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Wednesday, 17 Dec 2008
Dollar Volatility Set to Continue as OPEC Meet Today
The Organization of the Petroleum Exporting Countries (OPEC) is expected to discuss a significant decrease in Oil production later today. A production cut of 2-2.5 million barrels per day could help raise the price of Crude Oil to the $50-60 price range in the coming weeks. However, if OPEC fails to meet the recent fall in demand for Oil with a significant production cut, this may add to the recent volatility of the Dollar. Traders are advised to pay close attention to the OPEC meeting as developments unfold in Algeria throughout the day.
USD - USD Sinks after Federal Reserve Slashes Interest Rates to 0.25%
In a surprise move yesterday, the U.S. Federal Reserve unanimously decided to cut Interest Rates by 75 basis points from 1.00% to 0.25%. While the rate cut itself was expected, it was previously forecast to only drop to as low as 0.50%. This deeper-than-forecast cut signifies the Fed's willingness to act however necessary to put a halt to the economic recession and hopefully prevent a deflationary cycle.
The immediate effect of yesterday's rate cut was a sharp depreciation in the value of the USD, reaching lows against the EUR not seen in over 2 months, closing the day just over the 1.4000 price level. As the greenback had been steadily losing strength over the past week in anticipation of this rate cut, such an event was not out of the ordinary. What is significant is that this rate cut did indeed bring about a short burst of activity in the U.S. stock markets as the Dow Jones traded up 4.2% following the announcement.
The intended effect was to increase lending to consumers by providing banks with the liquidity necessary to do so. As lending increases, more investments are expected to follow. If enough mortgages are taken out by consumers it could help slow down the depreciation of the real estate market and stabilize Wall Street. This will help the global economy get back on a growth pattern and put an end to this troubling recession. But this is also a tall order for one central bank to take on by itself. The Fed has exercised almost all of its policy options, now it's up to the other central banks to follow suit.
Looking at today, there is very little news which can follow yesterday's announcements. The indicator to follow today which may help determine the underlying strength of the USD is U.S. Crude Oil Inventories. Despite a weakened USD, the price of Crude Oil has remained largely unchanged. If this inventory reports similar information it could indicate a future trend reversal for the U.S. Dollar in the next few weeks.
EUR - Will the American Interest Rate Cut be followed in Europe?
With little changed in the Euro-Zone since last week, the EUR has surprisingly regained phenomenal ground against the U.S. Dollar. Trading at highs not seen in almost 3 months, the 15-nation currency is currently trading above the 1.4000 level. However, the value of this pair has largely been determined by the sudden 75 basis point rate cut by the U.S. Federal Reserve yesterday.
The Euro-Zone consistently provides negative economic news, which has been evident in the consistent depreciation in value for the EUR over these last few months. While it made valuable gains against the greenback yesterday, it has remained in a holding pattern versus most other major currencies.
Now eye-balling the U.S. Federal Reserve's decision to reduce interest rates to near 0%, the European Central Bank (ECB) has to consider the value of a similar policy. Would lowering the Euro-Zone interest rates to a comparatively low level be capable of restoring growth to the battered economy? The same question also applies throughout the European economies outside of the Euro-Zone's monetary union. The United Kingdom is currently on track to slash its interest rates once more. Will we see a similarly large cut?
Looking forward, the EUR does not appear to be driving its own value as much as other currencies have been. The British Pound has taken center stage lately and may continue to do so throughout the rest of this week. Traders should watch whether the Bank of England (BoE) does indeed agree to lower its rates today by a unanimous vote as anticipated. This would signal an immediate depreciation to the value of the GBP, but potentially spur growth in European stock markets.
JPY - Bank of Japan now under Pressure to Reduce Interest Rates
The sudden reduction in U.S. interest rates yesterday has many analysts forecasting that the chances the Bank of Japan (BoJ) will cut its rates this Friday has increased. With the lowest global interest rate for the past 7 years, Japan has intentionally held down the value of the Yen by making it the currency of choice for funding carry trades.
However, now that global interest rates are being slashed, the value of carry trades has vanished and traders are buying back into the Yen. As such, Japanese exports have taken a hit, which is pushing its economy into a deeper recession. To stabilize its economy and return to a period of growth, the BoJ may indeed have to decrease its rates this Friday to as low as 0.10%.
Traders should be aware of the effects the U.S. rate cut will have on the Japanese economy. As of this morning, stocks have increased and the JPY has grown in value. If this pattern continues without a rate cut from the BoJ, forex traders may actually see the Yen reach record highs against most other currencies.
Oil - OPEC Meeting Today Expected to Yield Significant Production Cut
Despite a significantly weakened U.S. Dollar, the price of Crude Oil has remained relatively untouched. Floating near the $45 price range, Oil appears to be waiting in anticipation of the Organization of Petroleum Exporting Countries' (OPEC) meeting later today.
The cartel is expected to discuss a significant decrease in oil production. A potential cut of 2-2.5 m.b.d. (million barrels per day) could help raise the price of Crude Oil to the $50-60 price range in the coming weeks. If, however, OPEC fails to meet the recent fall in demand for Oil with a significant production cut, traders may expect to see the price of Crude Oil plummet to as low as $30 a barrel by the beginning of the new year.
The bullish trend is loosing its steam and the pair is consolidating around the 1.41 level. The 4-hour chart's RSI is already floating in the overbought zone suggesting that downtrends correction might take place in the nearest time frame. The daily chart's RSI also supports this notion. Going short with tight stops appears to be the right strategy today.
There is a very accurate bullish channel forming on the daily chart as the pair is now floating in the middle of it. However, the 4-hour chart's RSI is already floating in the overbought territory indicating that a bearish correction might take place in the nearest future. Going short with tight stops appears to be preferable strategy.
It appears that the bearish trend may have run out of strength as the current price level has dropped the pair into the under-bought territory on the daily chart's RSI. The pair also currently sits near the bottom border of the 4 hour chart's Slow Stochastic, suggesting a correction may be imminent. Going long with tight stops may be the correct strategy today.
A bullish cross on the daily chart's Slow Stochastic implies that an upwards correction might take place in the nearest time frame. The hourlies chart's RSI is floating in the oversold zone suggesting that the downward trend might be out of steam. Going long with tight stops appears to be the right strategy today.
The Wild Card
This commodity is near the beginning of a bearish correction as it appears to be floating in the over-bought zone on the hourly chart's RSI. The daily chart's RSI also supports this notion. Forex traders can benefit from this move by selling this commodity and setting tight stops.