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Wednesday, 20 May 2009
Economic Growth Boosts Risk Appetite, Commodity Prices
These past several weeks have seen a series of positive economic data emerging from various economies. Even a record contraction in Japanese GDP was anticipated and the market impact was minimal. As market optimism takes hold, safe-haven assets such as the USD begin to weaken. Traders have witnessed recently as the greenback has lost strength to most other currencies, and commodity prices have begun to climb back to 2007-2008 price levels. Is the recession coming to an end?
USD - Dollar May Slide Further On Global Optimism
The U.S Dollar declined Tuesday against its major counterparts after a report from the U.S. Commerce Department said new construction of houses fell to a record low in April. The USD traded at $1.3630 per EUR after falling 0.5% yesterday. Against the Yen the U.S currency was at 95.94 after decreasing 0.3%. Analysts said that the data showing U.S. housing starts and permits unexpectedly fell to record lows doused the view that the housing market was stabilizing, denting optimism in the market for the U.S currency.
The USD also slid as a result of improving business sentiment in Germany, which spurred renewed optimism about the global economy, reducing demand for safer assets and boosting currencies perceived as riskier. Traders were also closely watching U.S. stock markets for indications about investors' appetite for riskier assets. Earlier, major indexes clawed into positive territory, pushing the dollar to the lows of the day.
The greenback may decline further versus the EUR as three U.S. financial firms' efforts to return government bailout money fueled speculation that banks have sufficient cash, reducing demand for Dollar-safety.
EUR - Pound Reaches 6-Month High vs. USD
The EUR rose on Tuesday, trading at $1.3625, up half a percent from Monday, due to a surprisingly big improvement in German economic sentiment. The ZEW indicator jumped to 31.1 in May from 13.0 in April, above economist estimates of a 20.0 reading. This suggests that analysts and investors were not as grim about the economy as before.
The British Pound also rose to the highest level this year against the Dollar after ICAP, the world's biggest broker of transactions between banks, posted increased profit, and Marks & Spencer Group Plc's net income beat analyst estimates, stoking optimism that the worst of the recession is over.
Analysts said the EUR-positive reaction to the ZEW report suggested that market participants saw improving sentiment in the Euro- Zone as boosting demand for risk, even as other data show that the economy remains weak. Gains in the EUR and Sterling helped to push the Dollar down as some traders unwind positions in the U.S currency. The USD is perceived to be a safe-haven option during times of uncertainty; however, the ongoing bets that the global economy is improving has warmed demand among investors for riskier trades in past weeks.
JPY - Japan's Economy Shrinks at Record Pace
The Yen fell for a 3rd day against the EUR as stocks gained after a government report showed Japan's economy shrank less than expected last quarter. The Yen fell to 131.17 per EUR from 130.81 yesterday in New York trading. The Japanese currency also declined against the Dollar to 95.70.
Japan's economy shrank an annualized 15.2% in the three months ending March 31st, following a 12.1% contraction the previous quarter. Japan's Gross Domestic Product (GDP) has also contracted by 4.0% in the first quarter of this year, marking its biggest quarterly fall on record. Economists have said that despite this very bad data, it was in line with the expectations and therefore neutral in terms of market impact.
Analysts have said that even though some market players were still unsure of the outlook for the Japanese economy, their expectations remain that this is the bottom for the economic recession and they may start to see a recovery from here onwards.
Crude Oil - Crude Hits $60 a Barrel!
Crude Oil prices rose Tuesday, briefly topping $60 a barrel as analysts expected a drop in U.S. crude inventories, though gains were limited by disappointing U.S housing data. Oil's gains yesterday were aided by the Dollar's slump against the other major currencies, which bolstered demand for commodities as an alternative investment. Crude was up 62 cents, or 1.1%, at $59.65 a barrel yesterday. Previously it topped $60 overnight to reach $60.48, the highest level since the middle of November. However, Crude Oil reduced its gains after data showed U.S. April housing starts fell to a new low.
Oil prices have been on an upward trend since mid-April in equity led rallies. They have recovered from below $33 in December last year after a plunge from record highs above $147 in July. On Wednesday, market players will shift their focus to U.S. Crude Oil Inventories data. Analysts expect the data to show a decline in oil reserves by 1.3 million barrels. A reading above or below estimates can have a major influence on Crude Oil trading.
The pair has resumed its bullish activity for the past couple of days and is currently trading at the 1.3600 level. However, it failed to breach the 1.3715 level and has provided mixed results ever since. If the pair will indeed breach the 1.3715 level, a sharp bullish move might take place.
There is a very distinct bullish channel formed on the daily chart, as the cable is now floating near its upper border. Now, as all oscillators on the daily chart are pointing up, it appears that another bullish session could take place today.
After peaking at the 96.70 level, the pair has dropped consistently and is currently trading at the 95.50 level. The 4-hour chart shows that the MACD is about to demonstrate a bearish cross, suggesting that the bearish trend could extend. Going short might be the preferable choice today.
The daily chart shows that the pair has seen a strong downtrend over the past 2 months, dropping from the 1.1975 level to its current rate of 1.1115. Currently, as a bearish cross is taking place on the daily chart's Slow Stochastic, it seems that the downtrend could continue today.
The Wild Card
The daily chart shows that Gold has been traded within a restricted range lately, without making any significant breach. As Gold failed to reach over $934.10 an ounce, it seems that a modest bearish move could take place today. This might be a good opportunity for forex traders to enter the trend at an early stage.
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