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Friday, 24 Jun 2011
Euro Zone Manufacturing in Steep Decline, Risk Aversion Rising
The series of flash manufacturing and service data released by Europe yesterday painted a grim picture for the manufacturing sector of the euro zone. Analysts expect the USD to see further upside as interest rate differentials between the US and Europe drop from sight and traders harp on the stagnation in Europe for the second quarter of 2011.
USD - US Dollar Soars as Global Risk Aversion Spikes
The US dollar was seen trading higher yesterday as traders began to seek riskier assets after concerns about global growth began to dampen investor outlook. The EUR/USD was seen meeting resistance near 1.4400 yesterday and plummeted towards 1.4275 in late trading. Analysts expect the USD to see further upside as interest rate differentials between the US and Europe drop from sight and traders harp on the stagnation in Europe for the second quarter.
The series of flash manufacturing and service data released by Europe yesterday painted a grim picture for the manufacturing sector of the euro zone during the second quarter of 2011. Analysts are forecasting a significant downturn, especially as Crude Oil prices remain near $90 a barrel, despite recent bearishness, gouging companies dependent on exports and combustion-engine operation.
With moderately heavy news day expected Friday, traders are sure to see heightened volatility. Most significantly, the US will be publishing its core durable goods orders, which will likely portray the state of the American manufacturing sector alongside Europe's yesterday. Given recent events, many traders appear to be favoring long positions on the greenback due to heightened risk aversion.
EUR - EUR Takes Beating as Investors Flee Risk
The euro was seen trading significantly lower yesterday despite a dovish report suggesting a lingering low interest rate in the US. Following yesterday's ominous manufacturing reports in the euro zone, traders appeared more concerned with the potential Greece implosion and a sluggish second quarter. The EUR/USD was seen trading towards 1.4275 as a result.
While interest rate differentials between the US and Europe came into view this past week, the higher yielding assets like the GBP and EUR appear positioned to lose significant value as traders choose to focus on growth concerns and sovereign debt. The growth in risk aversion may have many investors choosing to store their value in lower yielding currencies, like the USD and JPY.
As for Friday, the euro looks to be anticipating an evaluation of its recent downturn against the other major currencies with mild bias to the downside. The euro zone will be publishing a few economic events on today's calendar. Traders should try and follow the significant publication of Germany's Ifo Business Climate report, since it will act as a gauge of business sentiment in the euro zone's largest economy.
AUD - AUD Seen in Decline as Risk Aversion Climbs
The Australian dollar (AUD) was seen trading lower versus most other currencies yesterday after news began to shift many traders back into safer assets. The Aussie has been a top performer these past several months considering many traders bank on a strengthening of the AUD due to a rise in Chinese demand for Australian raw materials.
The AUD was in a position to make solid gains yesterday after the vote of confidence in Greece helped many assume a rise in risk appetite was impending. Moves toward riskier currencies, however, failed to materialize as a string of manufacturing reports in the euro zone pushed many investors away from the region and into safe haven assets. As such, traders appear to be anticipating a mild downtick in the Aussie dollar prior to this week's close.
Oil - Oil Price Dips Below $90 a Barrel
Crude Oil prices dipped yesterday, reaching as low as $89.80 in late trading. Interest rate differentials have dropped from sight while manufacturing data revealed intense weakness in Europe and this has so far led several large investors and analysts to consider a shift away from the EUR and physical assets in exchange for the safety of the USD and JPY.
As investors sought safety, the value of crude oil, which has been seen holding steady most of the week, dipped to a weekly low of $89.80 a barrel. A sudden jump in dollar values due to this week's risk sensitive environment has helped many investors move hesitantly away from assets like oil. Should Crude Oil sentiment hold steady this week, oil prices may continue to take losses going into the week's final hours.
Last week's failure of the pair to close below the 100-day moving average should not dismay euro shorts. The late in the week rally failed to move above the 20-day moving average which may induce some traders to sell into any euro gains. Both monthly and weekly stochastics have turned lower and point to potential declines. Support is found at 1.4075 followed by the May low at 1.3970. The 200-day moving average may be a likely target and below that the rising trend line from the May 2010 low comes in this week at 1.3610. Resistance is found at Friday's high of 1.4340 followed by 1.4500 and the early June high of 1.4690.
Cable is on the verge of breaking the neckline of a head and shoulders top which comes in today at 1.6120. A breach at this level and a measured move from the chart pattern could take the GBP/USD lower to 1.5370. The likeliest target on the charts is the December low at 1.5350. On the way lower cable could encounter support at the May low of 1.6050 and the March low at 1.5940. To the upside the pair may see resistance at last week's high at 1.6440 as well as 1.6550 off of the May high.
The pair failed to establish a beachhead above the 81 yen level and proceeded to fall. This level will serve as initial resistance followed by the May 31st high at 81.75 followed by 82.20 and 82.57. Falling daily stochastics hint at further declines. Support comes in at the May low of 79.50 followed by the all-time low at 76.11.
The USD/CHF rose to the May support which has turned into a resistance level at 0.8550, a phenomenon which often occurs in technical analysis. A break higher would run into the 50-day moving average which coincides with the falling trend line off of the February high at 0.8640. This may offer traders a good level to enter short into the long term downtrend. Additional resistance is located at the mid-May low at 0.8750 and the May high of 0.8950. To the downside the all-time low could be supportive at 0.8325.
The Wild Card
Spot crude oil prices fell sharply yesterday below $90 but failed to close below the psychological support level. However, momentum continues to build to the downside and the IEA's announcement of the release of the strategic reserves may further drag crude oil prices lower in the near-term. A strengthening US dollar is also working against a rebound in oil. As such, forex traders may want to target the mid-February low at $84.00.