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Thursday, 23 Oct 2008
Is the Looming Recession Helping some Currencies?
One month after Lehman Brothers Inc. filed for bankruptcy, the USD has officially climbed out of its hole and gained around 1,600 points against the EUR. The European currency has continued to fall despite any economic news, positive or negative. And the JPY has moved in such an odd way that it has investors using terms like abnormal and counter-cyclical. Global recession means that all major economies are facing difficulties, yet some currencies are making record-breaking gains. How can this be?
USD - Unemployment Claims on Tap
The greenback continued its rally yesterday as it further strengthened against the EUR and GBP, continuing to prove that for the time being this is the solid currency that traders can rely on to provide them with steady profits. The USD marked a 4-year record against the GBP yesterday, as the pair sunk to the 1.6150 level. The USD almost saw a 2-year record against the EUR as well, as the pair was traded at the 1.2730 level.
Although no significant indicators were published from the U.S. economy, and no valid explanation can throw some light on this phenomenal trend, the USD continues to rise against all the major currencies, except for the JPY. It appears that in times when real estate is considered to be a risky investment with the word bubble hovering above it, and when stock markets around the globe are competing on who will provide today's most unfortunate news, the USD suddenly seems more attractive than ever.
To highlight the significance of this trend, consider this: September 15th was the day when Lehman Brothers Inc. announced its filing for bankruptcy, and is considered to be the day when the global turmoil started. On this day the EUR/USD pair was traded around the 1.4300 level - today, about a month later, 1.2700 looks to be the new daily support level! This is a difference of roughly 1,600 points.
As for today, the economic calendar is likely to play a leading role as the U.S. Unemployment Claims is expected at 12:30 GMT. If the U.S. economy is indeed heading towards recession, this is one of the leading surveys to predict it. An industry that contracts is one that aims to reduce expenses, and one which fears severe future losses. If the forecast for the 470K figure will be accurate, then the USD might face a bearish correction against the major currencies. Otherwise, the greenback will probably continue its journey to explore new bullish lands.
EUR - EUR Reaches 5-Year Low against JPY
If you went long on the EUR yesterday, let's hope you chose the EUR/GBP pair; otherwise, you are probably not that thrilled about that long position you opened. The EUR continued to weaken against most of the major currencies yesterday, with two highlights. First, the EUR fell to its lowest level against the USD since November 2006. Second, the EUR fell to its lowest level against the JPY since January 2003! The EUR/JPY pair tested the 124.00 level, completing a 1,400 point drop since the beginning of this week!
A few months ago, when the EUR/USD was traded around the 1.5000 level, Jean-Claude Trichet, the European Central Bank's (ECB) President, said that the EUR is still overvalued, and that its most natural rate against the Dollar is around the 1.2500 level. Whereas this scenario seemed so farfetched at the time, today we are only 250 points away.
It is quite clear that despite the U.S. economic indicators being mostly negative, investors are seeing the Euro-Zone as the weaker link in the global economy. The recent outlook for the Euro-Zone, given by the International Monetary Fund (IMF), warned that more European banks might fail, and that recovery is not expected before late 2009.
As for today, a batch of data is expected from the Euro-Zone, and analysts have published rather gloomy forecasts. The direction seems quite bearish, yet surprising figures might help to halt the EUR's recent downtrend. Traders should also follow the equity markets around Europe, as they have proven to set the tone for the past few weeks.
JPY - Recent Movement of the Yen described as Abnormal
The JPY is by all means this week's most profitable investment. In only four days the JPY gained over 700 points against the USD, over 1,400 against the EUR and close to an amazing 1,800 points against the GBP! The JPY is riding an intense bullish ripple that seems unstoppable. Many factors have brought the JPY to an almost 5-year record against the EUR and to an 8-year record against the GBP.
The incredible thing about this is that the Japanese equity markets are also reporting significant losses, and the Japanese outlook doesn't seem too bright. Regardless, the JPY still made gains and was the only currency to beat the USD's recent bullishness.
Looking ahead to today, there is no significant data scheduled from the Japanese economy, and the JPY doesn't give any signs of halting. However, traders should bear in mind that when an abnormal activity is taking place, it is usually an irrational reason that eliminates it. And that is why a reversal, or at least a local correction, might take place at any giving moment.
Oil - Many Factors Combine to Deflate Crude Oil Prices
Crude Oil continued to drop yesterday as the price of a barrel of oil decreased to about $66.20, dropping to its lowest level in two years!
At least three influences combined to damage Crude Oil prices recently. The first is the strengthening USD, and the well known equation hasn't change: the stronger the Dollar, the lower the price of Crude Oil. The second reason is the ongoing concern from global slowdown that had a devastating impact on Crude Oil demand. The third reason is yesterday's Crude Oil Inventories indicator which delivered better-than-expected results, reflecting higher supply and by that extending Crude Oil's bearish trend.
For now it seems that Crude Oil prices will continue to drop for as long as the USD continues to appreciate. Traders are strongly advised to follow the USD against its major pairs and crosses in order to try to predict today's developments.
Similarly to what is happening all across the board, the USD bullishness did not skip this pair as well. It appears that the local EUR/USD bearish momentum might be taking the pair to 1.2600 levels. There are still bearish signals on one hourly chart, yet it seems that pair is overlooking all technical aspects. Going short wit tight stop might be the right choice today.
A bearish formation on the daily chart is still intact; however the momentum is already quite low. The 4 hour chart is also maintaining a slightly bearish configuration yet with no distinct conclusion. The Bollinger Bands are tightening which indicates that the break might be imminent. Traders are advised to hold for the break and then swing into it.
The pair is continuing its bearish movement with full steam, as it breached the 97.60 support level. The daily chart shows that the current price has dropped beneath the Bollinger Band's lower boarder, indicating that the bearish move has more steam in it. Going short seems to be a preferable choice today.
The very strong resistant level of 1.1650 has been breached, and the pair is extending its bullish journey. An upwards momentum on the hourly chart's Slow Stochastic suggests that the pair may extend its bullish trend. Going long with tight stop might be the right strategy today.
The Wild Card
The Crude Oil price is once again dropping and a barrel of Light Crude is currently traded around $67. However, all oscillators on the daily chart are now providing bullish signals, indicating that the Oil might go up. In this case forex traders may have a great opportunity to enter a very popular trend.
|23:50||JPY||M2 Money Stock||y/y||4.4%||4.4%||-|
|00:00||JPY||Monetary Policy Statement||*||*||*|
|00:00||JPY||BoJ Press Conference||*||*||*|
|00:00||GBP||10-y Bond Auction||2.73|1.8||*||-|
|00:01||GBP||BRC Retail Sales Monitor||y/y||3.9%||*||-|
|00:30||AUD||NAB Business Confidence||8||*||-|
|06:00||JPY||Prelim Machine Tool Orders||y/y||40.3%||*||-|
|07:00||EUR||German Trade Balance||18.5B||19.3B||-|
|10:00||GBP||Inflation Report Hearings||*||*||*|
|15:00||GBP||NIESR GDP Estimate||0.8%||*||-|
|23:30||AUD||Westpac Consumer Sentiment||-3.0%||*||-|