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Tuesday, 5 Apr 2011
RBA Keeps Interest Rates on Hold
As expected, the Reserve Bank of Australia held rates steady at 4.75% in light of the natural disasters in the region and RBA Governor Glenn Stevens will speak later today regarding future Australian monetary policy. In the New York session, traders will be looking for positive results from the ISM services survey and the previous Fed meeting minutes.
USD - Federal Reserve in Focus
In quiet trading yesterday the dollar was mixed as a lack of any large scale news events kept the majors in tight ranges. In a closely followed speech late yesterday, Fed Chairman Ben Bernanke said policy makers must follow inflation closely in order to distinguish increasing costs driven by rising commodity prices that are not temporary in nature. Bernanke also noted that if inflation expectations remain well anchored and commodity prices do not continue to dramatically rise, then the increase in inflation should be only short-term. The Fed Chairman also noted that if inflation expectations are higher than forecasted the Fed would need to respond to maintain price stability.
Bernanke's speech is important as Fed members have recently come out in opposition to the loose monetary policy the Fed has enacted. The public comments have stirred a debate in the FX markets as to when the Fed will begin to tighten monetary policy which would be a catalyst for the greenback.
Today's release of the last Fed meeting minutes will help to shed light on the previous comments for the US economy and monetary policy which has become a major focus in the FX markets. Also due to speak today is Minneapolis Fed President Kocherlakota. His last comments were more hawkish than usual and spurred a round of dollar buying.
The ISM Non-Manufacturing PMI will be released and is expected to show continued improvement in the US economy as the survey may come in with its seventh consecutive gain. Forecasts are for a rise to 59.8 from 59.7. An ISM report higher than forecasts would be dollar positive.
EUR/USD support is found at the rising trend line off of the January low at 1.4070, followed by last week's low at 1.4020 and 1.3860. Resistance comes in at Sunday night's high of 1.4270 followed by the January 2010 high at 1.4580.
EUR - Traders Await ECB Rate Decision
The euro traded in a defined range yesterday as traders are awaiting the ECB rate decision on Thursday which will provide future direction for the euro. European PPI m/m came in above expectations at 0.8%. The previous month's inflationary data were reduced to 1.3% from 1.5%. Expectations were for a rise of 0.7%.
Yesterday the EUR/USD moved as high as 1.4268 in early Asian hours but quickly fell back and closed the day down at 1.4192. The EUR/CHF was off its 5-week high at 1.3112 from 1.3150. The EUR/JPY was unchanged at 119.72.
Market participants are split as to the severity of the interest rate increases to come in the EU. In a speech yesterday, ECB President Jean-Claude did not expand on the intentions of the central bank. Traders will need to wait until Thursday to know if the expected 25 bp interest rate will be a one off adjustment or the beginning of a tightening cycle with multiple adjustments to the Minimum Bid Rate.
A series of interest rate increases would help to extend the euro's appreciation and could take the EUR/JPY higher to the 128 level.
JPY - RBA Keeps Interest Rates on Hold
As expected, the Reserve Bank of Australia held rates steady at 4.75% in light of the natural disasters in the region. RBA Governor Glenn Stevens will speak later today regarding future Australian monetary policy. According to Australian bank bills, there is a 32% chance Stevens will keep the interest rate steady for the remainder of the year.
The Aussie dollar is off its all-time high of 1.0415 as increased investments in mining operations have increased growth expectations, though forecasts may have been cut following the Queensland flooding and natural disaster in Japan. Risks to the Aussie dollar's climb include the reluctance of the RBA to raise interest rates, a pullback in commodities prices, or the tightening of monetary policy by the US.
Following the interest rate announcement, the AUD/USD dipped but held at the 1.3010 level. Resistance is found at the all-time high at 1.0415. Support levels are 1.0250 and 1.0200, followed by a 38.2% retracement of the March move which comes in near 1.0150.
OIL - Crude Oil Remains Above $108 a Barrel
The price of crude oil came off a 2-1/2 year high during Asian trading, despite continued violence in the Middle East and positive US data released last week. At the close of the New York session yesterday oil was trading close to $108.50 a barrel, its highest price since August 2008. The commodity is currently trading steadily at just over $108.00.
Analysts attribute the spike to a combination of global factors, including violence in Libya and a positive US jobs report released last week that has increased demand in the world's largest oil consuming country.
Turning to today, a slow news day will likely have little impact on the price of oil. Traders will still want to pay attention to the US ISM Non-Manufacturing PMI, scheduled to be released at 14:00 GMT. A positive figure will likely continue to increase demand in the US and further drive up oil prices. In addition, any escalation in violence in Libya is likely to increase supply side fears among investors and could lead to a spike in prices.
Technical indicators are mostly showing this pair in neutral territory, meaning that no major price shift is expected in the near future. That being said, it looks like a bearish cross may be forming on the 8-hour chart's MACD. Traders will want to take a wait and see approach today to see if other indicators will show support for a downward correction.
The daily chart's Slow Stochastic appears to be on its way to forming a bearish cross. In addition, the Williams Percent Range on the 8-hour chart looks like it is inching toward overbought territory. Traders will want to pay attention to these two indicators. If they continue on their current trend, downward movement may occur.
The 8-hour chart's Relative Strength Index has moved into overbought territory, indicating that a downward correction may be on the horizon. In addition, the daily chart's Slow Stochastic has formed a bearish cross. Going short may turn out to be a profitable choice for this pair today.
Most technical indicators show this pair trading in neutral territory, meaning that no major price change is forecasted at this time. This could all change very quickly though. Traders will want to pay attention to the hourly charts for any signs of a possible shift for this pair today.
The Wild Card
The 8-hour chart's Relative Strength Index is approaching the overbought zone, signaling that a downward correction may occur today. This theory is supported by the Stochastic Slow on the daily chart, which has formed a bearish cross. This may be a great time for forex traders to open up sell positions for this pair before the downward breach takes place.