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Thursday, 6 Nov 2008
Euro-Zone Interest Rate Cuts in the Spotlight
Investors are speculating that the ECB will follow an expected Interest Rate cut today with further reductions in borrowing costs as the Euro-Zone economy continues to slow down. The economic momentum in Europe has been decreased dramatically for the last few months. The expectations remain that the ECB will continue its monetary easing into the first half of next year, which will likely lead to further U.S. Dollar appreciation.
USD - Presidential Election's Finale Shifts Attention to Euro-Zone
The U.S. currency has finally retained some gains against the EUR, after a sharp decline for the last two days which saw a decline in value to as low as 1.3059. The greenback was sustained by Barack Obama's decisive presidential win; Obama's victory could indeed become a vote of confidence for the U.S. Dollar. With the election out of the way, investors' focus turns to decisions by the European Central Bank (ECB) and Bank of England (BoE) regarding Interest Rate decisions later today.
Investors are speculating that the ECB will follow an expected Interest Rate cut today with further reductions in borrowing costs as the Euro-Zone economy continues to slow down. The economic momentum in Europe has been decreased dramatically for the last few months. The expectations remain that the ECB will continue its monetary easing into the first half of next year, which will likely lead to further Dollar appreciation. Barak Obama's victory has raised investors' expectations for bold policy measures in the U.S and is supporting the Dollar against its currency counterparts.
The President-elect has advocated a second financial package to help boost the U.S economy. About three weeks ago, while the financial markets were crashing and the crisis was deepening, Obama increased the proposed cost of his "middle-class rescue plan" to $175 billion from $115 billion. The proposal was viewed as a step to restore confidence and to mitigate the economic fallout from the crisis. Obama's victory will likely boost confidence in the U.S. economy and its assets, which should underpin the Dollar even more.
For the next few days it appears that the U.S. Dollar will likely continue its recent rally, opening today's trading at 1.2873 and gaining momentum. This will especially happen if the new administration embraces a strong currency policy to help attract much-needed capital inflows.
EUR - Interest Rate Cuts Expected Today; Will the EUR Sink Further?
The Euro-Zone currency may decline further against the US Dollar on speculation that the European Central Bank (ECB) will lower its main refinancing rate by a half-percentage point to 3.25%, making it the second cut in a month. The EUR continues to deteriorate after falling 0.2% yesterday. The ECB will announce its decision on Interest Rates at 12:30 GMT in Frankfurt, Germany, and ECB President Jean-Claude Trichet is expected to hold a press conference 45 minutes after this official release.
Last month the ECB reduced its target to 3.75%, thus joining the Fed, the Bank of England (BoE), the Bank of Canada and the Swiss National Bank in a coordinated reduction to stabilize the economy. The European Trade Union Confederation (ETUS) said that without expansionary fiscal and monetary policies, Europe faces the danger of debt reduction, depression, and deflation, and from there back to excessive debt and deleveraging. As a result, the ECB will likely cut its Interest Rates today while other governments embark on state-sponsored investment programs. The market will view the ECB action of a rate cut as a step to restore investor confidence, and to mitigate the economic fallout from the financial crisis.
The ECB isn't the only European institution trying to guarantee financial stability. Britain's business minister urged banks on Tuesday to pass Interest Rate cuts on to customers as markets are preparing for the BoE to slash rates by 75 basis points later this week. The BoE made an emergency 50 basis point rate cut last month and markets are pricing in a 75 basis point rate cut at its regular monthly monetary policy decision meeting today in an effort to soften the impact of the credit squeeze and stop the British economy from heading into a deep recession.
Britain's economy contracted in the third quarter for the first time in 16 years and many analysts expect it to shrink further in the fourth quarter, heading into a recession. And as expectations of a larger rate cut are growing, it appears to be positive for the Pound Sterling. The U.K. currency snapped a three-day drop versus the EUR and rose for a second day against the US Dollar. While the Pound fell against the Dollar earlier yesterday, after reports showed U.K. services shrank in October, it may well increase to as much as 78.50 pence per EUR in the coming days. This is much due to a speculation that the BoE may accelerate the pace of Interest Rate cuts, helping the British economy emerge from a recession sooner than the economy of the Euro-Zone.
JPY - Yen Expecting Small Gains despite Global Economic Weakness
The JPY firmed against its major currency counterparts as fears of a global recession prompted investors to unwind risky carry trades, in which investors use the low-yielding Japanese Yen to fund purchases of assets offering higher returns elsewhere. The Yen also appreciated against the U.S. Dollar on Wednesday as fears about a global recession prompted investors to trim riskier assets and buy back the low-yielding currency to repay Yen-denominated loans.
Investors are paying closer attention to the fundamentals of each economy now as the equity markets have stabilized a bit after unusually high volatility in October. No doubt the economic figures show poor data around the world, and investors also anticipate that the BoE and the ECB will coordinate a cut to their Interest Rates later today. The Bank of Japan's (BoJ) policy board agreed last month that the economic outlook was becoming more uncertain as strains in global financial markets intensified.
Now that the U.S. election is over, investors' attention has returned to the deteriorating outlook for the global economy. The Japanese currency appreciated to as much as 97.77 per US Dollar from 99.58 at the close of stock trading in Tokyo yesterday. The Yen also strengthened against the EUR to as much as 126.30 from 128.14.
Oil - USD Gains Causes Crude Oil Prices to Slide
Crude Oil prices dropped below $66 a barrel yesterday after a U.S. government report showed the world's top energy consumer's demand slowed even further. Crude Oil had surged 10% on Tuesday on signs Saudi Arabia, and other OPEC members, had made a cut in the amount of their Oil exports. This move came in compliance with an agreement made last month by OPEC aiming to halt sliding Oil prices.
The downward pressure on the price of Crude Oil came after Obama's victory in the U.S. presidential election, which boosted the U.S. Dollar. A firmer dollar makes Oil more expensive for holders of other currencies, and tends to pressure Crude Oil prices to go lower. Prices also fell because of concern that the U.S. economy, the world's largest consumer of energy, will continue to contract. Companies in the U.S. cut an estimated 157,000 jobs in October, the most in almost six years! The decline in employment was the biggest since November 2002 when the U.S. was emerging from a recession.
Traders should be eyeing news of key U.S. economic indicators, including a government report on weekly jobless claims due today and tomorrow. Moreover, worries that weakened international economic growth will depress Oil demand remains a key dampening influence on Oil prices. If the global economic condition deteriorates more aggressively, Crude Oil prices may extend their decline and fall towards as low as $50 a barrel.
The float within the widening bearish channel on the daily chart continues, as no significant breach has been made. The negative slope on the daily Slow Stochastic indicates the continuation of the bearish movement within the channel. Going short with tight stops appears to be the preferable strategy.
This pair is in the midst of a narrowing upward channel and this pair is now heading towards the top of it. The hourlies are providing mixed signals with its RSI floating in neutral territory. However, the Slow Stochastic of the 4 hour chart is showing quite strong bearish momentum, and the RSI confirms that the direction is indeed down. All indications are that there is room for further downwards movement and the preferred strategy today will be to go long on dips.
The hourlies show quite a wide range-trading with no specific direction; however the 4 hour chart's Bollinger Bands are tightening indicating upcoming increased volatility. A bearish cross on the daily chart's Slow Stochastic indicates an upcoming test of the 95 level once again. If that level is breached, swinging in the trend would be the best strategy.
Lately, this pair has been going through a relatively choppy trading session and seems to be unable to pick up a sustained trend. 4 hour chart's Bollinger bands are widened and its RSI flows in a neutral territory. Forex traders are advised to wait for a clearer signal before entering the market n this pair.
The Wild Card
Gold prices are in the midst of a very strong downtrend, and an ounce of Gold is currently traded for about $738.50. 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.
|08:00||EUR||German Industrial Production||m/m||0.1%||0.6%||0.6%|
|08:45||EUR||French Gov Budget Balance||-85.6B||-||-9.4B|
|08:45||EUR||French Trade Balance||-3.4B||-3.0B||-3.7B|
|09:00||CHF||Foreign Currency Reserves||498.4B||-||509.3B|
|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%||-|