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Friday, 7 Nov 2008
BoE Shocks the Market while Europe Disappoints
The Bank of England surprised the market yesterday, slashing Interest Rates by 1.5%. Europe followed suite by lowering their benchmark rate as expected but investors were looking for stronger action to tackle the continent's economic difficulties.
USD - U.S. Dollar Climbs amid British and European Rate Cuts
The markets were being driven yesterday by huge swings in European Interest Rates. The moves came from the Bank of England (BoE) and the European Central Bank (ECB). The BoE slashed their benchmark Interest Rate by 150 basis points. This was 100 points more then the market had forecasted. Their intent is to boost economic growth and reduce the likelihood of a prolonged recession by stimulating consumer spending and reducing mortgage rates.
The GBP/USD shed almost 150 pips and came very close to an intra-day low of the 1.5500 mark. The greenback also made a jump against the EUR but closed down against the JPY. The JPY has continued to see gains as the markets reevaluate the USD/JPY support lines.
The unusually large Interest Rate cut by the BoE sent a clear message to the market that the British economy may be in deeper trouble then preciously expected. Rising unemployment and slowing consumer spending are strangling the economy. Combined with a lower Interest Rate, the GBP is becoming a less attractive investment after the Rate Cut.
A new report from the International Monetary Fund about global growth shows that growth prospects were dimming for the U.S. economy. The world's largest economy may see a recession as early as next year. A reflection of this is the recent report that U.S. productivity slowed sharply during the third quarter despite efforts by businesses to keep it aloft by slashing payrolls. Productivity came out at 1.1% annual rate in the third quarter which is a significant drop from the second quarter's 3.6%.
As for today, all eyes will be on the U.S. Non-Farm Employment Change report that is expected to post 200K less jobs for October. The change comes on the heels of job losses of 159K in September. The U.S. Non-Farm report could reverse the initial market optimism following the election of Barack Obama as U.S. president. The news surrounding this important event may have more influence in the market today, driving the Dollar potentially to the 1.2900 level.
EUR - Big Rate Cuts Force EUR Down
The EUR has seen an increase in price volatility the past 3 weeks and yesterday was no exception. In an attempt to stimulate the stalling economies of Europe, the ECB cut Interest Rates by half a percentage point to 3.25%. As result, the EUR fell against most of its rival's currencies. The move was described as, "disappointing" by investors who hoped for a more aggressive rate cut after seeing the Bank of England take such a bold move.
Yesterday the EUR ended the day down 115 pips on the USD to close at 1.2758 and was unchanged against the GBP.
The euro may continue to be pressured as ECB President Jean-Claude Trichet said that despite the easing of inflation pressures, the door for further rate cuts will remain open. The recent string of poor economic data which stems from a deteriorating European economy suggests that Interest Rates may need to fall substantially in the months to come.
At this point some analysts are questioning the lack of response of the ECB to tackle the global crisis. The BoE rate cut indicated the British central bank was doing more than the ECB to strengthen its economy. As a result, the EUR was pushed lower across the board which brings many to the conclusion that the decline of the EUR is being caused by the ECB reaction. The ECB has been relatively slower to respond to the current financial crisis than its other central bank counterparts.
JPY - The JPY Appreciation Continues
The Japanese currency underwent a bullish trading and surprisingly gained in relation to its counterparts, being the only currency to stop and reverse the USD's bullish run despite a sudden drop in Japanese stocks yesterday. Japanese equity markets have recently suffered significant losses, particularly in the export dependant auto industry. A stronger JPY has hurt lowered the demand for Japanese goods as consumers find cheaper goods elsewhere.
The USD/JPY ended the day at 97.57, down 19 pips. The only economy release published was the leading Indicators which came out as expected by the forecast with 89.3% from a previous 91.4% in September. Despite its muted result, this indicator couldn't give us a better idea of the direction of the economy as it may tell us just how deteriorated the Japanese economy is.
As for today, Japan will be absent from the economic calendar. The JPY's trends will be affected by the rallies of its primary currency pairs. It seems the USD and EUR are expected to continue a volatile trading session today and their crosses with the JPY will likely be as well. Traders should keep a close look on the news coming from the U.S. and Europe as these economies will be the deciding factors in the JPY's movement today, especially the U.S. Non-Farm Employment Change.
OIL - Crude Looks to Drop Below $60
Crude Oil briefly broke the $60 mark yesterday before bouncing back to close the day down at $61.41. Oil is now trending towards $60 and may continue its week long slide. Lower demand has fueled the losses, and a rash of poor economic data this week has not provided any support. The U.S. Non-Farm Employment report today is expected to show a poor performance and traders may not see very much upside to Crude today.
For now, OPEC has ruled out future production cuts, but comments today from Libya's head Oil official signaled the potential for an OPEC meeting prior to their regularly scheduled date.
Oil prices have more then halved since its July high amid the growing economic slowdown and show no signs of stopping. Traders today may look for Crude to break below the $60 support line.
The pair is continuing to provide mixed results, and is now trading around the 1.2750 level. The one hour chart demonstrates a flat line ever since yesterday. Traders are advised to wait for a clearer signal before entering the market on this currency pair.
The Cable is still traded within the wide bearish channel on the daily chart and on a bigger scale appears to have more room to run. There is a bearish cross on the hourly chart's Slow Stochastic, and the 4-hour chart is also joining that notion with its RSI pointing to the continuation of the bearish movement. Being on the sell side appears to be the right choice today.
The pair has been range-trading for a while now, with no specific direction. The Daily chart's Slow Stochastic providing us with mixed signals. The hourly charts do not provide a clear direction as well. Waiting for a clearer sign on the hourlies chart might be a good strategy today.
The bullish trend is loosing its steam and the pair seems to consolidate around the 115.00 level. It appears that the bullish breach above the range was not validated, and that range trading might be the name of the game. Taking short term selling positions might be the right move today.
The Wild Card
On the daily chart, Gold is continuing its bearish slide and an ounce of Gold is currently traded around $730. However, the 4-hour chart is showing growing bullish momentum, while the daily studies also support that notion. This may prove to be a good opportunity for forex traders to join a strong local uptrend that might yield high profits.
|00:00||AUD||HIA New Home Sales||0.0%||-||-|
|00:00||EUR||German Prelim CPI||m/m||-0.3%||0.0%||-|
|00:00||EUR||Italian 10-y Bond Auction||2.44|1.5||-||-|
|01:30||AUD||Private Capital Expenditure||q/q||1.1%||-1.7%||-|
|09:00||EUR||Spanish Flash CPI||y/y||-0.1%||-0.3%||-|
|09:55||EUR||German Unemployment Change||-22K||-1K||-|
|10:00||EUR||M3 Money Supply||y/y||2.5%||2.6%||-|
|10:00||EUR||Italian Quarterly Unemployment Rate||12.5%||12.4%||-|
|13:00||EUR||GfK German Consumer Climate||8.5||8.6||-|