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Friday, 17 Oct 2008
Economic Growth Expectations Being Decreased as Recession Looms
Many of yesterday's economic data releases hinted at a slowing economy, both in the U.S. and the Euro-Zone. Consumer prices are stagnating, Germany has forecast a contracting economy, and the U.S. Philly Fed Manufacturing Index had its worst release in 18 years. Investors will have to adapt themselves to the upcoming economic hardship as these changes will not rectify themselves within a short period of time.
USD - Dollar Rises but Fails to Hold Gains
In a light volatile trading session yesterday, the USD made early gains against the EUR, only to retreat and end the day relatively unchanged as further data released from the U.S. pointed towards a recession. U.S. stock markets rallied late in the day after their worst decline since the 1987 stock market crash, fueling a greater risk appetite as investors moved out of the safety of the dollar, erasing most of its early gains.
Yesterday's data hints at a slowing economy as U.S. consumer prices remained steady. However, these figures tend to be misleading because businesses are unable to pass on higher costs to consumers in a fledging economy in order to maintain consistent growth rates. To give an example of the type of negative data emanating from the American economy, the Philly Fed Manufacturing Index had its worst showing in 18 years! This is also a signal that economic difficulties are starting to spread from the financial sector into the mainstream economy. Investors will have to adapt themselves to the upcoming economic hardships as these changes will not rectify themselves within a short period of time. Traders are advised to keep a close eye on any rise in the U.S. equity markets, or a lowering of the price of Crude Oil, as these have proven to have a strong correlation with an appreciating USD.
Due today are the Preliminary University of Michigan Consumer Sentiment Report and U.S. Building Permits figures. Given the recent drop in equity markets, look for the Sentiment Report to post worse-than-expected results. However, the USD has proven resilient despite recent negative economic news from the States. Possibilities persist for the greenback to continue its two month bullish trend and send the USD to as low as 1.3200 against the EUR.
EUR - EUR Still Taking Hits as German Growth Forecast is Diminished
The EUR ended yesterday's trading sessions down 22 points against the USD, regaining some ground in late trading to close at 1.3473, while losing 19 points against the GBP. The difficulties the EUR has faced do not seem to be over just yet.
Germany, the Euro-Zone's largest economy, cut its growth forecast from 1.2% to a meager 0.2% yesterday. The reduction comes after estimates of demand for German exports were reduced. In a speech given by the German Finance Minister, stagnation is a possible scenario for the nation's economy amid slowing global growth and weak consumer spending. The government also reaffirmed its confidence in the German banking system after receiving guaranteed loans of 500 billion EUR to German Banks.
EU leaders also met yesterday to discuss the global financial crisis and pledged to protect their national industries while unveiling plans for a global summit to discuss the world's economic position. Despite the European Central Bank's efforts to improve the economic situation in the Euro-Zone, the EUR continues to slump against its pairs. A greater sense of economic weakness versus its counterparts has helped to push the EUR lower the past two weeks and very well may continue this trend until the market receives positive economic indicators for the 15-nation currency.
JPY - Japanese Yen Continues to Find Strength
The JPY weakened against its major crosses yesterday, gaining 142 points to close at 101.57 by day's end. An increased risk appetite fueled by U.S. equity gains moved investors from the safety of the low-yielding JPY to positions of higher risk and returns.
The Japanese government announced its second economic stimulus package in a 3-month time period. The aim of this program is to provide assistance to Japanese citizens who have suffered recent investment losses. The JPY functions as a counter cyclical currency; as the global recession deepens, the JPY's gains continue further. Today, the JPY may continue to gain momentum against the majors, with a particular emphasis on the USD/JPY potentially reaching a level of 100.00.
Oil - OPEC Schedules Emergency Meeting to Discuss Production Cuts
The price of Crude Oil dropped 6% over recession concerns and fears that demand will continue to decrease. The U.S. economic indicators released yesterday helped to put pressure on the price of Oil, sending it under $70 for a new 14-month low. Poor indicators from the U.S. economy have reduced the demand for Oil lately. Reduced fuel costs may be the only bright spot to appear from this economic crisis.
Due to the continuing price declines, OPEC has initiated an emergency meeting, scheduled to convene on October 24. Reducing Crude Oil output will be heavily debated as a possible way to increase Crude Oil's price. However, for the time being, traders may look for another drop in value, potentially reaching into the $60-$65 range before day's end.
For the past 10 days, the pair has fluctuated without making a significant breach, and is now traded around the 1.3480 level. Currently, a double doji formation on the hourlies implies that a sharp movement is impending, and as both the RSI and the Slow Stochastic on the 4-hour chart are floating near the 50 line, it appears that the momentum is still somewhat bullish.
It seems that the cable has limited its bullish correction after peaking at the 1.7350 level. And now, a bearish cross on the daily chart's Slow Stochastic indicates that the general downtrend might extend. Going short seems to be the preferable choice today.
There is a very distinct bullish channel forming on the 4-hour chart, as the pair is now floating in its lower section. In addition, all oscillators on the 4-hour chart are pointing up, suggesting that the bullish move might extend. Going long might be the right strategy today.
The daily chart shows that the pair is currently range-trading within a restricted price range. However, as the RSI on the daily chart has dropped beneath the 70 line, it appears that a bearish momentum might be arising. Going short with tight stops could be the right choice today.
The Wild Card
Gold prices are in the midst of a very strong downtrend, and an ounce of gold is currently traded for about $809.80. The daily chart shows that the current price has dropped beneath the Bollinger Bands' lower border, suggesting that another bearish session might take place. This might be a good opportunity for forex traders to join a very popular trend.
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