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Thursday, 20 Nov 2008
Mid-Day Price Spike Caused by Negative U.S. Economic News
Following the release of yesterday's economic news from the United States, investors were less certain about the direction of the economy. Starting at 13:30 GMT the market witnessed a short-lived spike across the boards brought on by doubts in the strength of the U.S. economy. Confidence was restored shortly thereafter, and markets returned to their previous trends. Anticipating this move earned large profits for some, heartache for others.
USD - USD Recovers from Mid-Trading Day Losses and Gains on Stock Slide
The USD experimented with a choppy trading session against its main currencies rivals yesterday, amid a slide on worldwide stocks. The market fluctuations were conditioned by a fall on Wall Street, which saw stocks plunge to their lowest levels since 2003. There was also a fall in shares in the auto industry threatening bankruptcy in this vital sector of the U.S. economy.
The USD recovered from its earlier losses and managed to rally against the EUR later in the day. It is now trading back under the 1.2500 level after being traded at a session low of 1.2813 yesterday morning. Against the JPY the USD slipped as investors sought refuge from the low yielding currency.
In other news, investors witnessed a drop in consumer price levels from 0.1% to -0.1% in October, which may be indicative of two things. One, stores may be lowering prices across the U.S. to increase spending during the holiday shopping season. Secondly, consumers are simply spending less, lowering the demand for general goods and revealing the doubtful nature they have about their economic situation.
The price contraction has brought new fears, after the cheapening of Oil and other raw materials, because it could trigger deflation. In yesterday's FOMC Meeting Minutes, Fed officials said that with a deflationary spiral they lack the power to counteract because interest rates are already too low. Deflation is considered for many as a danger to the economy as the resulting fall in prices lead to consumers and businesses holding off on further purchases in expectations of even lower prices, sending the economy down a dangerous path. In addition, the Fed also pointed during its meeting that more interest rate cuts may be needed to prevent further damage to the already week economy.
EUR - EUR Yet to Hit Rock Bottom; Analysts Expect Further Depreciation
The EUR sustained heavy losses against its rival currencies as it continued with its recent downtrend produced by falls in the European stock market. During early trading, the EUR rose to a session high against the USD after the release of pessimistic economic data from the U. S. helped weaken the Dollar to its session low above the 1.2800 level. However, the 15-nation currency came back down later on, reversing the initial rally as U.S. stocks declined and sustained fears about a worsening global economic slowdown.
Against the JPY, the EUR lost more than 500 points, hitting bottom at 119.21. As a main cause for this behavior we point to the European stock markets, which closed with a fall of 4% following adverse result from the Asian and American markets. Another sector which was seriously affected was banks and securities companies dealing with raw materials. These companies fell victim to persistent fears that the global economic slowdown could cause the fall in demand of Crude Oil and other precious metals.
Looking at the news we see that the EUR was completely absent from the calendar yesterday. Today will be no different as only one economic figure will be released: German PPI, which measures the change in the price of goods sold by manufacturers. This indicator is forecasted to be lower than the previous month's. Traders should follow the development of the other currencies, the GBP and JPY primarily, as they will also affect the EUR's volatility today.
JPY - JPY Strengthened by Unwinding Carry Trades
The Japanese currency recovered lost terrain in the last two days and rallied against the USD and EUR as continuing uncertainty over the U.S. government's response to the financial crisis continues favoring the Yen by lowering the value of JPY-funded carry trades.
The low Japanese interest rate helped hold the value of the JPY lower than other currencies as traders used the JPY to fund the purchase of higher yielding assets. However, with global interest rates being slashed, the value of these carry trades have declined and traders have been unfolding them in exchange for more safe-haven investments.
In a recent data release by the Japanese Ministry of Finance, Japan's trade balance figure indicated a deficit of 63.9 billion Yen in October. The numbers reinforced worries that the consequent fall in exports for October may push the economy deeper into recession. Japan's trade balance registered its first effective deficit in nearly 26 years in August because high Oil prices pushed up import costs while overseas demand for Japanese-made goods weakened due to the spreading financial crisis.
Oil - Crude Oil Approaching the $50 Price Level
Oil prices registered a recovery during the day after falling to a 22-month low and getting close to the psychological barrier of $50 a barrel. At midday in the European market, Oil prices dropped below $54 and ending trading at $53.30 due to increasing fears of weakness in the global economy.
However, after reaching its lowest value since January 2007, Crude Oil prices bounced and recovered from earlier losses thanks to a lift in heating oil futures backed by the arrival of cold weather in the Northern Hemisphere. At 17:45 GMT, Oil prices traded at $55.34 on the NY Market, also marking the continuation of the recent downward trend.
Some analysts are pointing at this as the time of the year in which Oil prices touch bottom, while for the moment Oil prices are finding support from heating oil futures, which keep them from a bottomless drop. However, the downtrend continues under the uncertainty of how long and deep this recession will last, Oil prices might continue falling to below the $50 mark. If this level is breached another wave of selling could be unleashed, dragging Oil prices to as low as $40 a barrel.
The trendless wide range the pair has been going through on the daily chart continues with no hint of a distinct direction. However, there is a distinct bearish channel forming on the 4-hour chart, as the pair is now floating around its bottom level. The 4-hour chart's Slow Stochastic is negatively sloped suggesting that the downward trend will probably continue. A breach through the 1.2400 level will validate the next 1.2300 target price.
The daily chart indicates that the bearish trend has not yet said its last word. The 4-hour chart's Slow Stochastic is showing a negative slope supporting the notion that the bearish trend will probably continue. Going short with tight stops might be a very wise choice today.
The momentum which was created after the bearish breach through the tight flat channel on the 4-hour chart yesterday continues with full steam. The daily chart is still quite bearish while on the hourly level this pair is already floating in an oversold territory. It might be preferable to sell on highs today.
On the daily chart the moderate bullish price movement continues within the upwards channel which still has yet to be breached. The 4-hour chart is also joining that notion with the Slow Stochastic pointing to the continuation of upwards momentum. Next testing point should be around 1.2200. Going long appears to be preferable today.
The Wild Card
For a long period silver was fluctuating on a very consistent basis, all indicators on the hourlies and the 4-hour charts are implying that a bullish correction is quite imminent. Forex traders have a good opportunity to enter what appears to be the beginning of a steady rising trend.
|00:00||JPY||Monetary Policy Statement||-||-||-|
|00:00||JPY||BoJ Press Conference||-||-||-|
|00:30||JPY||Tokyo Core CPI||y/y||2.6%||2.5%||-|
|00:30||JPY||National Core CPI||y/y||3.1%||3.0%||-|
|01:05||GBP||GfK Consumer Confidence||-1||0||-|
|01:30||AUD||Private Sector Credit||m/m||0.4%||0.4%||-|
|07:00||JPY||BoJ Outlook Report||-||-||-|
|08:00||EUR||German Retail Sales||m/m||2.5%||-0.8%||-|
|08:45||EUR||French Consumer Spending||m/m||0.7%||-0.3%||-|
|10:00||EUR||Italian Monthly Unemployment Rate||12.3%||12.4%||-|
|11:00||EUR||CPI Flash Estimate||y/y||0.3%||0.4%||-|
|11:00||EUR||Italian Prelim CPI||m/m||-0.3%||-0.1%||-|
|13:30||USD||Core PCE Price Index||m/m||0.1%||0.1%||-|