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Tuesday, 7 Apr 2009
Equity Losses Benefit the Dollar
The euphoria of last month's equity rally has finally worn off and the Dollar is the primary beneficiary in these market conditions. The Dollar tends to rise as equity markets weaken with reduced risk taking in the currency markets.
USD - Dollar Rises as Risk Taking Disappears
Yesterday a drop in equities signaled an end to the higher risk taking environment and helped to strengthen the Dollar against the EUR and the GBP. The Dollar also rose to a 5-month high against the Japanese Yen to close above the significant 100 Yen mark. The Dollar tends to rise as equity markets weaken, reducing risk taking in the financial markets. On Monday the Dow Jones Industrial Average finished lower by 0.5% and at the end of the day the EUR/USD was at $1.3373 from 1.3572. The GBP/USD was at1.4681 from 1.4927, while the USD/JPY slid 0.4% to 100.53 Yen.
The announcement by the Federal Reserve that it has initiated new currency swap agreements with the European Central Bank, Bank of England, Swiss National Bank, and the Bank of Japan did not significantly impact the currency valuations yesterday. The move was seen as a step by the Fed to ease liquidity concerns for foreign national investors who purchase U.S. government bonds. The main driver yesterday in the forex market was the drop in U.S. equities.
Trading of the Dollar this week could continue to track equity markets as last month's rally may have been a bit premature. Global market sentiment was riding high but yesterday's trading atmosphere may have brought the reality of the economic situation back to earth. There have been very few economic indicators painting a different economic picture. Until there are, the EUR/USD may continue to fall towards its next support level of 1.3250.
EUR - Pound Continues its Bullish Trend
The Euro-Zone economy continues to show signs of weakness and yesterday was no exception. European retail sales fell more than twice the forecasted value as the economic situation continues to worsen. This was the largest yearly drop since the record has been tracked. Further erosion was seen in an investor confidence survey; though this result was slightly better than expected. The data highlights a European economy that has not shown signs of improvement.
This scenario has been apparent in the trading of the EUR/GBP. The Pound has jumped 4% on the EUR in the past 18 days. The trend has extended its gains as better than expected economic data has been seen from Britain the past week. Perhaps the Bank of England was successful in lowering their benchmark rate to 0%, well ahead of the European Central Bank's strategy which has entailed a measured pace to reduce European Interest Rates.
Today's trading of the EUR crosses may be influenced by the release of monthly manufacturing production data from Britain. Manufacturing makes up almost 80% of the industrial production in Britain. Therefore this release is treated as a leading indicator. If the reading comes in better than the 1.4% contraction forecasted for the previous month, look for the EUR/GBP to continue its decline to the 0.9050 mark.
JPY - Yen Hits a 5-Month Low against the Dollar
The Yen continued its decline against the Dollar, touching on a 5-month low during yesterday's trading. After the USD/JPY struck the 101.42 level the pair immediately reversed course. During early morning hours of the Japanese trading session the pair was still declining near the 100.50 mark. The recent decline of the Yen was due to a significantly distressed Japanese economy and a rally of global equity markets this past month.
The appreciation of the Yen seen early this morning may depend on the outcome of the Bank of Japan's (BoJ) press conference later today and the performance of global equity markets. A bullish statement from the BoJ could lead some traders to believe the BoJ is forecasting a rosier financial climate in Japan. Also a continuation of losses in global equity markets could increase the appetite for the Japanese Yen. If this happens, look for the Yen to trade near the 100.25 level.
OIL - Crude Drops Sharply on Equity Losses and a Strong Dollar
The price of Crude Oil fell sharply yesterday as a strong Dollar and weaker equity markets dampened investor's sentiment. Crude largely tracked U.S. equity markets which were sent lower on worries in the banking sector and overall market attitudes. This was the case with the previous month when Oil prices rose, tracking the rise of global stock markets.
These rallies and drops in the price of Crude present a terrific opportunity for traders to take advantage of market volatility. As the commodity follows the tone set in other financial markets, gains can be made by taking positions in the same direction of the U.S. equity markets. If the trend continues today with further losses in the Dow Jones, Crude could finish the trading day at $50.
Yesterday the pair has fully resumed its downtrend as it breached through the 1.34 level. Currently, all oscillators on the 4 hour chart are pointing down and it seems that another bearish session is quite imminent. Going short might be a preferable strategy for today.
The Cable is continuing to deliver coherent bearish signals, and is now traded around the 1.4700 level. On the hourly chart, the current price has dropped beneath the Bollinger Bands lower boarder, suggesting that the pair may drop once more. Opening short positions might be the right choice today
An upward movement on the 4 hour chart is running full steam ahead. A distinct bullish channel hasn't been breached yet, while 101.50 might be the next target price. The daily chart also confirms that notion; therefore going long may be a preferable strategy today.
After peaking at 1.1406 yesterday, the pair has been going through a moderate bearish correction. A bearish cross on the daily chart's Slow Stochastic indicates that the downwards momentum is still intact. Going short might be the right choice today.
The Wild Card
Oil prices are once again dropping, and a barrel of Light Sweet Crude is currently traded around $51. And now, all oscillators on the daily chart are giving bearish signals, indicating that the Oil prices might continue sliding. This might give
forex traders a great opportunity to enter quite a popular trend.
|18:01||USD||30-y Bond Auction||3.81|2.2||*||-|
|21:30||NZD||Business NZ Manufacturing Index||55.7||*||-|
|04:30||JPY||Revised Industrial Production||m/m||0.5%||0.5%||-|