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Monday, 13 Oct 2008
Dollar Continues its Rout over the EUR and GBP
Amid the background of a week with the worst performance for global equity markets in history, the Dollar continued to post large gains against the EUR and GBP while the JPY saw enormous gains against the Dollar.
USD - USD's Recent Up-Trends Reversed by European Rescue Plan
Last Friday many analysts were forecasting a dramatic change in the USD over the weekend following the G7 and G20 Summits. Not surprising many, these Summits did create a change in the market. Although described by some as "underwhelming," the statements issued after the G7 Summit were enough to move the market. A major development later occurred in the Euro-Zone in the form of a unified commitment by financial chiefs to prevent large financial institutions from failing.
Last week, the 390 pips gained by the USD against the EUR could largely be attributed to the instability of world markets. The financial crisis currently taking place is affecting every major economy and particularly US equity markets, but investors believed it was affecting the U.S. less as the government had at least made the efforts of presenting, and approving, a financial rescue plan. The lack of such a plan in other regions led to a flight to safety in the Dollar. As a result, banks were hoarding USD and selling off other currencies. This increased the demand for the Dollar, helping it rise to a 15-month high against its currency counterparts. Now that a similar rescue plan has been approved in Europe, we see investors buying up European currencies and returning en masse to carry trades. This has created a reversal to the USD's up-trends which it experienced last week. At the opening of today's market we saw the greenback rise sharply to the 1.3600 level against the EUR, up from the 1.3250 mark which it almost hit at market close last Friday.
Looking ahead this week, we have a number of important events to keep tabs on. The plan for how the U.S. will implement the $700 billion rescue plan is scheduled to begin today with a press conference being held by Assistant Treasury Secretary Neel Kashkari. Later in the week investors will hear Fed Chairman Ben Bernanke speak on the U.S. economic outlook and market health. We will also receive the indicators for retail sales and consumer inflation on Wednesday, and the Building Permits figure on Friday. More than ever this week, traders should pay close attention to the Euro-Zone as the implementation of its new rescue plan will be presented in more detail and no doubt will have a major influence on the movement of the USD.
EUR - Euro-Zone Bank Rescue Plan Approved by Central Banks
At last the European banks joined hands in an effort to save their financial system. The oft-stated difficulty the Euro-Zone faces is a lack of cooperation among the various central banks. After seeing the light this weekend, following the G7 and G20 Summits, as well as a meeting of the 15 nations making up the European Monetary Union, the European financial chiefs have announced an agreement to jointly stabilize the European economy. This effort will be done by propping up credit markets with tax-payer money as well as bailing out any major financial institution on the verge of collapsing. The idea is to prevent a catastrophe like the failure of Lehman Brothers Holdings Inc. in the U.S.
After this European bailout package was announced, market analysts began predicting a strong reversal for the 15-nation currency. As we have seen so far this morning, the analysts have been correct. The EUR jumped over 200 points against the USD during early trading this morning, lending strength to the claim that the EUR may see a strong rebound throughout the week. No doubt this economic rescue plan will need some fine tuning before it can be implemented, but its announcement has helped strengthen investor confidence for the time being. Will it be enough, however?
This week will be a rather dull news week for the Euro-Zone. With only a handful of economic indicators and one speech by ECB President Trichet scheduled, traders are less likely to see EUR volatility coming as a result of European data. The market movers this week will be the announcements surrounding the U.S. bailout plan's implementation, the multitude of economic data from the States, and the results of the International Monetary Fund's (IMF) meeting in which the recent credit crisis will be discussed by world financial chiefs and board members of the IMF and World Bank.
JPY - Re-Emergence of Carry Trades Lowers Value of JPY
Losing value across the boards, the JPY opened today's market with significant down-trends against every major currency. Analysts explained last week that the JPY was traditionally a counter-cyclical currency since it tends to go against market trends. Almost every currency was losing value last week, save the USD, which meant the JPY was gaining value as carry trades were sold off in favor of the yen. Now that markets are being rescued by central governments across the globe, the other major currencies are regaining their strength, making carry trades more appealing. As investors sell the JPY to benefit from its lower interest rate, the JPY is moving back to its previous lows against the other currencies.
This will be a quiet week for the Japanese currency as the most significant market moving events will be two speeches given by the Bank of Japan Governor, Masaaki Shirakawa, today and Friday. Those traders interested in the JPY should listen for clues about future Japanese interest rates from Shirakawa as his speeches tend to deliver indications of future policy decisions. Most importantly this week, the layout of the American and European financial rescue plans will drive the market more than anything and investors would be wise to pay close attention to any announcements regarding these events.
OIL - Price of Crude Oil Hits 13-Month Low
The price of Crude Oil gained slightly in today's early trading hours after dipping to a 13-month low of $77.07 a barrel. The news of a Euro-Zone bank rescue plan has generated a boost in the value of the EUR, which in turn lends support to the price of Crude Oil. Coupled with this bailout plan is a call from Iran for OPEC to cut Oil production in order to help stabilize world prices.
Losing 47% of its value since July, the price of Light Sweet Crude is being forecasted by energy experts to continue its decline. In fact, many financial firms, such as Goldman Sachs Group Inc., are lowering their expectations for the future price of Crude Oil in 2009 to as low as $75-86 a barrel, down from previous figures of $112-120 per barrel. Traders should pay close attention to the bank rescue plans of the U.S. and Euro-Zone economies as they are laid out in more detail over the coming weeks. The news releases surrounding these bailouts will generate the most volatility in today's market and traders would be unwise to neglect their impact on the market.
The Slow Stochastic and the RSI on the daily chart are showing a continuation of the current bearish correction. There is also a very accurate bearish channel forming on the 4 hour chart. In addition, all indicators on the hourly chart are pointing down. Going short might be the right choice today.
The Cable is in the middle of a very intensive downtrend that started a week ago and shows great momentum that on a bigger scale appears to have more room to run. In the shorter time frame a bullish cross on the hourly indicates that there might be a minor correction before the bearish move resumes. Selling on highs appears to be preferable 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. All oscillators on the 4 hour chart do not provide a clear direction as well. Waiting for a clearer sign on the hourlies might be a good strategy today.
This pair is still in the midst of a steady uptrend which is not yet showing any sign of leveling out. The RSI and Momentum on the daily chart are still positively sloped indicating that there is still plenty of steam left in this bullish move. Once this pair breaches the 1.1400 level it's likely to make another sharp break upwards.
The Wild Card
There is still a bearish configuration on the daily chart, indicating that the momentum is still down. The Slow Stochastic flows high supporting the notion that there is still room to run for this trend. In the shorter time frame there is a bullish cross forming on the hourleis indicates that there might be a small bullish correction before the bearish move resumes. Forex traders can maximize profits by selling on highs and taking advantage of a currently bearish trend.
|08:00||EUR||German Retail Sales||m/m||2.5%||-0.8%||-3.2%|
|08:45||EUR||French Consumer Spending||m/m||0.7%||-0.3%||-0.8%|
|10:00||EUR||Italian Monthly Unemployment Rate||12.3%||12.4%||-|
|11:00||EUR||CPI Flash Estimate||y/y||0.3%||0.4%||-|
|11:00||EUR||Italian Prelim CPI||m/m||-0.3%||-0.1%||-|
|13:30||USD||Core PCE Price Index||m/m||0.1%||0.1%||-|
|13:30||USD||Employment Cost Index||m/m||0.7%||0.6%||-|
|14:55||USD||Revised UoM Consumer Sentiment||86.4||86.4||-|
|14:55||USD||Revised UoM Inflation Expectations||2.8%||-||-|