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Tuesday, 9 Dec 2008
Obama's Pledge Spurs Risk Taking
With the announcement of an economic stimulus plan by President-elect Barak Obama, traders dumped safe haven currencies for riskier positions. The gains that were made last week as traders flocked to the Dollar and the Yen were reduced as a greater risk appetite helped pull fresh capital into the market, lending a boost to riskier assets and also Crude Oil.
USD - Dollar Continues its Drop against the EUR
The greenback has extended its losses against the EUR and the Pound for a second day after U.S. President-elect Barack Obama's pledge to spend more on infrastructure. The assurance may have prompted investors to reduce holdings of safe-haven Dollars and take on more risk which reduced the currency's risk haven appeal. The Dollar traded at $1.2963 per EUR yesterday in Tokyo, after dropping 1.9% and touching $1.2964, the weakest level since November 27. The USD also weakened 1.5% versus the GBP to $1.4915 yesterday; as investors were trending towards higher-yielding assets. A Democratic $15 billion rescue plan for the three U.S. automakers has also spurred global risk appetite, pushing the Dollar even lower. Hopes for a bailout gained traction on Friday after data showing the U.S. economy lost half a million jobs encouraged U.S. lawmakers to act. The Congressional Democrats said on Monday they had sent a $15 billion auto sector rescue package proposal to the White House for consideration and a deal could be agreed upon in the next week or two.
Global investors have apparently taken a significant degree of solace from Congress' apparent move towards a bailout of the auto industry and President-elect Obama's commitment to an economic stimulus package. This may have helped the Dollar gain ground against the JPY, rising 1% to 93.73 Yen. The U.S. President-elect Barack Obama also said on Saturday that his plan to create at least 2.5 million new jobs included the largest infrastructure investment since the 1950s and a huge effort to reduce the U.S. government energy use. Analysts do not expect the Dollar to continue losing ground; however, major concerns remain about the possibility of a deep global recession, which may keep investors wary of taking on too much risk.
EUR - EUR Rallies on U.S. Economic Stimulus Package Proposal
The Euro-Zone currency rallied against the USD and the JPY after U.S. President-elect Barack Obama's unveiled the biggest economic stimulus plan since the 1950s, cutting the appetite for Japan's currency as a haven. Apparently Obama's plan has lowered pressure on finance companies to hoard the U.S. currency amid the expending credit crisis. On Monday the EUR rose to $1.2836 from $1.2718 against the U.S currency. These gains in the EUR may be limited due to a drop off of investor confidence in Germany, Europe's largest economy. This may allow the European Central Bank (ECB) more room to cut Interest Rates. Investor confidence in the German economy could decrease in December as the ZEW Center for European Economic Research's index of investor and analyst expectations will probably show today. The index fell to -57 from -53.5 in the previous month.
The ECB has already lowered its benchmark rate to 2.50% from 3.25% only a week ago, on December 4. This decision was obtained by the ECB policy makers after data last month showed Europe's inflation rate fell by the most in almost two decades. However it appears that the Euro-Zone inflation expectations are falling faster than the ECB is cutting its Interest Rates. Economists suspect that the European fiscal and monetary authorities' slow response to the credit crunch will likely to keep the EUR under pressure in the future.
The European currency has climbed also against the British pound after the Bank of England cut its benchmark Interest Rate 1% point to 2%, the lowest level since 1951, in an effort to keep Europe's second-largest economy from falling into its first recession in 17 years. However according to several analysts the Pound's decline against the EUR is not likely to extend further. It might strengthen to as much as 85 pence per EUR by the end of the year.
JPY - JPY still Struggling to Recoup its Losses Against the Dollar
The Japanese currency was trading near a one-week low against the EUR. Some analysts are predicting that official efforts to tackle the global economic crisis will boost Asian stocks and reduce the Japanese currency's appeal as a safe haven. Stock market gains are seen as a sign of easing risk aversion and can curb demand for the Yen, which tends to grow when risk-taking declines and carry trades are unwound. In carry trades, investors obtain funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.3% target rate compares with 2.5% in Europe and 5% in New Zealand.
The JPY traded at 120.06 per EUR from 120.26 late yesterday in New York, when it fell to 120.96, the lowest since December 1. Against the Dollar, it was little changed at 92.95.
The Japanese economy had shrank in the third quarter faster then the government initially estimated, after businesses cut spending and slashed inventories in anticipation of a prolonged recession. This data, coupled with uncertainty over Obama's rescue package plan has put a brake on further JPY gains in the market. The Japanese currency has surged 14% against the Dollar since September, adding to exporters' woes by eroding the value of their profits made abroad.
OIL - Crude Attempts to Reverse its Price Plunge
Crude Oil rose 3% on Monday after falling almost 25% last week, the most since 1991. Crude has previously declined as a result of U.S economic data showing a worsening recession. The U.S. economy lost 533,000 jobs in November, bringing job losses this year to 1.91 million. Oil prices briefly firmed on speculation that the Organization of the Petroleum Exporting Countries (OPEC) is going to cut Oil output when the cartel meets on December 17. OPEC, facing a slide in Crude Oil prices since July of over $100 a barrel, has already agreed to cut about 2 million barrels per day of production to support prices. The member nations are said to be leaning toward further supply cuts at the December 17 meeting in Algeria.
The Organization of the Petroleum Exporting Countries pumps more than 40% of the world's Oil and agreed to cut daily output by 1.5 million barrels in October as prices slumped and inventories rose. In addition to the OPEC cartel, the Saudi Arabian Oil Co. announced yesterday it will also reduce Crude Oil supplies to a few of its Asian customers even more next month. Saudi Aramco is the world's largest state oil company and the world's top crude exporter. Analysts speculate that the Crude prices will likely increase as the date of the OPEC meeting approaches. The Organization will most likely fight hard in order to keep Oil prices from falling below $40 a barrel.
The pair began to appreciate after last week's devaluation. On the 4 hour and daily charts the indicators are giving mixed signal. However, the Slow Stochastic on the hourlies shows a bullish momentum. Going long with tight stops could be a good strategy today.
The bearish trend continues with plenty of steam. On the daily chart the bearish momentum is still intact as the cable now floats in the middle of it. The hourlies also support that notion; however the RSI implies that in the near future the ongoing bearish correction might run out of steam. Traders are advised to take advantage of the Cable bears.
The 4 hour chart is showing that the pair is still floating within its bearish channel. However, the RSI on the dailies has crossed the 30 line, indicating that the market is oversold. The Slow Stochastic is also showing a fresh bullish cross, suggesting that a bullish trend is imminent. Going long with tight stops appears to be preferable.
The float within the narrowing bearish channel on the daily chart continues, as no significant breach has been made. The negative slope on the 1 hour chart's Slow Stochastic indicates the continuation of the bearish movement within the channel. Going short with tight stops appears to be the preferable strategy.
The Wild Card
The Wild Card - Oil
After going through a bearish correction, a bullish cross on the daily chart's Slow Stochastic suggests that the Oil might be on the verge of resuming its general bullish trend. This might give forex traders an opportunity to enter the trend at a very convenient price.
|11:00||EUR||CPI Flash Estimate||y/y||0.3%||0.4%||0.4%|
|11:00||EUR||Italian Prelim CPI||m/m||-0.3%||-0.1%||0.1%|
|13:30||USD||Core PCE Price Index||m/m||0.1%||0.1%||-|
|13:30||USD||Employment Cost Index||m/m||0.7%||0.6%||-|
|14:55||USD||Revised UoM Consumer Sentiment||86.4||86.4||-|
|14:55||USD||Revised UoM Inflation Expectations||2.8%||-||-|