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Tuesday, 29 Mar 2011
Dollar Resumes Downtrend
The dollar moved lower versus the major currencies yesterday as traders continued to use the dollar as a funding currency in carry trades. Positive US consumer and housing data encouraged the resumption of this long term trend. Today, focus will be on the US consumer with the release of consumer confidence data this afternoon.
USD - Positive US Economic Data Spurs Dollar Selling
Following the strengthening of the US dollar during the latter half of last week, the long term trend of dollar weakness resumed yesterday after positive US economic data helped to bring traders back into short dollar positions.
Yesterday, personal income climbed 0.3% m/m for the month of February, up from a revised 1.2% m/m jump in January. While the release was less than the economic forecast of a 0.5% increase, the upward revision in January from 1.0% was enough to give the report a positive tone. Personal spending was stronger, climbing 0.7% m/m with an upward revision of the January numbers to 0.3% from 0.2%. Expectations were for a 0.6% increase.
The dollar came off its highs prior to the to the release of the economic data as traders shrugged off geopolitical concerns in the Middle East and found value buying in the euro, pound, and Canadian dollar.
Stronger than expected pending home sales spurred stronger selling of the dollar as February pending home sales rose 2.1% m/m on expectations of a decline by -0.5%. The rebound in housing numbers is an encouraging sign from the US economy as the data recovered from the January pending home sales report which plunged -2.8% m/m.
On the back of the strong economic data, the EUR/USD climbed higher to 1.4115 before falling back to close at 1.4083. The pair opened the week trading at 1.4041. The GBP/USD was also stronger, trading as high as 1.6036 and closed at 1.6024 after opening at 1.6002. The Canadian dollar was a strong performer yesterday with the USD/CAD trading as low as 0.9749 and closed at 0.9764.
Today traders will be focusing on further US consumer data with the release of the Conference Board Consumer Confidence survey. Expectations are for a decline in US consumer confidence to 64.9 from January's release of 70.4. Today's data release is the first major economic data in a week that culminates with the February non-farm payrolls data.
EUR - Traders Focus on Monetary Policy
The euro and the pound came off of their lows yesterday as traders renewed their short dollar positions for the European currencies that are expected to bring higher yield due to future ECB and BOE interest rate hikes. Unlike the US, both the EU and Britain share uncomfortably high inflation rates, rates that have been above the central banks' targets for inflation. This has led traders to focus on yield differentials in the FX markets while putting fiscal and geopolitical concerns on the back burner.
Given the recent string of negative euro zone news, traders have been remarkably lenient on the euro. Last week the 17-nation currency declined by only 2 cents versus the dollar. Earlier last week S&P reiterated a negative outlook on Portugal's credit rating and said further downgrades may come shortly. Over the weekend German Chancellor Angela Merkel's party lost a regional election. This is the second time this year as Merkel's party also failed to hold control of Hamburg.
Despite the deteriorating political and fiscal situation in Europe, traders appear to be focused on rising interest rate expectations in the EU and in Britain. This should leave the euro and the pound in a good position to rise further versus the US dollar as no change is expected in US interest rates and the Fed is currently forecasted to carry out the full $600B purchases for QE II.
Resistance for the EUR/USD is found at 1.4140, followed by last week's high of 1.4250. A move above 1.4280 would target the January 2010 high at 1.4580. Support is located at this week's low of 1.4020, followed by 1.3980 and 1.3860.
JPY - 82 Level Seen as Solid Resistance for USD/JPY
Positive economic data was released this morning with the Japanese unemployment rate falling to 4.6% from 4.9%. Economists forecasted the unemployment rate to remain unchanged. Retail sales y/y also rose 0.1% from last year's climb of 0.1%. Forecasts were for a decline 0f -0.4%.
While the economic data is a bright spot for the Japanese economy, one must remember that this data was collected prior to the earthquake and tsunami. The economic repercussions from the disaster have yet to be felt in the economic data releases. In the background of yen trading is the struggle to contain radiation leaks from Japanese nuclear power plants that suffered damage during the earthquake and tsunami.
Yesterday was characteristic of the performance of the yen as a lack of volatility was seen. The USD/JPY moved only 43 pips. The Average True Range (14) for the pair is 95 and falling. The pair rose to 81.84 before falling back to close at 81.71. The 82.00 level should serve as a solid resistance level for the pair with support coming in at 80.60.
OIL - Spot Crude Oil Prices Decline Despite Middle East Tensions
Crude oil fell for a second day to $103.75 a barrel on Tuesday as Libyan rebels gained ground against embattled leader Muammar Gaddafi, boosting expectations supplies from the nation may be restored quicker than expected.
Rebels, emboldened by Western-led air strikes against Gaddafi's troops, have regained control of key oil ports and advanced west. The progress comes as more than 40 governments and international organizations meet on Tuesday in London to try to lay the groundwork for a Libya without Gaddafi.
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 US CB Consumer Confidence 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 4-hour chart is showing mixed signals with its RSI fluctuating at the neutral territory. However, there is a fresh bullish cross forming on the daily chart's Slow Stochastic indicating a bullish correction might take place in the nearest future. When the upwards breach occurs, going long with tight stops appears to be preferable strategy.
The cross has been dropping for the past few days now, as it now stands at the 1.6030 level. The Slow Stochastic of the daily chart shows a bullish cross has recently formed, indicating that an upward correction is imminent. This view is also supported by the RSI of the 8-hour chart. Going long with tight stops may turn out to be the right choice today.
The pair has recorded much bullish behavior in the past few 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. A downward trend today is also supported by the 4-hour chart's RSI. Going short with tight stops may turn out to pay off today.
The USD/CHF has gone increasingly bearish yesterday, and currently stands at the 0.9145 level. The daily chart's Slow Stochastic supports the currency pair to fall further today. However, the 2-hour chart's RSI signals that a bullish reversal will take place today. Entering the pair when the signs are clearer seems to be the wise choice today.
The Wild Card
Russel 2000 index rose significantly in the last week and peaked at 820.60. However, the daily charts' RSI is floating in an overbought territory suggesting that a recent upwards trend is losing steam and a bearish correction is impending. This might be a good opportunity for forex traders to enter the trend at a very early stage.
|08:00||EUR||German Industrial Production||m/m||0.1%||0.6%||-|
|08:45||EUR||French Gov Budget Balance||-85.6B||-||-|
|08:45||EUR||French Trade Balance||-3.4B||-3.0B||-|
|09:00||CHF||Foreign Currency Reserves||498.4B||-||-|
|10:30||GBP||Consumer Inflation Expectations||2.5%||-|
|14:30||CAD||Labor Productivity q/q||q/q||0.1%||0.2%||-|
|14:30||USD||Non-Farm Employment Change||257K||241K||-|
|14:30||USD||Average Hourly Earnings||0.5%||0.2%||-|