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Tuesday, 14 Oct 2008

European Bailout Restores Some Needed Confidence to Markets

The major European powers agreed to their own financial bailout yesterday, pledging over $700 billion to solidify Europe's banking institutions.

EUR/USDGBP/USDUSD/JPYUSD/CHFAUD/USDEUR/GBP
Daily Trendupupupdownupdown
Weekly Trendupupupupupdown
Resistance1.37451.7610103.101.14100.71750.7870
1.37251.7590102.901.13900.71550.7850
1.36951.7560102.601.13600.71250.7820
Support1.36351.7500102.001.13000.70650.7760
1.36051.7470101.701.12700.70350.7730
1.35851.7450101.501.12500.70050.7710

Economic News

USD - Dollar Gives Back as Investors Return from Safety

Global markets reacted positively to news that the British, French, and German governments would commit funds to the prop up the continent's banking sector. Yesterday's trading lacked the price volatility that has been seen in the USD the last two weeks, with the Dollar dropping against the EUR and GBP, while taking slight gains against the JPY. U.S. financial markets were closed yesterday for a banking holiday.


Not just with words, but with firm commitments to action by the European governments helped push the Dollar lower yesterday against the EUR and the GBP. Perhaps traders were waiting for assurances that the worlds largest banks would not be allowed to fail, as was the case with Lehman Brothers. Government intervention is helping to reduce risk aversion, easing investor fears, and in turn creating the opportunity for traders to get back into riskier assets. Recently currency markets have witnessed a flight to safety in the Dollar and the JPY. During the past two weeks the Dollar has made gains of over 1200 pips against the EUR and dropped against the JPY almost 600 pips.


Today we will hear from FOMC Member Plosser and his remarks regarding the current state of the U.S. financial system. Traders will be listening for any hint as to the implementation of the U.S. financial rescue plan. Investors will continue to look for added confidence in the markets. Recently this has been in the form of government intervention. Another factor that has gone largely unnoticed in the currency markets has been the steady drop in Crude Oil prices. The price of Crude may not stay depressed for long. Any resurgence in Crude prices could push the USD lower in the short term.

EUR - European Bank Bailout Program Takes Shape

With no economic indicators released yesterday, the 15 nation currency's movement was mainly affected by the G7 rescue plan. Finally with such a move the European economy is expected to boost consumer confidence. The effect has already influenced the markets as European shares in the equity markets managed to rise 4.5% throughout the early hours.


The French Finance Ministry held a press conference yesterday to announce the creation of a 40 billion euro fund to purchase bad bank debts. Similar announcements are expected by additional Nations across Europe, while some have already been announced yesterday. With more and more central banks taking action to save the European banking sector, we may possibly see stabilizing equity markets and the EUR currency stabilizing in the near term.


With a batch of indicators to be released today, expectations for a more intense trading day today are high. ECB Trichet will hold a speech today in New York, while we can expect the German ZEW Economic sentiment to provide a better view of the European economic health. Traders may be looking in both ways as to the direction of the European economic health. Recently the Euro-Zone economy has been trending down but, with the recent European government bailout announcement, look for the EUR to post small gains in the near future.

JPY - JPY Jumps as Panic Grips Investors

As Japanese investors begin liquidating in excess of $1.3 trillion in overseas assets in order to bring money into the country, the Yen continue to extend its gains against its major currencies. The reason for the reshuffling of assets is due to the global slump in equities.


The Yen, which is a preferable currency in times of financial uncertainty, looks set for further appreciation. The Japanese currency may advance to 95 per Dollar should Japanese investment trusts, insurance companies and pension funds start selling foreign holdings. Yesterday the JPY rose for the third straight day to 99.87 from 100.67 per dollar at 12:04 p.m. in Tokyo on Friday. It has gained 8% over the past month. There has been almost no change in JPY versus the EUR, after European leaders agreed to guarantee bank borrowing and bolster big lenders. It declined to 134.76 Yen, from 134.96 at the end of last week.


As European countries have further room to cut Interest Rates in response to slowing global growth, evolving yield differentials should be further supportive of the Yen. The European Central Bank's benchmark rate of 3.75% compares with 1.5% in the U.S. and 0.5% in Japan. Traders raised bets on an ECB rate cut later this year.

OIL - Unexpected Rise in Crude Oil prices

Crude Oil begins to gain after falling below $82 a barrel at the end of last week. It rose after policymakers around the world took new and drastic steps to rescue banks and prevent the global economy from sinking into recession.

The governments of the U.S., Europe and Asia are offering their support for the banking system to stem the financial crisis threatening the global economy. After Crude declined for the past few months on concern that a global recession will cut demand for fuel, the market waits to see some evidence that these government interventions are having a positive influence, or are at least dampening the global panic. The recovery process is likely to be very long winded and will likely take about as long as the crisis. If government measures to shore up markets succeed, Oil prices will be poised for a recovery.


Moreover, since the EUR jumped the most in three weeks against the dollar today on the region's bank rescue plan it will also likely to speed up the crude prices . Because a weaker dollar typically supports Oil prices, it makes commodities cheaper for buyers in other currencies.

The announcements from over the weekend are likely to have some positive effects on the markets. And even though it's still very early at this stage to say if they would put an end to the financial crisis, the market's positive expectations are more than likely to raise crude prices.

Technical News

EUR/USD

The daily chart shows fresh signs of a bullish move, suggesting that the downtrend has vanished. The 4 chart's RSI also supports this notion indicating that the upwards momentum has more steam in it. Going long with tight stops might be the right strategy today.

GBP/USD

The daily chart shows fresh signs of a bullish move, suggesting that the downtrend has vanished. The 4 chart's RSI also supports this notion indicating that the upwards momentum has more steam in it. Going long with tight stops might be the right strategy today.

USD/JPY

On a daily chart the pair is showing consistent bullish momentum for a while now and today is no difference. Although the signal is not strong the pair might have a local target at 1.0400, which might make it feasible for forex traders to go long with tight stops.

USD/CHF

The pair has been range-trading for a while now, with no specific direction. The Daily chart's Slow Stochastic providing us with mixed signals. All oscillators on the 4 hour chart do not provide a clear direction as well. Waiting for a clearer sign on the hourlies might be a good strategy today.

The Wild Card

Oil

The 4 hour chart is showing growing bullish momentum, while the daily studies also support that notion. This may prove to be a good opportunity for forex traders to join a potentially strong uptrend that might yield high profits.

Current Time: 10/01 21:38 GMT
# Time $€£¥ Event Per. Prev. Fore. Act. Imp.
10/01
00:50JPY+ Monetary Base y/y40.5%38.9%-1
10/02
01:00NZD+ ANZ Commodity Pricesm/m-3.3%*-1
01:00AUD+ HIA New Home Salesm/m-5.7%*-1
01:00EUR+ Spanish 10-y Bond Auction2.27|1.8*-1
01:00EUR+ French 10-y Bond Auction1.32|2.8*-1
02:30AUD+ Building Approvals m/m2.5%1.1%-5
02:30AUD+ Trade Balance-1.36B-0.78B-5
04:45JPY+ 10-y Bond Auction0.52|3.6*-1
06:15AUD+ RBA Annual Report***1
08:00EUR+ Spanish Unemployment Change8.1K31.3K-3
09:30GBP+ Construction PMI64.063.7-5
10:00EUR+ PPI m/m-0.1%-0.2%-1
12:30USD+ Challenger Job Cuts y/y-20.7%--1
12:45EUR+ Minimum Bid Rate0.05%0.05%-5
13:30EUR+ ECB Press Conference***5
13:30USD+ Unemployment Claims 293K299K-5
15:00USD+ Factory Ordersm/m10.5%-9.2%-3
15:30USD+ Natural Gas Storage 97B--1
00:30AUD+ AIG Services Index49.4--1
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