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Monday, 28 Mar 2011
Dollar Gaining Ground as Jobs Report Highlights This Week's Trading
The US labor market will be the focus of this week's trading leading up to the non-farm payrolls report on Friday. Prior to the all-important jobs report, US Core Personal Consumption Expenditures (PCE) will be released. The report is a favorite indicator of the Fed to measure inflation. Housing data and the ISM manufacturing survey will also show the depth of the US economic recovery.
USD - Fed Comments Support Dollar Bids
Late Friday, St. Louis Federal Reserve Bank President James Bullard said the Fed should review its program of quantitative easing in light of recent positive economic data as the US economy, “Is looking pretty good.” Bullard, who has a vote on the Federal Reserve Open Market Committee said during the upcoming April meeting, the Fed may reexamine its decision to purchase $600B in US government bonds in order to lower US interest rates further and support the economic recovery.
However, the Fed, including Chairman Ben Bernanke has given no indication of its willingness to curtail its bond buying program which was enacted to stimulate the US economy. This week's data will provide some insight to the extent of the US economic recovery, in particular, a sustained recovery in US employment data. As such, it is unlikely the Fed will scale back its bond buying program and will carry out the full $600B purchases which are set to end in June.
To start the week the dollar was stronger with the EUR/USD trading at 1.4040. The GBP/USD was trading near last week's lows at 1.5980, and the USD/CAD was up at 0.9818.
Today will bring the release of US Core Personal Consumption Expenditures (PCE). The indicator is a favorite of the Fed to measure inflationary pressures in the US. Also pending home sales will be released later today. A pickup of inflationary pressures may be seen and would be dollar positive but housing data continues to lag.
The EUR/USD looks to be supported near the 20-day moving average line at 1.4020, followed by the rising trend line off of the January low which comes in today at 1.3980. A breach below this level could spur further selling of the pair the 1.3860 level where value buying may come into play. To the upside, Resistance is found at last week's high at 1.4063 followed by the November high of 1.4280.
EUR - Euro Strength Continues Despite Negative New Flow
The euro has shrugged off the most recent set of negative news after German Chancellor Angela Merkel's conservative party lost a state election that further weakens her position to negotiate a settlement in the European debt crisis. The political defeat in the Baden-Wuerttemberg state follows the defeat seen by Merkel's conservative party in the Hamburg elections last month.
The string of bad news for the euro zone continues from last week with the failure to reach a bailout agreement for Portugal and the resignation of the Portuguese Prime Minister in protest of overbearing economic cutbacks that would come with the acceptance of any European bailout funds. In a further blow to the euro zone, S&P downgraded Portugal's credit rating to BBB from A-, a rating that is very close to junk status. Fitch Ratings also cut the long term debt rating for Portugal on Thursday.
Despite the negative news flow, the euro has been fairly resilient, declining against the dollar by roughly 2 cents, while the euro has gained versus the Swiss franc with the EUR/CHF climbing above its recent high to 1.2980 in this morning's trade.
Expectations for an ECB rate hike in April have been supportive of the 17-nation in the face of the negative news stream. While tensions run high in the fixed income markets, FX traders have not been quick to sell the euro due to the prolonged drama in Portugal. This trend may continue as the market appears to have priced in a future bailout for Portugal and traders are currently focused on yield differentials between the euro zone and the US.
JPY - Yen Continues to Decline Following G7 Intervention
In overnight trading the yen continued to fall back as the USD/JPY is currently trading near its post intervention high. This week traders will be expecting key data from Japan. In particular, the market will be focused on the Tankan report which is set to be released Thursday. The previous report for Q4 2010 showed Japanese manufactures had lost confidence since the financial crisis ended as the yen strengthened and the government stimulus measures ended.
Traders will need to take the Q1 2011 report with a grain of salt as the survey was taken prior to the earthquake and tsunami which has since caused nuclear reactor problems and a spike in radiation levels.
Currently the USD/JPY is trading near its post intervention high close to 82.00. On Friday, the Japanese Ministry of Finance said it would not hesitate to intervene in the markets should excessive volatility once again be evident in the financial markets.
Initial resistance for the USD/JPY is found at the post intervention high near 82.00. A move above this level and the pair would likely be sold once again near the 200-day moving average line just below 83.00. To the downside, support is found at 80.60 and the all-time low of 76.41.
OIL - Crude Oil Holds Above $105 on Middle East Unrest
Crude oil prices held near a 30-month high as the U.S. and its allies attacked Libyan leader Muammar Qaddafi's troops and protesters clashed with government forces in Syria, bolstering concerns of potential disruptions of oil supplies.
A series of global events have rattled markets in the past several weeks, and analysts say oil prices are headed for wild swings as perceptions shift about how energy prices will affect the global economy.
As for today, traders should first and foremost follow the developments in the Middle East, as this issue will continue to impact oil prices in the near future. Traders are also advised to follow the U.S Pending Home Sales report, which is scheduled for today at 14:00 GMT, as this report tends to have a direct impact on the market and a correlation with oil prices.
The daily chart is showing mixed signals with its RSI fluctuating at the neutral territory. However, there is a fresh bullish cross forming on the 4-hour chart's Slow Stochastic indicating a bullish correction might take place in the nearest future. Going long might be a wise choice.
The pair has recorded much bearish behavior in the past several days. However, the technical data indicates that this trend may reverse anytime soon. For example, the 8-hour chart's Stochastic Slow signals that a bullish reversal is imminent. An upward trend today is also supported by the 4-hour chart's Slow Stochastic. Going long with tight stops may turn out to pay off today.
The pair has recorded much bullish behavior in the past two days. However, the technical data indicates that this trend may reverse anytime soon. For example, the 8-hour chart's Stochastic Slow signals that a bearish reversal is imminent. Going short with tight stops might be a wise choice.
The price of this pair appears to be floating in the over-bought territory on the 8-hour chart's RSI indicating a downward correction may be imminent. The downward direction on the 4-hour chart's RSI also supports this notion. When the downwards breach occurs, going short with tight stops appears to be preferable strategy.
The Wild Card
This pair's sustained upward movement has finally pushed its price into the over-bought territory on the 8-hour chart's RSI. Not only that, but there actually appears to be a bearish cross on the Slow Stochastic pointing to an imminent downward correction. Forex traders have the opportunity to wait for the downward breach on the hourlies and go short in order to ride out the impending wave.
|03:30||JPY||Average Cash Earnings||y/y||-2.4%||2.3%||-|
|08:00||EUR||German Factory Orders||m/m||2.0%||-0.5%||-|
|14:10||USD||FOMC Member Lacker Speaks||-||-||-|
|14:30||USD||Non-Farm Employment Change||215K||220K||-|
|14:30||USD||Average Hourly Earnings||m/m||0.2%||0.2%||-|