My EURUSD forecast for week ending 8 Nov

The most significant econ data of the week is the US Q3 advance GDP which at +3.5% beat estimates of +3.2%. This is largely a positive for risk sentiment as it marks the bottom of the economy and within the reading’s components; indications were of broad based recovery.

Looking into the details, household spending actually rose 3.4% even as household income fell 3.4%. It seems that instead of de-leveraging, families are returning to spending quite quickly (namely durable goods) and that suggests that this increase in spending might not be sustainable. That number can be largely attributed to cash for clunkers (new cars purchases with a government grant) which just expired.

Meanwhile, residential investment increased for the 1st time in 3.5 years as prices stabilized with help of 1st time home buyers tax credit (again, more government grants) helping real residential investment to rise an astonishing 23.4% after a drop of a similar magnitude in the 2nd quarter. Hence, Q3 will mark the turnaround in the housing market after the subprime crisis. Its sustainability is also questioned but to a lesser extent as the federal govt is likely to continue with the tax credit program until late 2010.

Prior to the release of the GDP data, we saw some risk aversion in the market during which Goldman Sachs downgraded GDP to +2.7%. EURUSD broke below 1.50 firmly and USDJPY came close to breaking the 90 support level as investors pared carry trade.

An observation is that the yen is coming back as the main funding currency now instead of the dollar as short term yields on the dollar at close to 1% is proving very attractive vis a vis yen assets, giving USDJPY support this week (which kept above 90 for the most part). But I the feel the main pair to watch for dollar direction is the EURUSD, the fact that it is now trading below 1.50 for 4 running days goes to show that mkt has been pricing an eventual recovery in the US economy which was confirmed by the GDP release and by extension, the unemployment rate.

Recently there has also been market talk in the WSJ and FT about the fed preparing to change its ‘extended period’ language and the suspicious may think this was induced by some in the fed to prepare the market for an eventual change in language.

In the FOMC meeting next week however, I think the fed will still keep its ‘extended period language’ because recovery is in its early stages and to do otherwise would be disruptive. But they will put more weight and words describing the recovery of the economy and maybe suggest more winding down of securities purchases in light of better corporate funding and financial conditions. QE has ended and would be a thing of the past. All these are dollar supportive as these have to take place before removal of the ‘extended period’ phrase. So even if PMI data and earnings in the earlier part of the week are good, any dollar sell off would be contained. Rangey trading is expected.

My expected range for EURUSD next week (ending 8 Nov): 1.4650 (50 day moving average) - 1.50 (I doubt the market is willing to take on risks before the outcomes of the FOMC on Wed and NFP on Friday.

How high can US stocks go?

I just took a look at the S&P500 weekly chart to see the next target point(s) should the bullish run continues.

It seems that the next important target is 1120 (red line), which has proven also to be a good resistance/support level for the broad equity index dating all the way back to 1998.

1120 happens to also be the 50% retracement level between last year's high and this year's trough, hence highlighting the significance of this level. Its like ISM's 50 expansionary/recessionary cutoff.

If the upward trend continues, the market should have less gyrations between 1080 (red line) to 1120 as this space in between looks quite clear historically. I've gotten the level 1080 from the confusing 'rays' - which I highlighted as brown lines. These are gann lines and show the natural support/resistance levels like Fib lines do.

In terms of momentum, it seems things are going well for the current trend. Volume continues to be higher than usual (vs pre- 3Q '08) and this means good interest in the equity market on the way up. Rate of Change (seen by the ROC section at the bottom) have ascending lows so this spells good momentum.

Beyond 1120, the next objective is 1220, which historically has been a good resistance/support levels for years dating past.

In terms of support, the first line of defence has always been the 12 wk mva (red mva) - a representation of the quaterly average of prices (some funds do window dressing every quarter btw). That currently stands at 1024, where the mkt bounced up from last week. The next level of support will be on the gann line, but because we are pretty far away from that now, let's leave this story to another day if the bear does comes to eat up the bull.