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Friday, 8 Feb 2008
Can The Greenback Fight Off The Bears?
Yesterday, the U.S. economy faced fresh difficuties that should further dampen growth. The U.S. Labor Department data showed Unemployment Claims released well above expectations indicating that the labor sector is now also facing the implications of slowing growth. The number of unemployment claims decreased to 356,000 in the week ended Feb. 2, from an upwardly adjustment 378,000 for the previous week, but still this level of unemployment is considered to be high.
Economists were expecting a much more significant drop in new claims to 340,000 from the originally reported 375,000 for the week ended Jan. 26. The explanation for the sharp jump in claims the previous week is explained mainly due to Martin Luther King holiday, which is a short workweek.
In addition, pending home sales decreased yesterday to 1.5 percent in December, which imply of additional tough conditions for the U.S. housing market. Economists predict that the housing market to will hit bottom in the first half of this year, particularly as mortgage rates continue to fall and if plans to expand federally insured loan limits are implemented.
The dollar gained yesterday versus 12 of the 16 most traded currencies. The U.S. Dollar Index traded on ICE Futures in New York, which tracks the currency against six major counterparts, rose to 76.58 yesterday, gaining 1.6 percent the past three days, as the EUR and the Sterling declined.
The ECB decision sent the EUR to a nearly two-week low against the dollar, reaching $1.4480, its lowest point since Jan. 22, and down from an intraday high of $1.4653. The dollar gained notably as the Bank of England cut interest rates by a quarter of a percentage point to 5.25 percent and the pound declined to $1.9459 from $1.9601. Although the outlook for the U.S economy at the moment is still very bleak the greenback continues to appreciate as a result of further UK and Euro-zone economic problems and many analysts believe that this U.S economy will be repaired first as a result of the string of aggressive rate cuts by the Fed.
Yesterday the ECB kept its key borrowing costs unchanged at 4 percent declining to follow cuts by counterparts in the U.S. and Great Britain.
The BoE decided to cut its key rate by 25bp to 5.25 percent, for the second time in three months. The decision of the Bank of England was quit predictable due to the fact that the bank is struggling to deal with diverse inflationary complexities caused from high energy and food prices which are a direct consequence of the recent turbulence in the financial markets.
By making this step the BoE attempt is to avoid future decrease in economical development which may push up inflation level above the reasonable target.
The European Central Bank held its key interest rate steady at 4 percent, despite the problem of slowing growth, mainly due to the growing inflationary pressure in the 15-member single currency area. The inflation issue is still the bank's chief concern, especially after inflation hit a record 14-year high of 3.2 percent in January, but according to latest data it seems that for the moment the Euro-zone faces diverse elements which influence its economic growth, and according to ECB President Jean-Claude Trichet those elements must be evaluated carefully before making any radical move to avoid an additional slowdown.
Like the Fed, the European Central Bank is caught between inflationary pressures and slowing global economy. As it seems for the moment, the ECB is not going to cut its interest key rate in the short term but indeed it is beginning to consider positively making this unpreventable step.
The 15-nation currency fell for a third day versus the U.S. dollar and the Japanese yen as Trichet said the U.S. slowdown may restrain economic growth in Euro-zone. The EUR dropped to 154.99 versus the JPY from 155.88, and fell to 1.4523 from 1.4632 versus the U.S. The EUR has been very resilient over the whole of 2007 and although it has depreciated sharply this week as a result of the pending ECB interest rate announcement, it is still too early to write this currency off and it may just begin to claw back some last ground early next week.
The Japanese yen gained yesterday against all of the 16 most-active currencies as European stocks dropped and the risk of companies defaulting on their bonds rose. The JPY advanced most versus the South African Rand, as emerging market currencies continue to take a hit due to the current high level of risk aversion. It rose 1.6 percent to 13.63 versus the ZAR and it also climbed 0.4 percent to 95.01 against the Australian dollar, which is one the carry trade favorites.
Today, Japan's core machinery orders fell more than expected in December due to the present global economic growth slowdown. Orders dropped by 3.2 percent from November, where they sank by 2.8 percent from the previous month.
Most economists expect that Japan's economy will not be influenced by the global recession, given Japanese investors' limited exposure to U.S. subprime-mortgage-related products and strong growth in neighboring countries such as China.
However the risk of slower growth has weakened expectations that the BoJ will push ahead with its policy of gradually raising interest rates. The BOJ has kept rates on hold since it raised them by a quarter percentage point from 0.25 percent in February last year, and as it seems for the moment, the bank doesn't have any intentions to touch it for the short term. The JPY gains will begin to ease of significantly as soon as risk appetite returns to market, which should return in full force as soon as the U.S economy begins to show signs of reparation.
This pair is now trading relatively flat after falling sharply throughout this week. This pair is now consolidating at around the1.4490 level. Bollinger bands are widened indicating increased volatility. Indicators are mixed on both the daily and hourly level. Therefore the preferred strategy today will be to buy on dips and sell on highs.
After breaching the key 1.9400 resistance level this pair is now making a correction. Indicators are still giving a flat signal which is a sure indication that the previous bearish move now seems to have bottomed out. An early long position seems preferable today.
On the 4H chart the momentum and RSI are positively sloped indicating that yesterday sharp bullish rally has still got steam. However this pair is trading in a flat channel and it is reaching the ceiling of this channel. So if this pair breaches the 107.80 level then it will indicate a breakout from this channel and we should see sharp upward movement. However if this pair fails to breach this level then it will move back down again.
We are at the beginning of an upward channel on the 4 H chart. RSI and momentum are positively sloped indicating further potential bullish movement. However the stochastic slow is crossing at the 70 mark indicating that this pair may have slightly slipped into overbought territory. Target price today will be the 1.1100 level.
The Wild Card
After breaking the key $90 a barrel mark this commodity now seems to be recovering. All indicators are very bullish and the stochastic slow has not yet crossed. This pair will continue to head up today before making another downward turn . Therefore Forex Forex traders can maximize profits by entering a long and then going short when the upward trend tops out.
|22:30||AUD||AIG Construction Index||54.4||*||-|
|07:45||EUR||French Gov Budget Balance||-80.8B||-||-|
|07:45||EUR||French Trade Balance||-5.8B||-5.1B||-|
|08:00||CHF||Foreign Currency Reserves||434.7B||*||-|
|09:30||GBP||Consumer Inflation Expectations||3.2%||-||-|
|11:00||EUR||German Factory Orders||m/m||3.3%||-0.4%||-|
|13:30||USD||Non-Farm Employment Change||204K||180K||-|
|13:30||USD||Average Hourly Earnings||m/m||0.1%||0.2%||-|
|13:30||USD||Core PCE Price Index||m/m||0.1%||0.1%||-|
|14:55||USD||Prelim UoM Consumer Sentiment||75.1||76.2||-|
|14:55||USD||Prelim UoM Inflation Expectations||2.9%||-||-|
|20:00||USD||FOMC Member Evans Speaks||*||*||*|