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Monday, 24 Nov 2008
CitiGroup Bailout and Economic Stimulus; Will they be Enough?
The U.S. government is bailing out CitiGroup, a very large investment bank, with $306 billion, and President-elect Obama is hinting at a further $300-700 billion economic stimulus package. This either indicates a future strengthening of the USD or highlights the weakness of the U.S. economy. Traders should bear in mind that the last few weeks have shown that the U.S. Dollar seems to be strengthening as a result of negative U.S data and not the other way around, which results in a type of pricing bubble. At some point the USD will meet an end to its recent bullish run. Will these bailouts be enough to ward off this catastrophe?
USD - USD Stabilizes against Major Currencies
The past week has proven that the greenback is consolidating at its current levels against the major currencies. However, the USD is constantly attempting to break through these current levels and it appears that a bullish breach seems far more likely than a bearish one.
Last week was filled with negative data from the U.S economy. The Producer Price Index (PPI) dropped for a third month in a row, landing on -2.8%, proving that consumers in the U.S are in a slump. The Building Permits survey dropped to a mere 0.71 million new permits that were issued in October, dropping for the fifth consecutive month. The housing sector in the U.S is one of the best gauges of the deteriorating economic condition as fewer banks are willing to provide a new mortgage which means fewer citizens are purchasing new homes. Last but not least was the Unemployment Claims figure, which reached 542K individuals who filed for unemployment insurance for the first time during the past week.
However, despite the unfortunate figures, the USD is refusing to slide. As stated here many times before, investors are currently seeing the negative data from the U.S as a pitfall for the leading economies, which will suffer greater from the ongoing decrease in U.S spending.
As for the week ahead, a batch of data is expected from the U.S economy. Traders should keep a close eye on four different indicators. First is the Existing Home Sales, which will be published today and will provide additional information on the U.S housing sector. On Tuesday, consumer related data such as the Preliminary Gross Domestic Product (GDP) and Consumer Confidence report are scheduled and will likely provide a better landscape of the consumers' conditions in the U.S. Lastly, on Wednesday, the Unemployment Claims figure will be announced.
Forex traders should bear in mind that the last few weeks have shown that the U.S Dollar seems to be strengthening as a result of negative U.S data and not the other way around, which results in a type of pricing bubble. At some point the USD will meet an end to its recent bullish run.
EUR - EUR Remains at Low Levels against the USD
In the past week the EUR has retained its relatively low exchange rates against the major currencies, and forced most traders to go short. For now it is quite clear that the previous levels of the EUR, such as 1.5000 against the USD, are a thing of the past, and seem highly unlikely to resume in the near future.
A few significant economic indicators were published from the Euro-Zone last week, but which only had a limited impact on the EUR as investors world-wide are focusing their attention to the U.S economic condition more than anything else. It can even be said that it appears that the EUR is mainly responding to the Dollar's movements.
Looking ahead to this week, the most crucial Euro-Zone economic indicators will be given from Germany. The German economy is considered to be the strongest in the Euro-Zone. An improving condition in the German economy will probably be a landmark in the Euro-Zone's race out of its recent recession, and is one of the key factors which will elevate the EUR.
Traders should follow the publications from the German economy and also watch out for any leading political announcements from the region that could have a great impact on the EUR.
JPY - Bank of Japan's Interest Rate Cut Proves Successful
The past week has proven successful for the Bank of Japan's (BoJ) recent decision to cut Interest Rates to 0.30%. The JPY's intensive bullish trend was halted and the JPY is currently trading at the 95.00 level against the USD and at the 120.00 level against the EUR.
The Japanese economic outlook seemed quite disturbing last week. The Preliminary Gross Domestic Product (GDP) dropped for the second month in a raw, confirming that Japanese consumers are being more careful with their spending these days. The Japanese Tertiary Industry Activity dropped for the second month in a row as well; pointing out that the Japanese economy has entered a phase of contraction.
This week's leading data will be the Preliminary Industrial Production for October, which is expected to decrease by 2.5%, and the Retails Sales survey which is expected to decrease by 0.9%. These figures will act as another proof that the Japanese economy is contracting further and that the JPY might enter a bearish trend against the major currencies in the coming weeks.
Oil - Will Crude Oil Prices Drop to $40 a Barrel?
Crude Oil prices are continuing to slide, breaking recent record lows on a daily basis. It appears that the psychological factor is the strongest reason for the constant drop in Oil prices. For a long time Oil prices were considered to be over-valued. Now Crude Oil seems be the biggest victim of the economic turmoil. Whereas the demand for Oil is only expected to decrease by 2.5%, Oil prices are dropping about 2.5% on a daily basis on average, and have fallen from over $147 a barrel to less than $50 a barrel in the past 5 months.
Another reason for the ongoing depreciation of Crude Oil prices is the massive strengthening of the USD, and it has seemed quite clear that if the EUR/USD will drop to the 1.2000 level, Oil prices will probably drop towards $40 a barrel.
This week traders should follow OPEC announcements in order to predict any price movements for Crude Oil, as production cuts may be in the works. Also, keep a close look on the EUR/USD as any deep changes in that pair will likely impact Oil prices this week.
The 4-hour chart shows that the momentum is still bullish. However, its Relative Strength Index (RSI) floats near the upper line indicating that the current trend might be closing to its end. On the hourlies, the local bearish correction is already intact. A bearish cross of the Hourly chart's Slow Stochastic validates that correction as well.
The daily chart is showing that the pair does not have a distinct direction, as the chart appears to be quite horizontal for the past 10 days. The Bollinger Bands are widened, and the 4-hour Slow Stochastic also provides no clear indication. On the hourlies, the pair has been range trading with high volatility for a while now. Waiting for a clearer sign before entering the market might be the smart move today.
The typical range trading on the daily chart continues. Both the RSI and Slow Stochastic are floating in neutral territory. The hourlies are also providing mixed signals with no specific direction. Good strategy might be to wait for a clearer signal before entering the market n this pair.
There is a very distinct bearish channel forming on the daily chart, as the pair now floats at the beginning of it. A fresh bearish cross on the daily chart's Slow Stochastic indicates that the bearish momentum will probably continue. The hourlies support the bearish notion as well, and it appears that the pair still has more room to run. Going short with tight stops is a preferred strategy today.
The Wild Card
There is a very distinct upward channel forming on the 4-hour charts. A fresh bullish cross on the daily chart's Slow Stochastic implies that the bullish correction is quite imminent. The RSI is floating in an oversold territory supporting the notion that there is still more room for the upwards correction. Forex traders can maximize profits by buying on lows and taking advantage of a currently bullish trend.
|17:00||USD||FOMC Member Fisher Speaks||-||-||-|
|12:00||GBP||CBI Realized Sales||12||21||-|
|14:30||USD||Core Durable Goods Orders||m/m||0.3%||0.5%||-|
|14:30||USD||Durable Goods Orders m/m||m/m||4.7%||-0.4%||-|
|15:00||USD||S&P/CS Composite-20 HPI||y/y||5.0%||4.6%||-|
|15:45||USD||Flash Services PMI||57.4||57.0||-|
|16:00||USD||CB Consumer Confidence||95.2||95.3||-|
|16:00||USD||New Home Sales||481K||501K||-|
|16:00||USD||Richmond Manufacturing Index||-3||0||-|