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Friday, 21 Nov 2008
The Dollar Increases Against Major Currencies as the Global Recession Deepens
Concerns regarding the prolonged U.S recession continue to influence the markets. Investors remain nervous about the U.S. automakers, which are seeking $25 billion in emergency loans from Congress, and the viability of banking giant Citigroup, whose shares slid to a 14 year low on Thursday.
USD - The Dollar Rallies, Despite the Rise in U.S. Unemployment Claims
Yesterday, the Dollar gained as investors withdrew from emerging-market assets to the safety of U.S. government debt, in what is set to be the worst financial crisis since the Great Depression. However, while the greenback has appreciated against high-yield currencies, it fell against the Yen. Yesterday's U.S. jobless data intensified concerns and signaled more trouble for the labor market, which has shed more than 1 million jobs so far in 2008. The report showed that the number of Americans filing for first time jobless benefits spiked to 542,000 last week, more than analysts had expected.
The Dollar advanced against a basket of major currencies, as investors reacted anxiously to the recession by removing their money from risky assets, such as stocks, commodities and high-yield currencies and investing their money in U.S. government bonds and Japanese Yen, which many are borrowing cheaply to finance investments elsewhere. As a result of disappointing U.S. economic data, the USD depreciated against the JPY. Analysts forecast that the bear market will probably continue lending more support to the Japanese Currency. The USD was last down 0.9% at 95.01 JPY; while against the EUR it was at $1.2514.
Meanwhile, concerns regarding the prolonged U.S recession continue to influence the markets. Investors remain nervous about the U.S. automakers, which are seeking $25 billion in emergency loans from Congress, and the viability of banking giant Citigroup, whose shares slid to a 14 year low on Thursday. Based on this data the Federal Reserve had issued a report stating that the U.S. economy is likely to contract in the second half of 2008 and first half of 2009, raising the prospect of a further reduction in the benchmark Interest Rates from an already low of 1%.
The situation in Europe and Asia appear to be even gloomier. Major central banks have been slashing Interest Rates aggressively in an attempt to boost their economies. Figures published this month show that Japan and the Euro-Zone already fell into a recession in the 3rd quarter. According to analysts this may lead to continued gains for the Dollar vs. most currencies, save the Yen.
EUR - The EUR Slides against the Dollar and the Yen
Despite aggressive steps taken by governments around Europe, such as Interest Rate reductions and stimulus spending plans, reports show that the Euro-Zone is headed towards deep recession. The EUR slipped 0.5% against the Dollar to $1.2458. The European economy continued to contract through 2008, leading to economists foreseeing no growth probably until the 3rd quarter of 2009. With inflation falling sharply, the European Central Bank has all the justification it needs for a further Interest Rate cut from the current level of 3.25%. Analysts foresee additional 50 basis point cut in December.
The British currency set new record lows vs. the EUR this week; in response to the Office for National Statistics' announcement that sales slid 0.1% last month. The Bank of England signaled yesterday that it's prepared to cut Interest Rates further, after reducing the target rate 1.5% to the lowest level since 1955. The Pound fell to $1.4771 as of 5:13 p.m. in London, from $1.4952 yesterday.
The economic outlook remains negative for both the EUR and the GPY. As the Euro-Zone currencies continue to descend versus a number of other global currencies, such as the Dollar and Yen, it raises the likelihood that policy makers will cut borrowing costs further, in order to revive the faltering European economy. In the meantime, it appears that the Dollar is a preferable investment versus the EUR.
JPY - The JPY Records Further Advances against the Major Currencies
Recently, the JPY rallied against the USD and the EUR on speculation that slides in global stocks will prompt investors to sell higher-yielding assets and pay back loans in Japan. The Yen also advanced versus the New Zealand dollar and against the British pound, as U.S. lawmakers held off taking action on a bailout requested by the nation's automakers, spurring a reduction in so-called carry trades. A rise in U.S. jobless claims and a drop in manufacturing also helped boost the JPY. The Yen traded at 94.16 per USD from 93.69 late yesterday in New York, and at 117.13 per EUR from 116.68 yesterday.
As the global economy slows, the JPY and USD are likely to continue to strengthen against most other currencies in the world. Risky assets are also likely to remain under pressure, as long as the end of the global recession is not in sight. Japan's Interest Rate remains the lowest, which continues to prompts investors to invest more in the Yen. Investors are using this to their advantage in carry trades, in which investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the two. Japan's benchmark Interest Rate of 0.3% compares with 6.5% in New Zealand and 3% in the U.K. As investors are keen to continue cutting exposure to risk, and unwinding Yen-funded carry trades in the process, due to fears about forecasted global economic collapse, the Yen may extend its broad rally against the major currencies even further.
OIL - Crude Oil Prices Drop to Their Lowest Level in Three Years
The demand for oil continues to drop, pushing Crude Oil below $50 a barrel. Crude Oil is poised to drop 15% this week, the worst performance since October, as the global economic crisis reduces the growth in demand of Oil to its weakest level in 23 years. The Crude Oil prices dropped after a bearish U.S. jobs report intensified concerns among traders of a long and deep global recession, further weakening fuel demand expectations. Analysts forecast further drops in the price of Oil, as global markets continue their instability, owing to the global recession.
The Organization of the Petroleum Exporting Countries (OPEC) is scheduled to meet on November 29 and again on December 17. It is expected that OPEC may lower output by a further 1 million barrels a day by the end of the year, according to some analysts. However, there is no guarantee that the production cut will support the Crude Oil prices. The same step taken by the cartel last month apparently hadn't produced the desired outcome. Since early September, OPEC has said it would remove about 2 million barrels per day from international markets, but the market has taken the view that falling demand has had a stronger effect on the Crude Oil market, rather than the tightening of supply.
The pair continues to fluctuate within a restricted range and is currently traded around the .12500 level. However, a double doji formation on the daily chart implies that a sharp move is impending, with a distinct bearish orientation. Traders should wait for the breach and swing.
The cable is being traded around the 1.4900 levels for over a week now, without making a significant breach. Yet now, a bearish cross on the daily chart's Slow Stochastic indicates that a bearish move is forthcoming. Going short appears to be the right choice today.
The pair is continuing to exhibit predominantly bearish signals, and is currently traded around the 95.00 level. On the daily chart, the pair's price has dropped beneath the Bollinger Bands lower boarder, suggesting that a sharp bearish move is imminent. Going short with tight stops might be a good strategy today
There is a very distinct bullish channel forming on both the 4-hour chart and the daily chart. And now, all oscillators on both the charts are pointing up, indicating that another bullish session might take place. Going long seems to be the preferable choice today.
The Wild Card
Crude Oil prices have breached through the psychological key level of $50 yesterday, and tested the $48 level. If Crude Oil will cross the $49 boarder once again today, a sharp bearish movement seems likely. This might be a great opportunity for forex traders to catch the trend at an early stage.
|07:00||JPY||BoJ Outlook Report||-||-||-|
|08:00||EUR||German Retail Sales||m/m||2.5%||-0.8%||-|
|08:45||EUR||French Consumer Spending||m/m||0.7%||-0.3%||-|
|10:00||EUR||Italian Monthly Unemployment Rate||12.3%||12.4%||-|
|11:00||EUR||CPI Flash Estimate||y/y||0.3%||0.4%||-|
|11:00||EUR||Italian Prelim CPI||m/m||-0.3%||-0.1%||-|
|13:30||USD||Core PCE Price Index||m/m||0.1%||0.1%||-|
|13:30||USD||Employment Cost Index||m/m||0.7%||0.6%||-|
|14:55||USD||Revised UoM Consumer Sentiment||86.4||86.4||-|
|14:55||USD||Revised UoM Inflation Expectations||2.8%||-||-|