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Wednesday, 8 Oct 2008
Major Currencies Enter a Holding Pattern in Light of Market Uncertainty
Directly following Fed Chairman Bernanke's speech yesterday afternoon, the value of the USD entered a period of uncertain floating as traders could not decide which position to take in light of the statements made in his testimony. Until the Fed makes its future monetary policy known, traders may see a continuation of this holding pattern across most of the major currencies and commodities which are usually affected by the value of the dollar.
USD - Bernanke Fails to Reverse Declining Confidence in the Market
Failing to put a cap on market fears yesterday, the speech delivered by Federal Reserve Board Chairman Ben Bernanke could best be described as lukewarm. On top of declaring a program to bailout short-term business loans, he also opened the possibility that a cut to the Federal Funds Rate may be imminent, but these announcements alone did little to reverse the recent "sell" attitude in the market. Investors are bailing out of their positions and looking to shore up their defenses in anticipation of the coming recession, which in turn is wreaking havoc on current market value and trader confidence. Directly following his speech yesterday afternoon, the value of the USD made a small downturn followed by a period of uncertain floating as traders could not decide which position to take in light of Bernanke's statements.
This holding pattern so far has not ceased as the greenback currently sits near 1.3600. The USD has been trading within a small range since yesterday afternoon and has yet to make a move which clearly indicates its direction. Until the Fed makes its future monetary policy known, traders may see a continuation of this holding pattern. This could be an excellent time for traders to take note of the high and low marks of the USD against its currency counterparts and trade within these ranges.
As for today, with a speech due to be delivered by Federal Open Market Committee (FOMC) member Charles Plosser, traders could get a glimpse into the next move to be made by the Fed regarding the financial crisis we are experiencing. If this speech comes off as hawkish it could boost the value of the USD and help decide its next direction. However, on the flipside, if his speech appears weak, or similar in temperament to Bernanke's speech, we could potentially see a continuation of this holding pattern, or a reversal to the USD's recent gains.
EUR - Are we Experiencing the End of the European Monetary Union?
Battered and bruised, the EUR has not seen a good day of trading for some time now. Today was a minor exception, however, as it made a few small reversals against the USD and JPY. This turn of events was not brought about by a strengthening EUR, but rather a weakening of the other currencies from fundamental news and economic indicators. What is widely known in today's market is that the Euro-Zone economy is approaching a recession and the various central banks in Europe have refused to cooperate on a comprehensive bailout plan for the bank failures experienced across the region recently. These factors combined generate even less confidence in an already shaken economy.
The biggest problem which the 15-nation currency faces is the ability to be rescued in times of financial crises. What makes the U.S. bailout plan capable of being put into practice is the commanding power of the Federal Reserve over the various regional banks across the U.S. The Euro-Zone does not have such a beneficial system. The various central banks of each country rarely agree on the proper corrective mechanism to crises such as those we are seeing today. More than a few analysts are now saying that this systemic financial shock is one of the few events which could lead to the dissolution of the European monetary union as such a crisis will only highlight the weakness of its decentralized banking system. If these rumors are true, traders can possibly expect the value of the EUR to continue weakening for the foreseeable future unless this crisis is somehow averted.
Traders today have very little fundamental news emerging from the Euro-Zone as the only figures being released are the French budget and trade balance and German industrial production figures. These indicators typically generate small amounts of volatility. The best indicator for trading the EUR today will be news that affects the USD as announcements surrounding its future monetary policy are uncovered over the next few days. The other major factor in the future movement of the Majors is the upcoming G7 summit set for Thursday where the leaders of many central banks will discuss the recent financial crisis and its potential solutions.
JPY - Japanese Currency Still Gaining Momentum
The JPY's recent rise in value has apparently not subsided. While going through some minor fluctuations yesterday against its currency counterparts, it nonetheless continues to climb. Japan's announcement that it would hold its interest rates steady came as no surprise as it has held one of the lowest interest rates worldwide for some time now. In the Bank of Japan's (BoJ) press conference yesterday it was announced that they had allotted an additional $20 billion to its new dollar-supply money market operation as the demand for the USD has recently increased. These indicators, coupled with the recent financial crisis, actually point to a continuation of the JPY's bullish trading as it has historically done well during times of economic downturns.
For today, traders can observe the monthly report from the BoJ as it summarizes the various factors which were taken under consideration before determining its recent policy on interest rates. While this report holds little significance, it has historically generated some volatility for the JPY as it gives clues for future policy decisions and general economic health. We will also see the Core Machinery Orders figure released today, which may grant a more in-depth understanding of the growth, or contraction, within the Japanese economy. However, following the recent trend, the USD appears to be clutching the reins of today's market. Traders would be wise to note its future direction as it usually carries a heavy impact on the other currencies.
OIL - As the Dollar's Value Enters a Holding Pattern, the Price of Oil Follows Suit
After temporarily rebounding to over $90, the price of Crude Oil has settled back into its former position in the $80-90 range. From the sudden uncertainty and price flotation in the market yesterday, Crude Oil was bought up by those traders who were unsure about the currency market. Also helping to raise the price of Oil yesterday was a call from Libya to cut production levels in order to prop up world price levels for Light Sweet Crude. The decreasing demand for energy has Oil producers in a panic to control price movements. Production cuts are one possible solution, but recent price activity which has occurred counter to supply levels has some analysts skeptical of such an action's impact.
One thing for sure is that the upcoming economic recession is weighing heavily on the price of Crude Oil. As economies falter, demand for energy drops. This adds further downward pressure on the price of Oil. For the time being, Oil appears to be floating along with the value of the USD. As confidence in the dollar wavers, the price of Crude Oil mimics the USD's holding pattern as its value is inversely correlated with that of the greenback. Without a clear indication for the movement of the USD, the price of Crude Oil will also continue this price flotation
The 1-hour chart shows that the bearish momentum has momentarily halted. However, a bearish cross on both the hourlies and the 4-hour chart indicates that the pair might resume its bearish trend quite soon. Going short appears to be the preferable choice today.
The cable is currently range-trading within a relatively wide range. A doji formation on the 4 hour-chart indicates that a sharp movement is forthcoming, and a bearish cross on the Slow Stochastic suggests that the move will be bearish. Traders should wait for the breach and swing.
There is a very accurate bearish channel forming on the daily chart as the pair is now floating in the middle of it. Currently, as all oscillators on the daily chart are pointing down, it seems that the downtrend will extend. Going short might be a good strategy today.
Recently, the pair has peaked at the 1.1480 level and has been dropping ever since. A bearish cross on the daily chart's Slow Stochastic suggests that the bearish move might have more steam in it. Going short with tight stops could be the right choice today.
The Wild Card
The pair is in the midst of a very strong downtrend and has dropped over 1200 pips in 4 days. On the daily chart, the pair's price is floating beneath the Bollinger Bands' lower border, suggesting that the bearish move has more room to go. This might be a great opportunity for
forex traders to join a very popular trend.
|12:30||GBP||Autumn Forecast Statement||-||-||-|
|13:30||USD||Core Durable Goods Orders||m/m||-0.3%||0.5%||0.5%|
|13:30||USD||Core PCE Price Index||m/m||0.1%||0.1%||0.0%|
|13:30||USD||Durable Goods Orders m/m||-1.2%||1.6%||3.0%|
|14:45||USD||Flash Services PMI||54.8||55.2||-|
|15:00||USD||New Home Sales||468K||500K||-|
|15:00||USD||Revised UoM Consumer Sentiment||93.1||93.2||-|
|15:00||USD||Revised UoM Inflation Expectations||2.5%||-||-|
|15:30||USD||Crude Oil Inventories||0.3M||-||-|
|17:00||USD||Natural Gas Storage||-||-||-|
|00:30||AUD||Private Capital Expenditure||q/q||-4.0%||-2.8%||-|
|09:00||EUR||M3 Money Supply||y/y||4.9%||4.9%||-|
|12:00||EUR||GfK German Consumer Climate||9.4||9.2||-|