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Tuesday, 18 Nov 2008
The Dollar May Rise On Speculation Investors Will Purchase Safe U.S Assets
Lately the dollar is gaining a bullish momentum overseas as investors are buying more of the safest U.S. assets as the global economy enters a recession. Overseas investors bought a net $27.2 billion of U.S. assets in September, compared with net purchases of $14 billion in August, according to economists' survey. The greenback also rose before the Treasury releases data that will probably show increased investment in the nation's securities. The Treasury will release the report at 9 a.m. today in Washington D.C.
USD - Choppy Trading Day Yesterday for the Dollar
Following a day of trading that was uninspired by the weekend's G20 meeting, the Dollar was relatively unmoved against the EUR, though traded in a wide range throughout the day. The Dollar lost ground vs. the JPY, despite the fact that Japanese economy posted recessionary economic data. During late U.S. sessions yesterday, the EUR/USD traded at 1.2622 and USD/JPY at 97.36.
The economic data released from the U.S. yesterday provided mixed results. The Empire State Manufacturing Index showed continuing signs of deteriorating commercial markets, posting a record low, while the Industrial Production report from the Federal Reserve showed improvements from the previous 2 months for the U.S. economy.
Risk aversion has also been influencing the markets, more so with the USD/JPY. As the Japanese economy posted GDP numbers that put its economy into a recession, investors have been moving into the JPY and USD to reduce the amount of risk and leverage that they carry in their trading portfolios. Poor performing global equity markets have also increased risk aversion in the market.
Traders today should be aware of the two events that could possibly move the Dollar. The Purchasing Price Index is set to be released today, forecasting a drop in prices by 1.9%. Also, Fed Chairman Ben Bernanke will be testifying before Congress on the progress and the recent changes to the U.S. financial system bailout. Traders can always look to the ForexYard Calendar for up to date economic indicators and breaking market events.
Future prospects for the Dollar may be trending up. If the markets continue to see the massive deleveraging that has been occurring over the past month, we may see the EUR/USD make further moves lower, possibly trading at a level of $1.2300.
EUR - GBP Recoups Losses from its 6 Year Low
After a week of heavy losses, the GBP took gains against the EUR and the USD. The 6 year low that the GBP saw last week is beginning to erode. The Pound was pushed down by the market with the expectations of future Interest Rate Cuts by the Bank of England. Yesterday the EUR/GBP closed down at 0.8529 while the GBP/USD closed up at $1.4980.
Traders may not take this as a sign of a sharp rebound form the Pound's recent lows. Comments made by the former Chancellor of the Exchequer discussed the positive aspects and benefits that a weak Pound could have on the British economy. He added that the benefits during negative economic growth could ease the national recovery, and also that a prolonged depreciation of the Pound could turn into a run on the currency. Overall, the GBP/USD has dropped 24% this year. The Pound has been sent lower on U.K. recessionary fears and an increase in the government budget deficit.
Concerns remain that the U.K. government may attempt to boost the economy through an economic stimulus plan. Many economists feel the stimulus measures may not have the desired affect and would saddle the government with unnecessary debt and an increased yearly budget deficit.
The UK economy and government is facing a massive challenge ahead. With this frame, there may be room for more depreciation of the Pound. The BoE may choose to cut Interest Rates further or undertake a large government spending program to spur economic growth. Future fundamental data should be closely followed. Any one of these changes, if positive, could send the GBP/USD to the $1.45 level.
JPY - Japan Enters Recession
The first modern economy has officially entered into a recession. Late Sunday the Japanese economy posted Q3 GDP results as forecasted of -0.1%. Despite the official recessionary trend, he JPY strengthened against the Dollar, closing the day at 97.33.
This could be taken as a positive sign of the market's reaction to the contracting Japanese economy. The Japanese economy may appear relatively strong compared to its counterparts. The Organization for Economic Cooperation (OEC) has forecasted Japanese GDP to fall 0.1% in 2009. OEC forecasted the U.S. economy to post a decline of 0.9% and the Euro-Zone to fall 0.5%.
OIL - Pirates Stir the Oil Market
There was a spike in Oil prices yesterday as pirates hijacked a Saudi super tanker off the coast of Somalia. The ship contains 2 billion barrels of Oil, or 1 day of Crude output from Saudi Arabia. When the news broke, the price of Oil jumped almost $3. But the gains were short lived. Within 4 hours, the price of Crude was in the red for the day.
This is an event that is unprecedented in scale, but underscores the bearish momentum in the market for Crude. An event like this can temporally move the market in the short term. However, it is not enough to reverse the long term negative outlook in the market. We may see the price of Crude head lower to the $40 mark.
According to the daily chart, this pair has been going through choppy sessions with mixed trends for the past several trading days. The trendless wide range the pair has been going through continues with no hint of a distinct direction. After range trading for most of the day yesterday, the pair now seems to be consolidating around the 1.2600 level and the volatility is beginning to decrease. Traders should wait for a clear signal on the hourly level before entering the market today.
Since the beginning of yesterday's trading session the Cable recouped losses, appreciating from 1.4681, up to 1.5083. The hourly chart's Slow Stochastic is positively sloped indicating that the bullish correction may continue at the near-term time frame. Daily chart's oscillators also support this notion. Placing long positions might be a right choice for today.
The daily chart is showing that the pair still does not have a distinct direction, as the chart appears to be quite horizontal for the past 10 days. The 4 hour chart is showing that this pair is trading within a tight channel as well and is now heading towards the bottom section of it. All oscillators are floating in a neutral territory without a distinct price direction. Traders should wait for a clearer signal on the hourlies before entering the market on the pair.
After bottoming at 1.1891 yesterday, this pair now consolidates a bit higher at around the 1.2000 level. All oscillators show that the bullish momentum will probably continue. The Slow Stochastic of the 4 hour chart is showing no crosses in the horizon, and the bullish momentum there appears to be intact as well. On the daily chart, this pair is still trending upwards and there are no imminent indications of a reversal. Therefore traders can maximize profits by entering steady long positions.
The Wild Card
There has been a sharp breach through the flat channel on an hourly chart which suggests that this commodity is now in the middle of its bearish corrective journey. All oscillators on the 4 hour chart are bearish as well, and
forex traders have a good opportunity of taking advantage of this sharp technical event. Going short appears to be the right direction today.