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Tuesday, 27 Jan 2009
European Currencies Strengthen as Stocks Rally
Yesterday's major market event appears to have been the announcement that Britain's 4th largest bank, Barclays, will not need additional bailout funds from the Bank of England. The resulting stability in the forex market led some investors to pull their investments away from currencies and back into the stock markets resulting in a worldwide rally in stocks. This pushed some currencies, such as the USD, to more realistic levels given recent negative economic data coming out of the United States.
USD - Dollar Slides against EUR and GBP on Risk Aversion
The Dollar slid yesterday by over 250 pips against the Pound and EUR to 1.4044 and 1.3211 on risk aversions. This was sparked by good news coming out of Britain's banking sector, led by Barclays, which said they won't need the 4-billion-Pound government aid for their investment banking arm. The reason why this led to the Dollar's decline against its major currency pairs, such as the GBP and EUR, is because when investors feel there is less risk in the market they invest in riskier assets. Therefore, investors drop less risky assets and currencies, such as the Dollar, and pour their money into riskier assets, such as shares in the stock market.
This is a pattern that we are likely to see over the coming weeks. For example, when it looks like the global economy is improving, and the recession seems it may be ending earlier-than-anticipated, then the safe-haven Dollar is likely to drop. This marks a contrast to last week, when the Dollar rose significantly against a number of its main currency pairs, such as the Pound and EUR.
The Dollar's decline yesterday was also due to the better-than-expected data release from the U.S. that showed Existing Homes Sales at 4.74 million, significantly higher than the forecasted 4.40 million. This resulted in a continuation of the Dollar's earlier gains. The combination of positive news yesterday on both sides of the Atlantic led to rallies in British and European stock markets, as investors abandoned the Dollar. The American stock market also made decent gains yesterday.
Looking ahead to today, the behavior of the Dollar may be similar to yesterday, as traders continue to reevaluate their portfolio. Traders are advised to follow the release of the CB Consumer Confidence figures coming out of the U.S. at 15:00 GMT. If the results are better than expected, then the Dollar may continue to decline against the Pound, EUR, and Yen. It is also advisable to follow the situation following the Senate's approval of President Obama's nominee for Treasury Secretary Timothy Geithner. It may take the currency market another day to digest the positive news for Obama and the U.S.
EUR - EUR and GBP Climb on Banking Rebound
The EUR gained on news from Britain that Barclays, Britain's fourth largest Bank, is scheduled to post better than expected profits. The importance of this is due to the fact that British and European banking stocks dropped dramatically last week; led by negative banking data coming out of Britain. This resulted in these 2 currencies declining significantly against their main currency pairs. However, so far this week, there has been a reverse in fortunes.
The EUR rose against the GBP by about 40 pips to 0.9405, as parity nears. The EUR and GBP rose significantly against the Dollar to close at 1.3211 and 1.4044 respectively. This comes about as British and European stock markets rallied as the positive banking news inspired investors to drop the Dollar. The other reason why these currencies were so volatile yesterday may be due to the fact that investors saw them as over-sold, and we may be seeing a price correction. However, only time will tell if this is the case.
Today, there is several important news events on the economic calendar scheduled for Europe. Coming out of Germany at 9:00 GMT is the German Ifo Business Climate report. Better than expected results are likely to push the currency higher against the EUR's major currency pairs. Britain releases figures on CBI Realized Sales at 11:00 GMT. Good results are likely to push the GBP up significantly against the USD and JPY. These 2 releases are likely to be the main determinants of the strength of the European currencies until the U.S. Stock Market opens later in the day.
JPY - Yen Slides on Stock Market Rallies
The Yen slid yesterday against the EUR and Pound, as global stock markets recorded impressive gains. This was sparked by Britain's Barclays Bank reporting that it didn't need to raise additional capital, as it is expected to release better-than-expected quarterly profits. This led to a considerable rise in British, European, and Asian stock markets, whilst U.S. stocks also posted gains. This confidence, which led to traders dropping the Yen, means that confidence may be returning to investors. The question is how long can this last? The answer depends on how quickly the global economy recovers.
If data releases today from Europe and the U.S. are better than expected, then the Yen is likely to lose further ground against its major currency pairs. It's important to take into account that a weaker Yen is better for Japan as this may help the country's exports. There is a possibility that in the coming trading days the Yen is likely to drop the gains that it made against the Pound and the EUR last week. This could come about as these 2 currencies were over-sold. As Japan releases more data showing how deep their recession really is, investors may further unwind their trades from the JPY, to the USD, EUR, and GBP.
Oil - Crude Oil Declines on Demand Concerns
The price of a barrel of Crude Oil fell around half a Dollar, or 1.5%, yesterday as the Organization of Petroleum Exporting Countries (OPEC) fears that their production cut may not be adequate enough to support prices. The International Energy Agency (IEA) backed these claims, stating that demand for Oil will decline for a 2nd year in a row as the global recession is set to prolong. Analysts say that the expected 5% cut in OPEC output this month won't be enough to support the prices. This comes about as supplies of Crude Oil in the United States reached their highest level since August 2007.
In the meantime, one of the only ways to uphold Crude's price, and push it up to a more desirable price-level, is by OPEC agreeing to cut production further. They are expected to meet again in March as the drop in revenues has pushed many Middle Eastern countries into the red. Today, Crude Oil may reverse some of yesterday's gains if Europe and the U.S. post positive economic data releases. What may also put pressure on Crude's price later today is if Barack Obama and Treasury Secretary Timothy Geithner increase their tough rhetoric on taking the U.S. and the world out of this recession.
After peaking at the 1.3250 level, the pair has halted its bullish momentum and is now trading around 1.3216. The RSI on the hourly chart is located around the 60 level, suggesting that the bullish move has more room to go. Going long might be the right strategy today.
Ever since bottoming at the 1.3550 level, the pair is now galloping full steam ahead and is currently traded around the 1.4056 level. The hourly chart is providing exclusively bullish signals; implying that another bullish session is forthcoming and the 4-hour chart supports that notion. Going long seems to be the right strategy today.
The 4-hour chart is giving mixed signals with its RSI floating in neutral territory. However, the hourly chart's Slow Stochastic is showing quite a strong bullish momentum and the RSI confirms that the direction is indeed up. Going long with tight stops is a preferred strategy today.
The bearish momentum the pair has shown since the breach of the channel on the daily chart continues. The 4-hour chart's Slow Stochastic is showing the continuation of the trend, and the hourly studies also confirm the bearish notion. Going short might be the right choice today.
The Wild Card
It seems that the bullish momentum is still relevant, and that Silver is heading up with plenty of room to run. The Bullish correction which took place 4 days ago seems to have larger potential as all oscillators on the daily and the hourly charts are showing fresh upward momentum. Forex traders have a great opportunity to join the bullish move at a very early stage and with a great entry price.
|10:30||GBP||Manufacturing Production m/m||m/m||-0.8%||0.4%||0.5%|
|10:31||EUR||German 10-y Bond Auction||0.69|1.2||-||0.62|1.1|
|16:00||GBP||NIESR GDP Estimate||0.5%||-||-|
|16:30||USD||Crude Oil Inventories||4.0M||2.2M||-|
|19:01||USD||10-y Bond Auction||2.24|2.7||-||-|
|01:01||GBP||RICS House Price Balance||53%||54%||-|
|01:50||JPY||Core Machinery Orders||m/m||-3.6%||3.3%||-|
|05:45||JPY||30-y Bond Auction||1.41|3.1||-||-|
|07:00||JPY||BoJ Monthly Report||-||-||-|
|07:00||JPY||Economy Watchers Sentiment||49.3||48.6||-|
|08:00||EUR||German Trade Balance||22.8B||20.2B||-|