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Tuesday, 4 Mar 2008
Credit Crisis Continues to Hurt the Greenback
Yesterday, escalating fears of a recession in the U.S., hammered global stocks and sent the USD to record lows against the EUR for the 5th consecutive day.
The greenback's drop to an all time low yesterday came after the ISM Manufacturing report showed that U.S. manufacturing diminished for the second time in 3 months. The ISM index, which measures the activity level of purchasing managers in the manufacturing sector, dropped to 48.3 in February from 50.7 in January. This unfortunately, is not the only trace of the U.S. economic slowdown, as all signs continue to hint that the economy is slipping into a 'mild' recession. HSBC yesterday, announced huge losses, due to credit issues, as they reiterated the uncertain future of the US economy in their official statement. The Housing Crisis is having an impact on the broader economic picture, and the ramifications could be disastrous for the future. Declining Home Constructions are already dragging on growth, undermining consumer spending, which accounts for two-thirds of the economy. Americans are in the precarious position of feeling less wealthy and in turn buying fewer goods.
Such an economic environment provides a heavy burden on the U.S. currency, keeping it where it is now, floating around record lows. Fed Chairman Ben S. Bernanke recently stressed that the Fed will not hesitate to ease rates further if the economic outlook deteriorates. Now, traders are betting that the Fed will be forced to reduce its benchmark interest rate by 0.75% at its March 18 meeting. During the following days, these bets will most likely be priced in by the market and we might see the greenback stabilizing ahead of the FOMC Interest Rate announcement in 2 weeks.
As for today, there is not much on the U.S. economic calendar. Fed officials Bernanke, Fisher and Mishkin, all are expected to deliver speeches on economic issues during different events today. Traders may expect another weak USD trading session. It is likely; the greenback will stay low and continue to deteriorate on expected positive European data.
Yesterday, the EUR ended its trading session 0.3% higher, closing at 1.5223 vs. the USD. Earlier, the currency pair had hit a record peak of $1.5275, after Warren Buffet speculated that the U.S. economy is already deep in a recession.
European Manufacturing PMI was unchanged yesterday at 52.3, signaling that the growth of the European manufacturing sector is slowing down. Along with record energy costs, the soaring EUR has made European exports less competitive, adding pressure on the Euro zone economy.
Additionally, the European CPI, which measures the rate of inflation, remained yesterday at a record high level of 3.2%. Unlike the Federal Reserve, ECB President Jean-Claude Trichet is placing greater emphasis on inflation rather than on growth. Therefore, following the latest inflation data, the ECB is widely expected to keep Interest Rates unchanged at 4.00%. Recent economic data gives the ECB all the justification that it needs to remain hawkish, especially as commodity prices climb to record highs.
As for the mid-term forecast, here is the equation; as long as 'inflation pressure' prevents the ECB from slashing its Interest Rates, the European currency is expected to stay elevated.
Toady's European economic calendar will be relatively quiet with only the PPI and the GDP figures on tap, both of which are of minor importance to market movement. If these indices will bring stronger figures than forecasted, the EUR/USD may press even higher and any retracement should be seen as an opportunity to add to long positions.
The JPY breached below the 103.00 level against the USD, and reached 102.62 for the first time since 2005 after the ISM report showed that the U.S. manufacturing contracted once again. The Yen also gained on the back of stronger Japanese economic data. Yesterday's Japanese Average Cash Earnings, an indicator which measures the monthly change in the wages paid to jobholders, jumped 1% in the month of January which suggests that the Japanese economy may be accelerating.
The JPY gained against about a dozen of the most traded currencies as Credit Market losses prompted investors to reduce holdings of higher yielding assets financed with loans from Japan, a strategy called the Carry Trade. The rapid upward movement in the JPY against the USD is fueling speculation of a breach to the key 100.00 level for the first time since 1995. At the mid term, we believe that the combination of deteriorating U.S. data and a speeding up in the Japanese economy, may indeed deliver such a result.
As for the short term forecast, today's Japanese economic calendar will be quite empty with only Capital Spending data due to be released. This quarterly indicator measures the total amount of new capital expenditures by private businesses. The market is expecting a low release, signaling less business investments during the last quarter; however it is expected to generate relatively small interest in the market. Today, there probably will not be too much volatility in the wake of Friday's Interest Rate Announcement and the BoJ Monthly Report. The JPY looks prime for another day of range trading.
The strong bullish momentum is calming and the pair is finding consolidation at 1.5180. The slow stochastic on the 4 hour chart is showing a negative slope, which indicates that a corrective move might be quite imminent. Going short with tight stops might be a good decision today.
The daily chart is showing that the cable is trading in a range with no specific direction for the past 6 trading days. The very strong resistance level of 1.9900, and the bearish cross on the daily slow stochastic indicates that a local bearish move might take the cable back to the 1.9800 levels as a first target price.
After bottoming at 102.60 the pair shows fresh bullish momentum and is now floating around 103.20. The cross on the daily slow stochastic is very strong and will most likely cause a local technical corrective move. The RSI which has crosses the 20 level from above support the bullish notion, and it appears that although the USD/JPY will likely range trade, being on the buy side of such activity might be a preferable strategy.
The failure to breach beyond the 1.0300 level on the daily chart establishes a very strong support level at that point. A bullish cross on the daily slow stochastic indicates an upcoming move that might take the pair to the 1.0500 zone quite quickly. Going long might be preferable today.
The Wild Card
There is a very clear narrowing bullish channel forming on the 4 hour chart as the pair now floats at the bottom level of it. The inability to breach through the 101.70 level will validate the channel and will probably take Oil beyond the 102.00 levels again. This should be a great opportunity for Forex traders to be in the bullish move at a relatively good entry point.
|08:00||EUR||German Retail Sales||m/m||0.5%||0.3%||-2.3%|
|08:45||EUR||French Consumer Spending||m/m||0.1%||0.7%||0.4%|
|10:00||EUR||Italian Monthly Unemployment Rate||12.4%||12.3%||-|
|11:00||EUR||CPI Flash Estimate||y/y||0.2%||0.2%||-|
|11:00||EUR||Italian Prelim CPI||m/m||0.1%||0.0%||-|
|14:30||USD||Employment Cost Index||q/q||0.7%||0.6%||-|
|16:00||USD||Revised UoM Consumer Sentiment||93.3||94.2||-|
|16:00||USD||Revised UoM Inflation Expectations||2.8%||-||-|