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Tuesday, 28 Apr 2009
Swine Flu Prompts a Return to Safe Haven Buying
Traders continue to be influenced by the pandemic of Swine Flu in Mexico. Fears of reduced short term economic activity have traders moving out of riskier, higher yielding currencies into the safe haven Dollar and Yen. Crude Oil prices also fell yesterday as investors fear a weakening demand for international travel.
USD - Dollar Climbs As Swine flu Spreads
Yesterday's trading in the currency market was highly influenced by the outbreak of swine flu in Mexico. Worries about a spreading outbreak drove losses in equity markets, and with that came forex traders buying safe haven currencies. As such, the Dollar and the Yen were the prime beneficiaries. The Dollar rose sharply against the EUR as comments by the European Central Bank (ECB) President sunk the European currency along with other risk sensitive currencies. However, the Dollar fell against the JPY.
The flu pandemic has been driving trading in the financial markets the past two days. A void of economic data has also created opportunities for markets to head south. Trading has been characterized as extremely risk averse. Losses in equity markets and moves to the Dollar and Yen were seen as an example of this trading behavior. However, this pattern may be only short lived as an important economic indicator is set to be released tomorrow.
The Conference Board will release its Consumer Confidence index at 2:00pm GMT. The survey is a leading indicator of consumer spending and is an excellent gauge of current economic conditions and the overall economic situation. The release of the survey typically creates a volatile trading environment, affecting not only the USD pairs but also the value of Crude Oil and Gold. A survey with a result greater than the forecasted value of 29.6 could send the EUR/USD below the 1.2950 mark.
EUR - ECB Remarks Punish the EUR
The EUR suffered its largest 1-day drop versus the Dollar in a month on comments from two members of the European Central Bank (ECB). ECB Governing Council member Ewald Nowotny remarked there is the potential to hold European Interest Rates at a low for the foreseeable future. Later in the day ECB President Jean-Claude Trichet declared that the ECB will announce at its next scheduled meeting on May 7th a new program of quantitative easing. This sent the EUR/USD plunging to 1.3024 from 1.3166. The EUR/JPY also suffered during yesterday's risk adverse trading session, ending the day at 125.43 from 127.18.
It is expected that the ECB will lower Interest Rates by 25 basis points to 1% at their next meeting. No further comments were made by Trichet of the proposed unconventional measures for monetary policy. However, further weakening may be seen in many of the EUR pairs in the coming days. This is likely to be more apparent if traders continue to flock to safe haven currencies, such as the USD and JPY as the Swine Flue pandemic continues to spread.
Throughout the day today Preliminary Consumer Price Index numbers will be released. This data is the Euro-Zone's earliest inflation numbers and could help to lower the EUR during today's trading. The EUR currency crosses are also likely to be affected by important economic news events coming out of the U.S. and Britain. These include the U.S. CB Consumer Confidence at 2:00 pm GMT and the British CBI Realized Sales at 10:00 am GMT.
JPY - JPY Safe-Haven Status Restored
The Yen showed signs of a return to its risk haven status of old as fears of Swine Flu have traders moving out of riskier, higher yielding currencies into the safe haven of the Yen. The logic of this move is a wider outbreak of the flu may increase the amount of time the global economy will need to recover from the current recession. In light of these market conditions, the Yen continues to strengthen. The USD/JPY fell for a 9th day in a row to settle at 96.30 from 96.59. The Yen also climbed against the GBP, ending the day at 140.69 from 140.97.
Japanese banks will be closed for a Bank Holiday today. Major institutional banks are key contributors to liquidity in the forex market. With their closure, price moves can become exaggerated by currency speculators. This can provide ripe opportunities for forex traders to take advantage of the unusual price volatility today. Additionally, traders are likely to take advantage of this more during times of important data releases coming out of the key industrialized nations today.
Crude Oil - Crude Oil Dips on Swine Flu Fears
The price of Crude Oil fluctuated greatly yesterday as worries of Swine Flu took hold of the market. Crude Oil dipped as low as $47.98, though it failed to break a key support level. The price finally settled at 49.37 from an opening price of $50.34. Worries that any economic recovery could be delayed due to transportation restrictions or the flow of human capital would severely hurt Crude Oil demand and sank the price of Oil yesterday.
The long term impact of Swine flu could have a muted impact. As such we could see a fair value of Crude Oil near the mid $40 range. Notably higher Crude Oil inventories during the warmer months is implying that fuel consumption will be significantly lower in the upcoming peak travel season. In the meantime, better-than-expected economic data from the U.S. and Euro-zone may help prevent Crude prices from slipping further into the red.
Since the beginning of the week the pair has entered a bearish trend, dropping from 1.3300 down to 1.3000. And now, as all the oscillators on the 4-hour chart are pointing down, it appears that the bearish movement might have more room to go.
The 4-hour chart shows that the cable has been range-trading for over a week now, failing to breach through the 1.4500 level. However, a bearish cross on the daily chart's Slow Stochastic suggests that the breach might happen today, with the potential of falling to the 1.4400 level.
There is a very distinct bearish chart forming on the daily chart, as the pair is now floating in the middle of it. The pair is now testing the 95.50 level, and if it falls below this level, it might reach as low as 93.80.
The pair saw an extremely bullish session yesterday, as it climbed almost 250 pips. Currently, A double doji formation on the 4-hour chart indicates that a sharp move is expected, and as the MACD is giving bullish signals, it seems that going long could be the right choice today.
The Wild Card
After peaking at almost $920 an ounce, gold has entered a bearish momentum once again, and is currently trading for about $897.00 an ounce. Currently, as a bearish cross is taking place on the daily chart's Slow Stochastic, it appears that the bearish trend has more steam in it. This might be a good opportunity for forex traders to join a very popular trend.