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Thursday, 18 Dec 2008
Bearish Dollar Helps Oil Rally
Oil prices rallied in reaction to the record production cuts announced by OPEC, while the Dollar continued to give back the gains it made during the first 3 months of the financial crisis. In turn, the weak Dollar also helped contribute to the spike in Oil prices late in last nights trading.
USD - Interest Rate Cut Sends the Dollar Down Across the Board
The Dollar took a big plunge on the heels of the Federal Open Market Committee's surprising move. On Tuesday the Fed slashed rates to the floor, down to 0.25%. Most analysts had forecasted the rate to sit at 0.5%. The Fed seems to be sending a clear sign that they will supply the necessary liquidity to the market, as U.S. Interest Rates will effectively be 0%. Other aggressive measures that may be taken by the Federal Reserve are buying agency debt, mortgage debt, and perhaps even U.S. treasuries. Flooding the market with Dollars for liquidity purposes is likely to be the reasoning behind the Fed's actions.
The EUR/USD ended the day at 1.4430, breaking a key 1.4400 level. Big price jumps were seen as early as yesterday morning from low levels of liquidity, as the year end approaches along with the holiday season. The GBP/USD closed up 1.5533, and the JPY strengthened to a 13 year high to close at 87.71.
More negative U.S. Unemployment Data is due today at 1:30pm GMT. Look for the Dollar to continue its plunge, perhaps to the 1.4600 level by the days end. The low U.S. Interest Rates may signal continued weakness in the Dollar going forward. With an Interest Rate effectively at 0.0%, this will give investors little advantage to hold Dollars over other currencies.
EUR - EUR Benefits from U.S. Rate Cut
The EUR has been the primary benefactor from the cut in U.S. Interest Rates as the EUR's bullish run continues into its 9th day. Other factors driving the EUR higher in recent days have been an increase of negative economic data flowing from the U.S. economy. A string of poor unemployment numbers, combined with the Federal Reserve's negative outlook on the economy has sent the EUR/USD to its highest level in 3 months.
Another factor adding to the EUR gains have been low liquidity in the currency markets. As the holidays and end of year approach, currency markets tend to lose their liquidity. Therefore trends tend to be multiplied. Also the recent appreciation of the Dollar during the financial crisis had many traders bullish on the Dollar. Traders who have been long on the Dollar needed to reverse their positions in order to jump on the trend of the falling Dollar. This may have had the effect of amplifying swings in the market, sending the EUR/USD even higher. If these trends continue, the 1.5000 mark may be reached. This level has not been seen since August, just one month before the world was gripped by a financial crisis.
Today the German Ifo Business Climate report will be issued at 9:00am GMT. The report is a leading indicator of economic sentiment in the Euro-Zone's largest economy. Traders are advised to follow this release for short-term intraday trading strategies.
JPY - Will Japan Follow America's Aggressive Monetary Policy?
The recent Interest Rate cut in the U.S. sent the USD/JPY tumbling down below the 88 Yen level. Yesterday the JPY showed a bit of spark, reaching the 87.12 mark. This is a level not seen for nearly 13 years. The Yen is up more than 25% this year vs. the Dollar. The bullishness of the Yen has had some negative effects on the Japanese economy. For example, an appreciation of the JPY has significantly hurt Japanese exports, which make up a large percentage of the Japanese economy.
Currently U.S. Interest Rates are lower than Interest Rates in Japan. The U.S. rate cut has put more pressure on the JPY and also on the Japanese government to further cut rates. Japan has historically had one of the lowest Interest Rates, making the carry trade a profitable trading strategy. Some economists are calling for further rate cuts in Japan to help weaken the Yen. The Bank of Japan (BoJ) meets on Friday to determine Interest Rate Policy. We may see some further weakening in the USD/JPY as the BoJ Interest Rate decision nears. Look for the pair to trade perhaps near the lower 87.00 level.
We have yet to hear of direct intervention in the currency market by the Japanese government, though tough talk has been heard from the Japanese Finance Minister. However the market appears to be shrugging off these comments. These may be one of the tools the Japanese government is using in an attempt to artificially boost the Yen.
Oil - OPEC's Slash in Output Sparks Oil Rally
A massive production cut by OPEC help boost the price of Crude Oil yesterday. This was in reaction to the cartel agreeing to reduce Crude supplies by 2.2 million barrels per day. This was the largest cut announced in the cartel's history. OPEC's large output cut led to a 450 pip rise in Crude prices to $44.73 a barrel at around 23:00 GMT last night. Many analysts agree that non-member oil producing countries are likely to follow through on the tough talk.
Traders are still wondering if the drop in Crude prices may reverse in the near future. Oil prices have fallen below most analysts' expectations in the past two months and there is a possibility that prices may continue to drop to $30 without further fundamental support. Potentially prices may be significantly boosted in the next several months if there is an increase in demand and more dramatic supply cuts.
The fall in the Dollar also helped increase the price of Crude last night. A number of analysts point to the correlation to a falling Dollar and an increase Crude Oil prices. Thus the recent drop in the Dollar supported the spike in the price of the commodity late in last nights trading.
The Daily chart is showing that the pair is still in the bullish configuration. However, the RSI is already floating in the overbought territory indicating that a bearish correction might take place in the nearest future. When the downwards breach occurs, going short with tight stops appears to be preferable strategy.
The bullish trend is loosing its steam and the pair seems to consolidate around the 1.55 level. The hourlies chart's RSI is already floating in an overbought territory suggesting that a recent upwards trend is fading away and a bearish correction is quite impending. In this case, placing short orders might be a preferable trading strategy.
The hourlies chart is showing mixed signals with its RSI fluctuating at the neutral territory. However, the Daily Chart's RSI is already floating in the oversold territory indicating that a bullish correction might take place in the nearest future. When the upwards breach occurs, going long with tight stops appears to be preferable strategy.
The 4 hour and the daily chart's RSI have peaked at the over-sold zone, suggesting that a bullish correction move might be quite imminent. In this case, placing long orders might be a preferable trading strategy.
The Wild Card
Gold prices rose significantly in the last two weeks and peaked at $864 for an ounce. However, daily charts' RSI is floating in an overbought territory suggesting that a recent upwards trend is loosing steam and a bearish correction is impending. This might be a good opportunity for forex traders to enter the trend at a very early stage.