDP result, the economic performance is still slacking if we compare to Singapore’s economic achievement during the first half of the year.

If we scan through the above chart of USD/MYR(the dark color ) and the USDSGD , the first three days both pairs move in tandem but on Thursday (August 19) there was a correction for USD/SGD while USD/MYR keep sliding downward. This clearly indicate that ringgit strength is more influenced by Bank Negara decision to get rid one of last vestige of the capital controls that Malaysia implemented in September 1998 i.e. that the Ringgit is still barred from international convertibility

Analysts viewed that the Bank Negara decision will the increased flexibility given to corporate hedging activity and this is the biggest driver of the ringgit's strength, as speculation mounted that BNM was moving towards allowing the currency to trade freely offshore.

In anticipation of pickup in capital inflow after easing currency regulation, Malaysian bond yields fell. Benchmark five year bond yields dropped to 3.32%, approaching an 18-month low of 3.29% this week.

Last week, I did mention that the support for USD/MYR was at 3.16. It was broken on Tuesday and the next support at previous low at 3.138 was also breached on Thursday. With both support decisively broken, the pair is currently on the bearish sentiment.

For the coming week, support is at 3.09 with resistance at 3.164.

Cable unable to push above 1.60

Many of us were anticipating GBP/USD to break above 1.60 level last week after the pair has been consolidating below that level for five days.

1.60 seem to be a level hard to be penetrated despite three attempts to do so. The previous week four attempts were made on 1.60 level.

By Tuesday, it was clearly indicated that the pair is not going to move upward. It break the upper line of ascending channel and move swiftly downward breaching the support at 1.561 and by Friday closing it reached my target T1 at 1.558 and the lower line of ascending channel.

From the close last Friday at 1.5941 to the close this week at 1.5592, cable lost 349 pip. That range was the longest for the past few weeks indicating a strong selling all week for the pair. The downward move was within the descending channel with prices having moved below the 100 EMA.

On Friday, the pair’s opening price was almost level with the closing price an indication of trend indecision, the short term intraday seem to be neutral but medium term look very nervous. I am expecting for early of the week GBP/USD will rebound with resistance 1.583.

Failure to take out 1.583 will bring cable down to initial support 1.54.

Falling Dow, Rising US Dollar

Last week we saw US Dollar rally sharply against all major currencies with the Euro and the Sterling effected the most. US Dollar closed higher for the first week in nine amidst a sharp correction in Wall Street.

Early of the week, US Dollar rally was seen as an unwinding of overextended US Dollar short position but by mid week it showed that the US Dollar may yet to continue higher till the end of the week.

Fundamentally, The US Dollar strong rebound was attributed to the lite version “Quantitative Easing ” announcement which downgrade the economic outlook. Wall Street was on the sell off mood and the US dollar rebounded.

Our immediate reading on the US Dollar move into next week is whether US Dollar can maintain its trajectory and pace. Interest rate and economic fundamental considerations take a back seat to trader sentiment trends; but confidence can be catalyzed or destroyed by meaningful fundamental events.

It will be critical to watch whether the highly-correlated US S&P 500 will continue lower in the days ahead. The index had recovered sharply following noteworthy tumbles in mid-June to early July. Yet a substantial 11.7% trough-to-peak advance was not enough to take it above highs set in June, and the recent turn lower leaves momentum firmly to the downside. It may be especially important to watch when/if the S&P tests the 1050 mark, as a break below would leave the strongly psychologically significant 1000 handle as next significant support.

Technically, US Dollar Index managed to hold above the psychological 80 level and has rebounded strongly since then. The current development suggested that The US Dollar is still bullish and expected to test resistance at 83.45 (38.2% retracement of 88.70 to 80.08 at 83.37).

The USD/MYR pair fall further to T2 before rebounding on strong US dollar moved against almost currencies on Wednesday. The uptrend rebound was resisted by the downtrend line and on Friday the pair experienced a sharp fall on strong showing of local stock market.

The next week, the pair is expected to test the support at 3.16 with resistance at previous high at 3.1952.

A break of 1.60, next target is 1.61

GBPUSD has cleared the top of a rising channel set from the lows in May but met a strong resistance of 61.8% retracement at 1.5966 from a swing high of August 2009 to swing low of May 2010. By the middle of the week the pair found support at T1 before attempting to break the resistance level on Friday to test the 1.60 psychological level on the heels of the non-farm payrolls (NFP) report, and establishing a new 6-month high for the pair.

The intraday and medium term sentiment is still bullish. A push above 1.60 is expected to carry the pair to 1.61. Support is at 1.5810.

Ringgit Appreciation due to …weak US Dollar or Our Economic Performance?

Last week we saw that the ringgit strengthened against the US Dollar with the most of the move occurred on Monday and Friday.

On a trade-weighted basis, the benchmark currency, US Dollar Index slipped below the midpoint of its December-to-June rally (approximately 81.40) in early of the week and it marked a total nine percent loss.

Over the past two-months, the US Dollar depreciation can largely be largely attributed to a ‘price correction’ effect but the six-month uptrend preceding the June reversal developed well before the negative turn in risk appetite and the fundamental deterioration behind the European Union (the most prominent threat to global financial stability since the US housing collapse). This could be due to excess premium built into the US Dollar as reserve currency that could easily dissipate as soon as the trend was broken and risk appetite enlivened.

By Friday, The US Dollar dropped to as low as 80.08 before closing at 80.41 as poor non-farm payroll report intensified speculation that Fed will re-start the quantitative easing program in this week's meeting.

Most technicians viewed fall from 88.70(June High) is merely a correction to rise from 74.19 only and should be contained by 80 psychological level. However, the previous weeks downside acceleration at such stage and the bullish outlook in EUR/USD and GBP/USD made this view very vulnerable.

The overall weakness in US dollar caused an appreciation in Asian currencies including the Ringgit. The South Korean Central Bank was very busy this week to contain the rampant appreciation of the won against the US dollar.

The strengthening of Asian currencies could also be attributed by international investors flocking back into Asian markets with higher yielding currencies. It was estimated that foreign investors bought almost a net US$9bil of stocks in India, Indonesia, South Korea, Taiwan, Thailand, Vietnam and Pakistan in July, although no figures were available for China and Malaysia.

Official statistics released by Bank Negara last Friday showed overseas funds raised their holdings of ringgit-denominated bonds for a fourth straight month to RM96.1bil in June.

They owned RM59bil worth of government bonds, the highest level since records began in 1970, according to a Bloomberg report.

In other words, the ringgit has been on riding up on this wave of foreign money coming into the market rather than the uninspiring local economic performance.

On the daily chart of USD/MYR (see the above chart), the pair has breached the previous low of 3.1701 (26/4) and consolidating at T1 in early of the weeks. On Friday, the pair broke that level and approaching the T2 level at 3.1341.

Cable target above 1.58

Cable continued the bullish mood that started since Thursday of the previous week. It moved toward the upper resistance line of ascending channel and on Thursday it reached the target upper T2 and make a price correction on the 20 EMA.

By end of the week, cable managed to test the strong resistance level at 1.5708 and the 50% retracement of swing high of 5^th August 2009 and swing low of 20^th May 2010.

Given that US dollar is getting weaker, GBP/USD is expected to continue its uptrend next week. The resistance level is at 1.5838 with support at 1.5527 .

Deteriorating FDI

The U.S. dollar ended lower for an eighth straight week as concerns over domestic growth and firm risk appetite weighed-in.

US reported a disappointing GDP figure last week, which showed lower than expected growth of 2.4% annualized rate in Q2. 2007's GDP was revised down from 2.1% to 1.9%, 2008 down from 0.4% to 0.0%, 2009 down from -2.4% to -2.6%. Peak-to-trough decline was revised down from -3.8% to -4.1%. These revisions showed a much deeper recession than originally reported and in turn indicated that the US economy has a deeper hold to dig itself out of.

The Dollar index slipped further to as low as 81.46 last week as the fall from 88.70 continued. The near term still clouded with bearish tone and 83.45 resistance level still intact. Support is at 80.04, which is close to 80 psychological level as well as 61.8% retracement at 79.73 to contain downside and bring rebound.

The overall bearish US dollar resulted in bullish ringgit. USD/MYR moved to as low as 3.1766 penetrating the last low of 21^st June. The slide of the pair is within the downtrend line that started in 25^th May.

The bullish ringgit against the US dollar is also reflected in bullish tone in local stock market despite bad news on the economic front-the deteriorating Foreign Direct Investments (FDI). FDI figures were hotly debated last week with the ruling government, BN flip-flopping the issues so much so that the ex-Finance Minister, Tengku Razaleigh insinuating that the International Trade and Industry Minister Mustapa Mohamed is not telling the truth about the reason for the deteriorating FDI.

As for the coming week, I am expecting the pair to test the previous low at 3.1701 with support at 3.166. Resistance is at 3.1930.