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Monday, 5 Sep 2011
A Brief Pause for the EUR
With both the US and Canada away on holiday liquidity will be tight in the North American trading session which may allow for a brief pause in the decline of the EUR versus the USD and CHF.
USD - Slowing but Not Stalling Growth
The disappointing data from the US economy continues to roll in. Friday's NFP report showed the US failed to add new jobs in the month of August. Average hourly earnings fell to -0.1% from a gain of 0.5% which takes a bit of the bite out of last week's strong personal spending data. The number of aggregate hours worked also declined.
In contrast to Europe the US economy is stalling but not contacting. This will likely bring policy responses from both the fiscal side as well as the monetary policy side. With pressure from Republicans, President Obama has moved his economic speech to September 7th where the ideas being kicked around range from extending US unemployment benefits, an extension of the payroll tax break, and a potential jobs program that may fall short of such previous ambitious programs of the Works Progress Administration from the mid-1930s.
A monetary policy response may come from the2-day Fed meeting in September. The potential exists for the Fed to increase the length of maturities of the debt it holds on its balance sheet or perhaps a pledge to target inflation at a particular rate, similar to the Fed's commitment to hold interest rates until mid-2013. Additional bond buying seems unlikely at this time given the uptick in US inflationary pressures.
EUR - Stalling Economic Growth
After a stellar Q1 where the German economy grew by 1.5%, Q2 stands in stark contrast with growth sputtering to 0.1%. Expectations are not rising with euro zone manufacturing PMIs falling below the 50 boom/bust level in August. The French economy has also stalled with zero growth in Q2. Additional pressures are being felt in both Italy and Spain with PMIs falling to new lows.
Europe has been engulfed in a debt crisis and in contrast to the US will not allow for a fiscal policy response. The opposite approach has been taken to implement additional austerity measures in Italy and Spain which may intensify the stagnant growth just as the global economy begins to slow. The options for the ECB remain limited in its upcoming policy meeting. Last week Trichet hinted at a slowing of inflationary pressures and a reduced inflation forecast will likely be formally made on Thursday. It is unlikely the ECB will back away from its two interest rate increases earlier this year as to do this would be the admission of a failure to correctly implement monetary policy. Note that in 2008 the ECB continued to raise interest rates as the world crept towards the financial crisis, only to backtrack in light of the Lehman Brothers collapse.
Additional pressures are being felt in Greece. The Troika has packed up and left Athens early after failing to complete their review of Greece's finances. The Greek government has admitted that GDP will likely contract further than expected and therefore the country will likely fail to reach its previously outlined budget deficit reductions. Greek 2-year yields have been trading at their highest levels prior to the July 21st agreement.
As such the EUR/USD has fallen from 1.45 to below 1.42 this morning in Asian trading. The pair has broken its rising trend line from the July low and is moving towards the 1.4100 level where the August 11th low coincides with the 61% Fib retracement from the July to August move. The EUR/USD could remain range bound unless the pair moves below the 1.4050 level. The EUR/CHF also looks vulnerable after closing the August 15th gap. The EUR/CHF dropped a dramatic 1000 pips in only a week.
AUD - RBA Set to Meet Tomorrow
The Reserve Bank of Australia will be meeting tomorrow and the forex trading blogs have been widely speculating of an impending RBA rate cut, similar to that of Turkey and Brazil. However, growth in Australia is not slowing as it is in other parts of the global economy. Retail sales continue to post strong returns and commodity prices remain well supported. The speculation of an RBA rate cut may be premature and could leave some upside potential for the Aussie dollar.
This morning the AUD/USD gapped lower and this level of 1.0625 followed by 1.0800 should serve as the first two resistance levels. To the downside, movement may be capped at 1.0310. The AUD/NZD is showing a bullish head and shoulders reversal pattern with the neckline providing resistance at 1.2750 with a measured move of roughly 400 pips.
Crude Oil - $90 Seen as Near Term Resistance
Spot crude oil prices continue to struggle to maintain their gains. Last Friday's disappointing NFP report did little to bolster expectations for increased global economic growth or demand for the commodity. Stagnant US unemployment continues to weigh on the US economic recovery but hopes of additional policy easing by the Fed may allow a test of the $90 resistance level. Support may be found at $84.50, $83.00, and $79.40.
Last week's candlestick highlights two key points; the inability of the EUR to maintain a bid above the 1.4500 level and the formation of an outside day down candlestick pattern on the close. As such the key support levels for the pair are found the 1.4100 level where the August 11th low coincides with the 61% Fib retracement from the July to August move. The other key level is the rising trend line from the May2010 low which comes into play at 1.3975. To the upside resistance is found at this week's opening gap of 1.4180 followed by 1.4325 and last week's high of 1.4550.
The GBP/USD has the monthly, weekly, and daily stochastics falling while the price is encroaching upon significant support where the 200-day moving average and the August 11th low coincide at 1.6110. A break here could open the door to 1.6000 with additional support way down at 1.5780. To the upside the high from last Thursday/Friday at 1.6250 stands as initial resistance followed by 1.6450 and 1.6615.
The JPY has formed a base at 76.40 while failing to move below the all-time low of 75.94 set earlier in August. Weekly and daily stochastics have turned up but monthly stochastics remain firmly to the downside. Initial resistance is found at 77.70 followed by the post intervention high of 80.20 and finally at 81.30 off of the 2007 falling trend line.
The appreciation of the pair failed at the 0.8275 resistance and the long term downtrend continued with a vengeance, falling as low as 0.7710 before recovering slightly. There are two levels that stand out from the August move higher; 0.7650 at the 50% Fibonacci retracement and the 0.7510 at the 61% retracement.
The Wild Card
Since last weekend crude oil has switched directions and slid about 470 pips. Currently as the Slow Stochastic on both the 4-hour and the 1-day charts are rolling lower, it seems that the bearish trend has potential pick up speed. Crude has support at $84.00 a barrel. This could be a great chance for forex traders to join in a very popular trend.
|04:45||JPY||30-y Bond Auction||1.46|2.7||-||-|
|08:00||EUR||German Factory Orders||m/m||4.2%||-0.8%||-|
|13:00||GBP||Official Bank Rate||0.50%||0.50%||-|
|13:00||GBP||Asset Purchase Facility||375B||375B||-|
|13:30||USD||Challenger Job Cuts||y/y||17.6%||-||-|
|13:45||EUR||Minimum Bid Rate||0.05%||0.05%||-|
|14:30||EUR||ECB Press Conference||-||-||-|
|14:30||USD||Revised Nonfarm Productivity||q/q||-1.8%||-2.2%||-|
|14:30||USD||Revised Unit Labor Costs||2.7%||3.1%||-|
|16:00||USD||FOMC Member Williams Speaks||-||-||-|
|16:30||USD||Natural Gas Storage||-||-||-|
|23:30||AUD||AIG Construction Index||45.9||-||-|