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Thursday, 31 Mar 2011
Gains in Equity Markets Fuel USD Declines
The dollar was down on the day as an equity rally fueled greater risk taking in the FX markets. As such, lower yielding currencies such as the dollar and the yen sold off. Today, traders will be anticipating US weekly unemployment data, a day prior to Friday's jobs report.
USD - Gains in Equity Markets Fuel USD Declines
The dollar was down on the day as an equity rally fueled risk taking. Global bourses were higher with the gains beginning in Asia as the Nikkei was up 2.6%. In Europe the DAX rose 1.8%, while the Dow climbed 0.6%. As the equity rally built momentum, traders sold traditional carry trade currencies such as the dollar and the yen to fund higher yielding equities.
Traders largely ignored the release of the ADP employment report for March as the payrolls company data showed the US economy added 201K jobs in February on expectations of 208K. The previous month's revisions were not significant, falling to 208K from 217K. The accompanying statement from ADP was bullish on the US employment picture as the report, “removes any remaining doubt that nonfarm private employment accelerated heading into 2011."
Trading of the EUR/USD was more volatile than usual, with the pair moving as low as 1.4051 just prior to breaking higher during the New York trading session to 1.4146 where the pair closed at 1.4131. The GBP/USD was up on the day at 1.6088 from 1.5994. The Aussie dollar reached a new all-time high at 1.0345 before closing at 1.0317.
Today traders will be focused on the release of US weekly unemployment numbers scheduled for 12:30 GMT along with Canadian m/m GDP. Markets will also be following the Chicago PMI survey at 13:45 GMT.
Tough talk by Fed officials for a normalization of US monetary policy fell to the wayside as traders continue to focus on yield. Until Fed Chairman Ben Bernanke hints at a pullback in the Fed's liquidity programs, traders will continue to use the USD as a funding currency in search of higher yielding assets.
EUR/USD resistance is found at 1.4220, 1.4250, and1.4280. Support is located at 1.4150 followed by 1.4115, and 1.4020.
EUR - Focusing on Multiple European Interest Rate Increases
The euro moved higher versus the dollar but fell against the Swiss franc as traders continue to focus on expected rising European interest rates. Spurring euro gains were comments by ECB executive board member Lorenzo Bini Smaghi who said the ECB will be looking to raise interest rates gradually.
The Swiss franc was supported by a strong KOF Economic Barometer which shows the Swiss economy may be accelerating faster than forecasted.
The EUR/CHF climbed to the resistance level at 1.3038 before falling to close at 1.2969. The 1.3038 level coincides with the March high. A breach above this price could target the 200-day moving average which comes in today at 1.3075, followed by the February high of 1.3200.
Recent comments by St. Louis Fed President James Bullard have been dollar supportive but the affect wore off into European trading. Bullard was quoted saying the Federal Reserve should begin discussing scaling back its $600B quantitative easing program.
Traders continue to focus on the expected interest rate increase at the next ECB meeting on April 7th. This event has been built up with such significance that it may present a situation where the ECB will disappoint traders. Much of the built in premium to the euro is on the basis of successive interest rate increases and a normalization of European monetary policy, not simply a one-off adjustment. The currency should continue to be supported with further comments by ECB members expressing their support for multiple increases to the interest rate. Downside risks for the currency may be a delay in rising European rates.
JPY - Yen Falls as Carry Trade Resumes
As traders continue to search for increased yields, they have turned to funding their trades with the low yielding yen. In addition to the G7 intervention, a return of the carry trade has helped to drive the yen lower following its sharp appreciation during the middle of March following the earthquake and tsunami.
The yen has been on its back foot versus the euro with the EUR/JPY rising to a new high in early European trading. The pair is currently trading up at 117.45 from 116.82. Versus the dollar, the USD/JPY is up at 82.80 from 82.66.
The Japanese currency is now trading at its weakest point since the G7 intervened in the FX markets. It appears traders have been positioned out of long yen trades by the unilateral intervention. Also improved risk sentiment is helping as traders unwind risk-off trades from the previous two weeks and are moving into carry trades which support a weaker yen.
USD/JPY resistance is found at 83.30. This level has extra significance as it coincides with a falling trend line off of the September 2010 high. A breach of this level would then target 84.00. To the downside, support is at 82.00 and 81.60.
OIL - Oil Sees Minor Gains in Overnight Session
The continued violence in Libya caused oil to make slight gains during the Asian trading session, despite the fact that US stockpiles of crude oil rose significantly higher than expected according to a report released yesterday. Typically a high US crude inventory signals that demand is down and leads to a drop in prices. It appears that supply worries due to Middle East violence are still propping up prices.
Currently crude oil is trading at $104.85 a barrel, up close to $1 since last night. With no clues as to if or when the situation in Libya will become pacified, traders can expect the price of crude to remain above $100 a barrel for some time. That being said, tomorrow's US Non-Farm Employment Change figure is likely to inject significant volatility into the marketplace and the price of oil is likely to be affected. Traders will want to watch out for any surprises which could cause crude to shift dramatically.
Technical indicators are beginning to show signs that this pair may be in overbought territory, signaling a downward correction may take place today. A bearish cross on the 8-hour chart's MACD has taken place, while the Bollinger Bands on the same chart are beginning to tighten. Opening short positions may be a wise choice today.
The 8-hour chart's Bollinger Bands are narrowing, indicating that a price shift is likely to occur in the near future. The 4-hour chart's Williams Percent Range has entered overbought territory, which could mean the price shift will be downward. Going short with tight stops may pay off today.
The daily chart's Relative Strength Index has entered the overbought zone, which is typically a sign that the pair will face a downward correction. This theory is supported by the Stochastic Slow on the same chart, which has formed a bearish cross. Going short may be a wise choice today.
Most technical indicators place this pair in neutral territory at the moment, meaning that a significant change in price is unlikely to occur in the near future. That being said, it appears that a bullish cross may be forming on the 4-hour chart's Stochastic Slow. Still, traders will likely want to take a wait and see approach today.
The Wild Card
Most technical indicators are showing that the precious metal may have reached its peak and could see a downward move in the near future. The Williams Percent Range on the 8-hour chart is currently at -5, well into the overbought zone. In addition, the daily chart's MACD has formed a bearish cross. Forex traders may want to take advantage of the impending downward move and open up sell positions for potentially high profits.
|01:00||EUR||German Prelim CPI||m/m||0.9%||-||-|
|01:00||EUR||Italian 10-y Bond Auction||1.36|1.5||-||-|
|01:50||JPY||Prelim Industrial Production||m/m||3.7%||-||-|
|09:00||CHF||KOF Economic Barometer||90.1||-||-|
|09:00||EUR||Spanish Flash CPI||y/y||-1.1%||-||-|
|10:30||GBP||Net Lending to Individuals m/m||m/m||2.4B||-||-|
|10:30||GBP||M4 Money Supply||-0.8%||-||-|
|14:30||USD||Core PCE Price Index||m/m||0.1%||-||-|
|16:00||USD||Pending Home Sales||m/m||1.7%||-||-|