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Monday, 23 May 2011
European Woes Boosting US Dollar
Renewed tensions surrounding Europe and the peripheral nations' debt crisis combined with weak US economic data has helped to drive the dollar rally for the third week.
USD - Dollar Rally Gains Momentum
Last week's dollar rally gained momentum following Fitch's downgrade of Greece's debt rating by three notches and included a negative outlook. While the resumption of the Greek debt crisis combined with elections in Spain were the main drivers in sending the EUR/USD close to its monthly lows, weak US economic data has drove much of the declines the across the majors.
Last week US data was released below expectations across various sectors. In housing data, US building permits declined from the previous month as did existing home sales. Foreign investors were seen moving out of long term US securities, possibly lending to fears of the oversized US budget deficit. Most startling was the sharp drop off in the Philly Fed Manufacturing Index. As US economic data begins to slow, stock prices should also decline in-line with the recent downturn in commodities. Lower US growth rates may cause global portfolio managers to reduce their exposures to higher yielding assets which would benefit the US dollar.
This week traders will be eyeing data releases from the US. In particular, Tuesday's new home sales and Wednesday's core durable goods orders for the month of April will give global investors an idea of the direction US GDP will take in Q2. Thursday will have preliminary Q1 GDP that could strengthen the dollar if any further decline is seen in US output.
The EUR/USD has weekly stochastics which continue to fall and monthly stochastics are beginning to turn as well. Similar to last Friday's price action for the EUR/USD, one strategy may be to fade any potential dollar declines. Support for the EUR/USD comes in at the 100-day moving average near 1.3970. Below this level rests the 61.8% retracement from the January to May move at 1.3660. Resistance is found near Friday's high and the 50-day moving average at 1.4340.
EUR - Spanish Elections Add Uncertainty
Global investors have an aversion to uncertainty and this weekend's elections in Spain add that element. The incumbent Socialist Party failed to hold municipal and regional offices, suffering losses to the Popular Party by roughly 10 percentage points. The elections were accompanied by large street protests throughout the week leading up to the vote on Sunday.
The shift in power in Spain carries significant risks for euro bulls. Concerns that the incoming regional governments may hold back on possible austerity measures to reign in underfunded Spanish budgets, as well as uncover previously undeclared debts in local municipalities, thereby increasing the likelihood of a downgrade in the sovereign credit rating of Spain.
Until now European officials have succeeded in creating a fence around Spain as investors chose to focus on the underfunded debts of Greece, Ireland, and Portugal. However, Friday's trading had yields on Spanish sovereign debt rising, as was the case in Greek bonds. Further tensions are building in the Greek drama as the ECB stated a restructuring of Greek sovereign debt would cause the ECB to reject Greek bonds in return for liquidity provisions.
Momentum is beginning to shift against the euro not only versus the dollar but in the crosses as well. The EUR/CHF fell below its lowest level in 5-months while the EUR/GBP is testing the lower border of its recent consolidation pattern. A break of 0.8660 and the EUR/GBP could unravel to the 0.8530 level.
JPY - Japanese Economy Expected to Deteriorate
The Bank of Japan expects the economy to decline following today's negative economic assessment. The report for the month of May shows production has fallen and domestic private demand continues to weaken following the earthquake and tsunami on March 11. The report stated, "Japan's economy faces strong downward pressure, mainly on the production side, due to the effects of the earthquake disaster." One upside to the report showed optimism by the BoJ that the economy will return to grow at a moderate pace as supply-side constraint become less restrictive and production increases.
The Japanese economy contracted by 3.7% on an annualized basis in Q1 and on Friday the BoJ did not enact new monetary policies in order to stimulate growth following the earthquake. Despite the earthquake, the Q1 GDP data showed the Japanese economy was most likely headed for a recession.
The decline in growth has allowed for the yen to come off of its lows versus the dollar, something the BoJ and Ministry of Finance are most likely thankful for as this should aid any economic recovery. Further USD/JPY targets may be retracement levels from the April to May move at 82.50 followed by 83.25.
Oil - Crude Prices Decline but Remain within Recent Ranges
While volatility has increased this month given the sharp declines at the start of May, spot crude oil prices continue to consolidate over the past two weeks with a bias to the downside as the European debt crisis reemerges. Spot crude oil prices are trading lower in the Asian session at $98.40 from an opening day price of $99.92.
Bias remains the downside as flair up in the European debt crisis threatens to weigh on global economic growth and investor sentiment. S&P's move this weekend to lower Italy's credit rating to negative from stable did little to boost traders' confidence in the European economy. The war of words between ECB officials and Greek leaders has also hurt sentiment for the crude oil bulls.
Until a catalyst emerges in the crude oil markets or a resolution is finally reached in the European debt crisis, crude oil prices may continue to slide. Initial support for spot crude oil is found at $94.70. A breach here could trigger declines to $93.00. Resistance comes in at $101.40 followed by $104.70.
The EUR/USD has gone increasingly bearish in the past 2 days, and currently stands at the 1.4070 level. The daily chart's Slow Stochastic supports this currency cross to fall further today. However, the 4-hour chart's Stochastic Slow signals that a bullish reversal will take place today. Entering the pair when the signs are clearer seems to be the wise choice today.
The pair has been range-trading for a while now, with no specific direction. The daily chart's Slow Stochastic is 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 4-hour chart is showing mixed signals with its RSI fluctuating at the neutral territory. However, the daily chart's RSI is already floating in the overbought territory indicating that a bearish correction might take place in the nearest future. Going short with tight stops might be the right strategy today.
There is a bullish cross forming on the daily chart's Slow Stochastic indicating a bullish correction might take place in the nearest future. The upward direction on the 2 hour chart's Momentum oscillator also supports this notion. Going long with tight stops might be the right strategy today.
The Wild Card
This pair's sustained upward movement has finally pushed its price into the over-bought territory on the 4-hour chart's Williams Percent Range. Not only that, but there actually appears to be a bearish cross on the Slow Stochastic, pointing to an imminent downward correction. Forex traders have the opportunity to wait for the downward breach on the hourlies and go short in order to ride out the impending wave.
|02:00||AUD||HIA New Home Sales||m/m||-1.8%||-||-|
|02:01||JPY||Monetary Policy Statement||-||-||-|
|08:00||EUR||German Industrial Production||m/m||0.7%||-||-|
|08:01||JPY||BoJ Press Conference||-||-||-|
|08:45||EUR||French Trade Balance||-3.3B||-||-|
|09:00||CHF||Foreign Currency Reserves||540B||-||-|
|10:30||GBP||Manufacturing Production m/m||m/m||-0.8%||-||-|
|10:31||EUR||German 10-y Bond Auction||0.69|1.2||-||-|
|16:00||GBP||NIESR GDP Estimate||0.5%||-||-|
|16:30||USD||Crude Oil Inventories||4.0M||-||-|
|19:01||USD||10-y Bond Auction||2.24|2.7||-||-|
|01:01||GBP||RICS House Price Balance||53%||-||-|
|01:50||JPY||Core Machinery Orders||m/m||-3.6%||-||-|