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Tuesday, 21 Apr 2009
Recession Fears Reignite Safe Haven Buying
Drops in U.S. equity markets rattled investors as both the Dollar and the Yen benefited from traders unwilling to take on further risks. The price of Crude Oil also plunged due to further signs the U.S. economy has yet to turn the corner.
USD - Drop in Equities Leads to a Higher Dollar
The Dollar continued its bullish run yesterday, appreciating for the 6th day in a row against the EUR as the pair reached a one-month low. Driving the Dollar's gains were losses in U.S. equity markets which were sparked by renewed banking fears and worries of a delayed U.S. economic recovery. At the end of the day Monday, the EUR was at $1.2907 from 1.3008. The British Pound was at $1.4482 from 1.4470
The greenback appreciated during most of the day's trading, but the gains accelerated after first quarter earnings reported from Bank of America sparked renewed tension in the banking sector. Heavy losses were seen in U.S. equity markets as the Dow Jones Industrial Average fell 3.56%. This prompted traders to move from positions of higher yielding currencies to more safe-haven bets such as the U.S. Dollar and the Japanese Yen.
The losses seen in the Dollar as the Fed unveiled its quantitative easing program have been erased as the Dollar experiences another bullish run under a period of less risk taking. Higher equity losses have reduced trader's appetite for riskier currencies, lending strength to the Dollar. This trend could see its first reversal today as Treasury Secretary Geithner is scheduled to speak at 2:00pm GMT. Testimony from Geithner often leads to periods of high volatility in the forex market. The EUR/USD could strengthen above the 1.3000 mark again later today after his speech.
EUR - EUR Continues to Decline Against the Pound and Dollar
The EUR continues to weaken amid further loses in equity markets and reduced risk levels in the currency market. The EUR/USD has now shed all of its gains since the U.S. Federal Reserve began its program of quantitative easing 1-month ago. Some market analysts believe the depreciation of the EUR coincides with the strengthening of the corporate bond market that also occurred three weeks ago. For the past three weeks the EUR has shed 4% against the Dollar and 2% against the GBP.
This losing trend for the EUR versus the Pound could continue today as key economic data is due to be released from both the Euro-Zone and Britain. German ZEW Economic Sentiment is forecasted to make a large improvement from the previous reading while important inflation data will be eyed from England. Yearly CPI is measured against the target rate of inflation set by the Bank of England (BoE). The BoE appears to be ahead of the curve in setting monetary policy. The inflation numbers may come in line and help to strengthen the Pound today, perhaps to the 0.8825 level.
JPY - Less Risk Taking Helps the Yen Rise Across the Board
The Japanese Yen was a big benefactor from yesterday's flight to safety as the JPY made considerable gains against its major crosses. Declines in U.S. equities had traders scrambling to readjust their positions as market participants sold higher yielding currencies for the safety of the Japanese Yen. This sank the USD/JPY to 97.78 from 99.30. The GBP/JPY fell to 141.64 from 146.69. The EUR/JPY also dropped to 126.21 from 129.29.
Two scenarios could play out in the trading of the Yen today. If declines in equity markets continue for the second day in a row, these may again lower trader's appetite for riskier currencies and boost the Yen. However, yesterday's gains may be short lived due to the release of the Japanese Trade Balance. This economic indicator may show worse than expected results as the Japanese export industry has been severely hurt during the economic recession. Past indicators have shown export numbers dropping dramatically. This has the potential to weaken the Yen in the short term horizon.
Oil - Oil Plunges on Renewed Economic Concerns
The price of Crude Oil plunged today on fears of a deepening economic recession in the U.S. The dramatic sell-off occurred after the release of first quarter earnings from Bank of America. The day ended with the price of Crude Oil trading at $48.64. This was 7% lower than today's opening price.
The sell-off was very characteristic of traders fleeing riskier investments for those that are considered safe havens. Currencies such as the Dollar, the Japanese Yen, and commodities such as Gold and Silver experienced sharp appreciation yesterday. Such a sharp drop in price may have left Crude Oil in an oversold position. The $50 mark may leave some room for profits in Oil trading.
The price of this pair appears to be floating in the over-sold territory on the daily chart's RSI indicating an upward correction may be imminent. The upward direction on the 4-hour chart's Momentum oscillator also supports this notion. When the upwards breach occurs, going long with tight stops appears to be preferable strategy.
The hourly chart is showing mixed signals with its RSI fluctuating at the neutral territory. However, the 4 hour chart's RSI is already floating in the over-sold territory, suggesting an upward correction may be imminent. When the upwards breach occurs, going long with tight stops appears to be preferable strategy.
The typical range trading on the hourly chart continues. The daily chart Slow Stochastic is floating in neutral territory. However, the pair currently sits near the bottom border of the 4 hour chart's RSI, suggesting an upward correction may be imminent. When the upwards breach occurs, going long with tight stops appears to be preferable strategy.
There is a fresh bearish cross forming on the daily chart's Slow Stochastic indicating a bearish correction might take place in the nearest future. The downward direction on the 4-hour chart's Momentum oscillator also supports this notion. When the downward breach occurs, going short with tight stops appears to be preferable strategy.
The Wild Card
Oil prices have dropped significantly yesterday and peaked at $ 48.60 per barrel. However, on the 4 hour chart RSI is floating in an oversold territory suggests that a bullish correction is impending. This might be a great opportunity for forex traders to enter the trend at a very early stage.
|18:00||USD||FOMC Member Evans Speaks||*||*||*|
|01:00||AUD||CB Leading Index||m/m||0.3%||-||-|
|01:00||GBP||BoE Inflation Letter||*||*||*|
|02:30||AUD||Monetary Policy Meeting Minutes||*||*||*|
|04:00||NZD||Credit Card Spending||y/y||3.6%||-||-|
|05:30||JPY||All Industries Activity||m/m||0.6%||-||-|
|16:30||USD||FOMC Member Bullard Speaks||*||*||*|
|17:45||CAD||BOC Gov Carney Speaks||*||*||*|