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Monday, 30 Jun 2008
Oil Prices Are Taking a Toll On US Economy.
The US Dollar experienced a bearish trading session last week, largely due to the rising oil prices and the hesitancy of the Federal Reserve to hike Interest Rates in order to battle inflationary scares in the US. Investors came into last week with the assumption that the US would beat the Euro-Zone to the punch and hike Interest Rates. This and some poor fundamental data from the Euro zone initially sent the USD up vs. most of its major counterparts. However, as the week passed by, the greenback was not able to maintain this trend and began to fall consistently versus most of its major currency rivals. Poor US data did little to help the greenback cope with what ended up being a non-changing Fed Rate announcement. Additionally, the FOMC was about as vague as possible regarding how inflationary struggles in the US would be addressed. Dollar prices proceeded to make substantial drops versus the EUR and JPY. As the dollar slide continued towards the week's end, Crude Oil prices hit an all time high, and the US stock markets took a big hit.
This week should prove to be even more important to the Dollar as we look forward to critical news, in what is already a shortened holiday week in America. On tap this week we can expect the ISM Manufacturing Index, ADP Nonfarm Employment Change, Factory Orders, Crude Oil Inventories, Average Hourly Earnings, Unemployment Claims, and the Unemployment Rate. These figures will be highlighted by the Thursday release of Non-Farm Payrolls and the ISM Manufacturing Composite. These events will likely provide much needed volatility in the market which has missing for quite some time now. We can expect to hear from several members of the Fed this week, as we have begun to see a clear division of monetary policy within the US economy. With the next scheduled rate statement for the Dollar roughly one month away, the Dollar will have to move in response to outside news.
Today, the US will be uncharacteristically absent from most of the news day. Chicago PMI is the only scheduled event on tap and should have minimal effect on overall market movement. As such investors are advised to review the USD counterparts before placing their transactions.
The EUR recovered nicely last week, mainly against its US counterpart. Poor data early in the week left a bad taste for Euro enthusiasts as all seemed to be going in favor of the USD. Once the FOMC statement from the US came back with no change, traders jumped into action again and used their EUR to purchase more of the USD and the JPY. Furthermore, the EUR has now put the ball back in its court in terms of renewing its dominance aboard the currency lists, especially after Crude Oil prices took their toll the hardest on the USD last week
The week ahead should be huge for the EUR as we can expect market affecting news from Monday to Friday. The week from the EZ will be highlighted by German Retail Sales, Manufacturing PMI, PPI, German Factory Orders and the all important Interest Rate Statement. The markets are scheduled to return with favorable results, but the real key is the Minimum Bid Rate hike. ECB President Jean-Claude Trichet has been hesitant in regards to a possible Interest Rate hike since announcing a shift in policy several months ago when he called for July to be the month where the rate will change. July is now upon us. Investors are happy to access the market under such anticipated favorable conditions.
Today we can expect the 9:00 GMT release of the CPI Flash Estimate and Italian Preliminary CPI. Both events should have little effect on the market's movement. Euro traders should continue to see gains spill over from last week. However these gains may be within a smaller range with the lead up to Thursday's mega news day.
The JPY experienced two different trading periods within last week's session. Up until Thursday mid-day the JPY was within its usual habit of range trading versus its rivals and bearish trend against the USD. Last week's Japanese economy produced a great deal of fundamental data. Yet, these data proved to have little effect on the movement of the Japanese currency. The big move came on Thursday, when the US Federal Reserve left Interest Rates unchanged and left traders in a state of ambiguity regarding the future of the USD. This sent US stock prices down. The movement of the stock markets sparked risk aversion in the market initiating the JPY's bullish trends against most of its rivals. By the end of the previous week, the USD/JPY traded at a 3 week low, dropping almost 200 points to close just above 107.
Looking ahead this week three important indicators will be published. Today, the Tankan Large Manufacturers Index and the Tankan Large Non-Manufacturers Index will print their results. Both indices are forecasted to decrease. The 3rd vital indicator for the week will be the Average Cash Earnings, which should decline to 0.7%.
Traders are advised to pay close intention to Japan's trading partners and stay keen as this week is expected to turn extremely volatile for the Japanese currency.
Crude Oil -
The surging prices of Oil are taking a toll on US consumers on their country's economy. Mounting concerns about the condition of the US economy will probably bring Oil prices into sharp focus. Moreover, this Thursday, the European Central Bank is widely expected to raise Interest Rates. Higher Interest Rates in Europe are expected to lower the value of the USD and push it further south. Correspondingly, a weaker U.S. currency tends to boost the price of dollar-denominated commodities, such as Oil, as it makes them cheaper for holders of other currencies.
Last week stocks finished the week sharply lower, with Oil near $143 a barrel. Record-high Crude prices are the larger dangers to the economy than any other factors
Rising Oil prices are also driving up inflation rates. In fact, US Core Consumer Price inflation rose at a 2.3% annual rate during the first quarter, up from a previously estimated 2.1% rise. Core inflation has risen 2% in the past year, just at the high end of the Fed's comfort zone.
There is a very distinct bullish channel forming on the hourly chart, as the pair is now floating around the bottom level of it. The Slow Stochastic on the 4 hour chart suggests the trend can continue rising. The breach through the 1.5815 level will validate the next 1.5855 target price.
All indicators on the hourlies are showing that we may see the pair correcting back to the 1.9850 level. A bearish cross on the 4 hour chart seen by the Slow Stochastic also supports that notion indicating that a local correction might be imminent. Going short with tight stops might be the right thing to do today.
The downwards channel on the daily chart still remains intact, as the pair now floats on the bottom barrier. The momentum is bearish and very strong. The hourlies also support the bearish notion, and it appears that the pair still has some more room to run. Going short is a preferred strategy today.
The bearish momentum the pair has shown since the breach of the channel on the daily chart continues. The daily Slow Stochastic is showing the continuation of the trend, and the hourly studies confirm the bearish notion. Going short might be the right choice today.
The Wild Card
It appears that the recent bullish trend has reached its current pick, and now, all indicators on the 4 hours chart are showing that a bearish correction is impending. forex Traders may have a great opportunity to join the corrective move at a very early stage.
|04:45||JPY||30-y Bond Auction||1.46|2.7||-||-|
|08:00||EUR||German Factory Orders||m/m||4.2%||-0.8%||-|
|13:00||GBP||Official Bank Rate||0.50%||0.50%||-|
|13:00||GBP||Asset Purchase Facility||375B||375B||-|
|13:30||USD||Challenger Job Cuts||y/y||17.6%||-||-|
|13:45||EUR||Minimum Bid Rate||0.05%||0.05%||-|
|14:30||EUR||ECB Press Conference||-||-||-|
|14:30||USD||Revised Nonfarm Productivity||q/q||-1.8%||-2.2%||-|
|14:30||USD||Revised Unit Labor Costs||2.7%||3.1%||-|
|16:00||USD||FOMC Member Williams Speaks||-||-||-|
|16:30||USD||Natural Gas Storage||-||-||-|
|23:30||AUD||AIG Construction Index||45.9||-||-|