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Tuesday, 11 Nov 2008
Recession Fears and China's Loaded Bailout Dampens US Economy
The U.S. Dollar regained its losses after the initial optimism regarding China's economic package had quickly faded. Many European currencies also lost ground after it unveiled its $600 billion bailout plan. While this package was a step in the right direction, it may not be enough to prevent the rapidly approaching recession.
USD - Chinese Economic Stimulus Package Boosts the US Dollar
The greenback has rebounded against the EUR after it initially dropped earlier to an intra-day high of $1.2925 in late New York trading. The U.S. Dollar gained after the initial optimism regarding China's economic package had quickly faded, ending the day at 1.2737. China launched an economic stimulus package on Sunday worth nearly $600 billion, and the market's initial reaction to the announcement in China was very positive and gave some support to investors seeking to take on more risk. As a result of the reduced risk aversion, the Dollar ended the day up versus the EUR.
However, China's plan may not be enough to help avert a global recession. Some analysts said that though the initiative from China was a step in the right direction, it was unlikely to provide an immediate fix to the struggling global economy. Some parts of the program have already been announced, such as tax breaks for exporters and property developers. Other parts, like the spending for the reconstruction of Sichuan province from the recent earthquake, will simply be front-loaded. China, like many countries, including the U.S., Japan, Germany and the UK, is also supplementing its monetary accommodation policy with fiscal steps.
Some analysts predict that the USD could be the main beneficiary of China's stimulus package. Because China is a key driver of global growth, it might lead to some recovery in market sentiment. Nevertheless it remains to be seen how much of this plan is followed through, which sectors get the additional spending, and most importantly, whether that translates into improved quarterly growth. Much concern remains among investors that China still has to take more drastic action in order to tackle the economic crisis, since even this huge package will not likely prevent the global recession and markets remain jittery with ongoing worries about a global economic slowdown.
Due to national holidays, U.S., Canadian, and French banks will be closed today. Today's trading could potentially see high price volatility or extremely low volatility. Large banks are the primary market makers in the currency markets. Traders may be able to take advantage of the added volatility in their trading practices today, as large price swings may be seen if volatility arrives.
EUR - EUR Rises Early but Loses its Gains to USD
Yesterday the EUR climbed roughly 1.4% against the dollar to a session high of $1.2925, only to finish the day down, shedding 150 points The GBP also rose throughout the day versus the USD, climbing 0.8% to 1.5870, but in the last hour of trading, gave back its gains to end the day down 169 points. The currencies lost ground after China, one of the world's biggest contributor to growth, unveiled a $600 billion plan to stimulate their economy.
In the past few months, several countries around the world have been slashing Interest Rates to buffer their economies against the negative impact of the global downturn. The Bank of England (BoE) shocked markets last week by lowering its benchmark rate to 3.0%, while the European Central Bank (ECB) cut Interest Rates by 0.5% to 3.25%. ECB President Jean-Claude Trichet announced yesterday that receding inflation may allow central banks to further reduce Interest Rates to tackle the economic slowdown.
Today the ZEW Economic Sentiment is being released. This data will likely show that an index of German investors' and analysts' expectations decreased this month, which is an indicator that the overall sentiment in Europe is deteriorating. Perhaps this will offer more reasons for the ECB to cut Interest Rate even further.
For now the currency markets remain tense, with ongoing worries about a global recession ensuing and any recovery in risk appetite remains tentative. Investors expressed concern that even China's huge package will hardly prevent the global recession. Therefore the EUR/USD may end its current correction phase with a break to the downside.
JPY - JPY Back on the Rise from Weakened Carry Trades
The Japanese currency advanced against the EUR on speculation that the world's biggest economies will contract, prompting investors to sell higher-yielding assets and pay back loans in JPY. Investors have been reducing carry trades, where they obtain funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.3% target lending rate is the lowest among major economies.
The Yen also rose against the Dollar as Asian stocks extended losses on concern a recession will reduce corporate earnings. It gained to 97.78 against the Dollar from 98.00. The market's current sentiment seems to be in favor of further Yen gains. A weak stock market causes a reversal in risk trades, which is supportive of the JPY. The EUR is vulnerable because the economic outlook points to lower Interest Rates in the future. Analysts forecast that there is a possibility that the Yen could rise to 97.30 per Dollar and 124.20 against the EUR in today's trading session.
Oil - Saudi Arabia Comes in Line with OPEC; Cuts Production
Crude Oil prices rallied earlier on Monday as China's launch of a near-600 billion Dollar economic stimulus plan offset concerns about the global economy. The price of Crude Oil also rose 2% following Saudi Arabia's announcement that it will cut its Oil production. Saudi Arabia told refiners in Asia that it would cut December supplies by 5%, signaling its adherence to an OPEC plan to cut output across the board. Signs that Saudi Arabia was making good on the OPEC deal helped give beaten-down Oil prices a brief boost last week, but by Friday they had fallen back to below $60 a barrel for the first time in a year-and-a-half.
Oil prices plunged more than $80 from a record $147.27 a barrel in July as U.S. fuel use slumped to the lowest in nine years. Moreover China's economy, which is one of the largest Oil consuming nations, is expanding at the slowest pace since 2003 as the credit crunch spread to the world's fastest-growing energy consumer. As the threat of the worst economic recession since World War II continues to destabilize fuel consumption, the International Energy Agency (IEA) may cut its 2009 Oil demand forecast for a third month in a row. The IEA already cut its 2008 forecast about 1.3 million barrels a day in seven revisions this year. OPEC cited falling demand for its Oct. 24 decision to reduce production by 1.5 million barrels a day. OPEC forecasts 87.2 million barrels a day, the same as the IEA's assessment and is scheduled to release its monthly report on November 17.
The float within the widening bearish channel on the daily chart continues, as no significant breach has been made. The negative slope on the daily Slow Stochastic indicates the continuation of the bearish movement within the channel. Going short with tight stops appears to be the preferable strategy.
The daily chart is showing flat consolidation around the 1.5650 level with no distinct price direction. The 4-hour chart is showing mixed signals, and the daily chart is dwelling in neutral territory. Traders are advised to wait for a clear signal on any direction or keep out of that one today.
The daily chart is showing the formation of a very accurate and distinct bullish channel, as the pair now floats in the middle of it. The daily Slow Stochastic and the RSI are pointing to very bullish grounds, and no correction appears to be in sight. Next target price should be around 102.00 and going long looks like a preferable choice today.
After a very long period of range trading with no distinct direction, the pair has made its bullish breach, and appears to have established a starting point for a relatively strong bullish trend. The Slow Stochastic of the daily chart confirms the bullish momentum, and being on the buy side appears to be the right choice today.
The Wild Card
After the sharp bearish move which ended at 740 price level, Gold is now making a bullish comeback and is forming a tight bullish channel on the 4-hour chart. The RSI is strengthening the notion that the bullish move will probably continue which provides forex traders with a great opportunity to enter the market with a long position at a good entry price.
|09:00||EUR||German Ifo Business Climate||103.2||103.0||-|
|14:00||EUR||Belgian NBB Business Climate||-6.8||-5.3||-|
|14:45||USD||Flash Services PMI||57.1||57.3|
|23:50||JPY||Monetary Policy Meeting Minutes||3.5%||3.6%||-|