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Tuesday, 26 Jul 2011
Stalled Deficit Talks Rile Forex Market
The value of the US dollar (USD) was seen trading lower during a day of risk aversion--- which traditionally results in a stronger dollar. The surprise turn of events is tied with the failure of Congress and the White House to strike a deal over lifting its debt ceiling; an event whose deadline will be met early next week.
USD - USD in Decline as Debt Talks Heighten Fear
The US dollar (USD) was seen decreasing yesterday as traders began to seek shelter following speculation that debt limit talks in the US may falter. The value of safe-haven assets like the Swiss franc (CHF) and Japanese yen (JPY) have been buoyed by a shift away from higher yielding assets, though the dollar has been skipped this time around due to the domestic nature of this risk aversion.
The news so far has inched traders into a position of market pessimism which has so far dropped the value of the USD as the other safe-haven currencies soar. With the economies of Europe and the US absent from yesterday's calendar, little news emerged which put a dent in the amount of pessimism surrounding the forex market, particularly in the fragile United States and euro zone.
With a heavy news day expected today, however, traders are sure to see a return of portfolio adjustment as volatility becomes elevated. The US economy will be publishing two reports on housing and a measure of consumer confidence. Should today's news disappoint, there is a possibility that more investment will get pushed towards the safety of the Swissie and yen, driving USD values lower in the process. Traders will also want to keep an eye on euro zone economic news as it may also impact risk sentiment heavily during the morning sessions.
EUR - German Consumer Confidence under Review
The euro (EUR) has been seen trading with mixed results so far this week as traders assess the risk sentiment across the region. Against the US dollar (USD) the euro was seen trading bullish in late trading as shifts away from the greenback, due to uncertainty about a possible failure to lift the US debt ceiling, caused a stir in the foreign exchange market.
News of debt contagion spreading across the euro zone also has several economists worried that a toppling of consumer confidence may be up next, followed by additional ratings downgrades that lead into an ever deepening spiral of debt and default. Rising inflation poses a threat in this scenario and the euro zone faces the debacle of lifting interest rates to quell inflation, but gouge their ability to pay off debt; or hold rates steady to allow for more growth while inflation takes off.
On tap today, traders will witness the release of a moderately significant report on consumer confidence in Germany. At 7:00 GMT, the organization known as GfK will be publishing its consumer climate reports for Germany. Should the figures reveal stagnation in consumer and business optimism, we could see heftier flights to safety in the days and weeks ahead. This would likely push the value of the EUR lower over the long-haul as traders continue to flee risk in larger numbers.
AUD - Risk Aversion has the Aussie Dollar Mixed
The Australian dollar (AUD) was trading mostly weaker versus its currency counterparts yesterday after data releases have begun to shift traders back into safety. The Aussie has been losing momentum these past few weeks as risk aversion becomes predominant in the global market. Fears of a debt contagion spreading from Greece to Italy now factor greatly into global risk assessment, as does the current deficit talks in the US to lift the national debt ceiling.
This movement has gouged the AUD against all of its currency rivals, especially against safe-havens like the US dollar (USD) and Japanese yen (JPY). With Australia's central bank governor Glenn Stevens giving a speech at the Anika Foundation later today, there is a chance that speculators will pick up on several cues to adjust their positions in regard to the Aussie and its linked interest rates. Being tied to commodity prices could also help lift the AUD in the near future as oil prices soar, but general risk aversion is likely to push the currency lower as traders flee risk.
Oil - Oil Prices Holding Steady amid Market Turmoil
Crude Oil prices held steady Monday as sentiment appeared to favor a downturn in global stocks should the US fail to lift its debt ceiling by August 2. Data releases out of Europe and the US last week are still driving many investors back into safe-haven assets as many reports suggested a surprise downtick in growth among global industrial output and consumer spending.
An expected jump in dollar values due to this week's risk averse environment has helped many investors ram up their short-taking positions on physical assets, but with the USD's gains not materializing, sentiment appears to have the price of crude oil holding steady. Should Crude Oil sentiment continue to flatten this week, oil prices may reach a decision point which forces a wide swing by mid-week.
The EUR/USD has taken a step away from the edge after failing to get a close below its 200-day moving average and the price is testing the falling trend line from the May and July highs at 1.4450. Short term momentum is currently rising and break above this resistance line may find resistance at the peaks from July, June, and May at 1.4580, 1.4700, and 1.4940 respectively. However, a bearish tweezer candlestick pattern has formed on the daily chart from last week's highs on Thursday and Friday, strengthening the argument for the 3-month old resistance line to hold. Support is found at 1.4015, 1.3835, and 1.3780 from the rising trend line off of the June 2010 low.
After dipping as low as 1.5780 which is the 38% Fibonacci retracement level from the May 2010 to April 2011 move, Cable has broken above both the neckline from the head and shoulders pattern and the resistance line falling from the April and May highs. The pair has now found resistance at the previously broken trend line from the May 2010 low and now serves as initial resistance at 1.6360. A move above this line will likely go on to test the May high at 1.6545 though sterling bears may make a stand before the April high of 1.6745. To the downside support may come in where the neckline and the previous resistance line off the April and May highs intercept at 1.6190. Additional support is located at 1.6000 and the July low at 1.5780.
The reemergence of yen strength has taken the USD/JPY one step closer to its all-time low at 76.11. Falling stochastics on the monthly, weekly, and daily charts all point to additional declines in the pair. Initial support is found at 78.20 followed by the lower line from the falling wedge pattern from December 2008 which comes in at 77.50. A move higher may find resistance at 79.60 and 81.50.
An attempt to push the USD/CHF higher ran into resistance at 0.8270. Since failing to hold any gains the pair looks to test the most recent all-time low at 0.8080. Any attempt to move the pair higher will likely encounter resistance at 0.8270 and 0.8385 from the falling trend line off the February high. Relative value sellers of the pair may also be lurking at 0.8550.
The Wild Card
With the release of today's Q2 UK GDP the risk is for the numbers to come in on the lower side of economists' forecasts. Consensus estimates are for an increase of 0.2% from 0.5% in Q1. For those traders who expect the US to come to some sort of agreement on the debt ceiling the dollar could receive a bounce going forward. Thus, a potential opportunity may exist for forex traders to short the GBP/USD as the pair has risen to 1.6360 where the previously broken trend line from the May 2010 lows is located. A protective stop could be placed above the trend line with a target at the July low of 1.5780.
|16:30||USD||Crude Oil Inventories||1.9M||1.3M||-3.9M|
|19:30||USD||FOMC Member Lockhart Speaks||-||-||-|
|01:30||AUD||AIG Construction Index||50.1||-||-|
|07:45||CHF||SECO Consumer Climate||-6||-11||-|
|08:00||EUR||German Factory Orders||m/m||-0.9%||1.6%||-|
|08:45||EUR||French Industrial Production||m/m||0.0%||0.1%||-|
|08:45||EUR||French Trade Balance||-3.4B||-3.5B||-|
|09:00||CHF||Foreign Currency Reserves||522.3B||-||-|
|10:15||EUR||Spanish 10-y Bond Auction||-||-||-|
|13:30||USD||Challenger Job Cuts||y/y||6.4%||-||-|