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Wednesday, 24 Sep 2008
Stability Emerges as Investors Anticipate Bailout Results
Investors were encouraged by a slight decrease in the price of Crude Oil as they awaited details of the U.S. government's bailout package. The initial euphoria about the plan to buy damaged mortgage debt has turned to anxiety about how the government will fund the $700 billion deal without burdening the U.S. taxpayer. The Euro-Zone sees a downturn in light of negative data and traders await today's testimonies from Bernanke and Paulson as they continue to push their economic rescue plan.
USD - Rescue Package Generates Confidence in the USD
The USD surprisingly underwent a bullish trading session yesterday as it appreciated against all of its major currency rivals. Earlier in the day, the greenback reached session highs against the EUR after negative Euro-Zone manufacturing data focused attention on weakness in the Euro-Zone. At the end of yesterday's session the USD closed at 1.4644 versus the EUR. The USD also saw steady gains against the Pound Sterling and Swiss Franc.
The most influential economic data coming from the U.S. yesterday were the testimonies of Fed Chairman Bernanke and Treasury Secretary Paulson to the Senate Committee on Banking, Housing, and Urban Affairs. Investors were encouraged by a slight decrease in oil prices as they awaited details of the U.S. government's bailout package. The initial euphoria about the plan to buy damaged mortgage debt has turned to anxiety about how the government will fund the $700 billion deal without burdening the U.S. taxpayer. Analysts say that this has limited the USD's gains. Liquidity was thin in the market, with investors uncertain about the future movement of the stock market. They were staying on the sidelines until turmoil in financial markets subsided. In other news, the Bernanke and Paulson testimonies were in support of their proposal to give the government the authority to buy up illiquid assets, something Congress seems skeptical about unless there are mechanisms built into the law that would protect U.S. taxpayers from any downside losses. The proposal has had a huge affect on the greenback so far this week.
Looking ahead to today, the most important financial indicator scheduled to come from the U.S. economy is the Existing Home Sales. Analysts forecast that the Existing Home Sales will slightly drop to 4.93M from 5.00M. If data returns inline with expectations we should see the dollar's resurrection continue as traders will look to infuse bullish USD positions. Traders should also keep tabs on today's testimonies by the Bernanke and Paulson as they are scheduled to testify to financial committees in Congress again today regarding their economic rescue package.
EUR - Negative Manufacturing Data Creates Bearish Reversal for EUR
The EUR finished yesterday's trading session with mixed results versus the major currencies. The 15-nation currency saw high volatility, especially against the USD, eventually closing at 1.4644 levels. The EUR also depreciated yesterday versus the GBP and JPY, but finished strong against the Swiss Franc.
The most influential economic indicator coming from the Euro-Zone was the Flash Manufacturing PMI. Euro-Zone services and manufacturing activity decreased for a fourth consecutive month in September, pointing to an economy in stagnation despite economic figures beating expectations. Euro-Zone manufacturing activity fell to a near seven-year low of 45.3 from August's 47.6, considerably below the 47.2 forecast. When this indicator is above 50.0 it signifies growth in the manufacturing industry, and just the opposite when it is below this figure. Another important indicator was French Consumer Spending. French shoppers cut back on spending in August, and manufacturing output saw its sharpest contraction in over six-and-a-half years in September, pointing to weak economic growth in the Third Quarter. These indicators point out the already well-known fact that the European economy has significantly weakened the EUR.
Looking ahead to today, the most important financial indicator scheduled from the Euro-Zone is the German Ifo Business Climate, which is an economic measure based on a survey of about 7,000 business managers and has historically been an excellent indicator of general economic health. Traders are advised to pay close attention to this announcement as a stronger-than-expected result may launch a bullish correction to the EUR's weakness which started yesterday.
JPY - Yen Gains Stability from Calming Markets
Yesterday, the JPY underwent a relatively flat session against most of its major currency rivals. Floating between 105 and 106 against the USD and closing at 105.64 yesterday. The JPY was predominantly influenced by the other major currencies' behavior, which experienced more volatile sessions due to the rapidly changing markets in today's economy.
The only economic indicator coming from Japan yesterday was the BSI Manufacturing Index, a general measure of market conditions and business health. Large manufacturing corporations saw their business conditions index bump up to -10.0 from -15.1 in the Second Quarter, while the Non-Manufacturing index also increased to -10.2 against a prior -15.3. Small corporations saw a minor increase in business conditions, but still have the largest number of negative figures. Sentiment in all industries increased from -36.5 to -34.3 in the Third Quarter, helping the JPY's stability overall.
Today's late release of the Japanese Trade Balance and CSPI should provide little fluctuation in the market as well. Traders should keep a close watch on the news coming from the U.S. and Euro-Zone as both will continue to be the deciding factors in the Yen's movement today.
Oil - Price of Oil Comes Down from Suspicious Price Jump
How can the recent spike in the price of Crude Oil be explained? An interesting perspective by analysts has it that a maneuver taken by powerful traders pushed the price to jump during the last hour of trading for October delivery of Light Sweet Crude in an attempt to grab a corner in the market. Investigations have been initiated to look into these allegations. This outlook can be justified by the fact that only about 41,000 trades changed hands, as compared to the usual 200,000+ that change hands on a typical trading day, yet still the market made an historic jump in price, which automatically raised eyebrows among investors.
Dropping from the $110 mark reached Monday and leveling-off near $106 during today's early trading sessions; the price of Crude Oil appears to be coming down from its recent flight. Adding to this downturn is the rally seen by the USD which has investors more confident in the strength of the currency market. For today's trading, the movement of the USD should remain a strong indicator for the price of Crude Oil, especially since Crude Oil Inventories are to be released today from the U.S., and the economic recovery program is still under deliberation, potentially causing higher volatility in the market.
The pair has been going through choppy sessions with no distinct direction for the past 3 trading days. Several attempts to breach through the 1.4500 support level failed, and the pair is consolidating around 1.4650. The daily chart provides mixed signals; however, the 4-hour chart is showing signs of local bearish momentum. The Slow Stochastic is negatively sloped, implying that a bearish correction might continue in the near future.
The daily chart indicates that the bullish trend has not yet said its last word. The Slow Stochastic is showing a positive slope on the daily chart, and it appears that the bearish trend will continue. Going short with tight stops might be a very wise choice today.
The momentum which was created after the bearish breach through the flag on the 4-hour chart continues with full steam. The daily chart is still very bearish as the 4-hour chart is starting to show first signals of a moderate bullish momentum. It might be preferable to sell on highs today.
There is a widening bullish channel forming on the 4-hour chart as the pair now floats at the bottom level of it. A bullish cross on the Slow Stochastic supports the notion that the pair will test the upper level of the channel, probably before the weekend. Going long with tight stops might be a good choice today.
The Wild Card
This commodity is in the midst of a strong bullish corrective move and appears to be heading to a very high price. The bullish channel, together with the sharp positive slope of the daily chart's Slow Stochastic, makes it quite lucrative for forex traders to join the bullish trend and swing in with wide stops.