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Thursday, 31 Jan 2008
The greenback is on its way down.
Yesterday the greenback slipped sharply against most of the major currencies on the back of the news that the Fed had slashed the Fed Fund Rate and the Discount Rate by an additional 0.5%. The Federal Funded rate, which is the U.S inter-bank lending rate, was cut from 3.50% to 3.00%. While the Discount Rate, which is the rate at which U.S banks can borrow funds directly from the Reserve Bank, was slashed from 4.00% to 3.50%. The Fed has been continuously slashing the interest rate over the last few months in an attempt to stabilize the faltering U.S economy and to stave off a recession. Yesterday's rate cut comes just over a week after the Fed surprisingly cut its benchmark lending rate by 0.75%, in order to stimulate the economy. This series of aggressive monetary expansion by the Fed will significantly boost U.S consumer spending, which will mean that the number of unsold U.S homes will decrease thereby alleviating the housing slump and loosening the persistency of the recent credit crisis. However the Fed will have to keep a close eye on future inflation figures, particularly since the recent Personnel Consumer Expenditure figure released above expectations. The PCE figure is not relied upon by many economists and therefore it's is widely believed that inflation is not a major concern and that yesterday's 0.50% rate cut was absolutely necessary in order to prevent the U.S economy from spiraling into recession. Inflation is expected to remain moderate in the near term, although there is a slight risk of it spiking on the back of the rate cuts. Nevertheless, stagflation is highly unlikely and it seems that the worst case scenario for the U.S economy will be a recession.
In other U.S news yesterday, the Annualized GDP quarterly figure released at 0.6%, which was well below the forecasted figure of 1.2%, giving further indication of slowing U.S economy. Also released yesterday was the ADP report, which has some predictive value for the Non-Farm Payrolls report which is to be released this Friday. The ADP report surprised on the upside, coming in at 130K and far-surpassing the expected figure of 40K. Therefore looking ahead, traders will now begin to shift their focus on Friday's NFP report, which is usually a major market mover. The greenback may be able to pull back some lost ground on Friday as according to the ADP report we may see a positive surprise for the significant NFP report. Nevertheless, due to instability in the U.S financial markets coupled with slowing growth the short term outlook for the greenback remains very bleak. However we remain optimistic longer term and believe that towards the second half of 2008 the U.S economy will climb out of this deep pit and it will be accompanied by a sustained USD rally.
There was no significant Eurozone news yesterday as all attention shifted to the U.S interest rate announcement. The EUR rallied sharply against the greenback on the back of the Fed rate cut and it reached above the 1.4900 level. The EUR also rallied strongly against the GBP, as the BOE still struggles to balance rising inflation and slowing growth. However, the European currency had a mixed trading day against most of the other majors. Looking ahead to today, there will a host of Eurozone news which will be released kicking off with the German Retail Sales and Unemployment Rate. The German economy, which is heavily reliant on exports, remains resilient despite the recent appreciation of the EUR. The other key news today will be the Eurozone CPI, which will give some indication as to the inflationary pressures that the ECB may have to face. Many analysts believe that the strong EUR will eventually take its toll on the European economy and that it may take more hawkish comments from the ECB with regards to inflation in order for the EUR to keep its bullish momentum.
The near term outlook for the EUR, in stark contrast to the greenback, remains bright and most analysts believe that it will once again head towards the 1.5000 level against the USD. However it may slip slightly this week before resuming its upward momentum as the market digests yesterday's rate cut causing some temporary greenback consolidation.
The JPY rallied sharply yesterday on the back of the Fed rate cut as investors pared off any risky positions thereby causing carry trades to unwind further. The current uncertainty in the global financial markets is causing all the high yielding currencies to depreciate sharply and we should see the JPY continue its bullish momentum as risk seeking investors run for the hills. The Japanese economy is showing moderate growth and it is finally beginning to experience some positive inflation, so this could be a good launching pad for a future rate hike from the BoJ. In the meantime a rate hike remains unlikely due to possible deflationary pressures and there will need to be sustained expansion before the BoJ can consider a rate hike. The outlook for the JPY remains very bullish particularly as global market instability and currency volatility continue to drive risk-aversion. However, as soon as the U.S economy is back on its feet, investors will once again be willing to take risks and this could pull the JPY off the bullish express.
The 4 Hour chart indicates that there is still room for the pair to reach new heights, particularly after breaching the key 1.4850 resistance level yesterday. Both the RSI and momentum are indicating that this pair should continue its bullish rampage. Oscillators show that a breach through 1.4950 will validate an additional bullish move into the 1.50 levels.
The cable is trading in a very unstable and choppy manner in the past few days. The daily studies show a slight bullish momentum and the hourlies show mixed signals. The RSI and Momentum on the daily chart are positively sloped indicating that this pair still has steam left in its bullish movement. However the 4 Hour chart is slightly bearish, so a preferred strategy for today might be to buy on dips, as the daily movement should still be bullish.
The breach through the wide range is showing the full power of the bearish momentum. The pair is traded at the 106.50 levels, and another bearish move is quite imminent. All the indicators are showing that the bearish momentum has not yet said its last word, and a target price of 105.00 will no be a big surprise.
This pair is still in the midst of a steady downtrend which is not yet showing any sign of leveling out. The RSI and Momentum are still negatively sloped indicating that there is still plenty of steam left in this bearish move. The oscillators show that a positive breach is quite unlikely, and the daily charts are also showing bearish momentum. Going short still might be a preferable strategy.
The Wild Card
This commodity has been on a sharp rise over the last week and this bullish trend is likely to stick around in the near future. All charts are still giving a strong bullish signal, however there might be short term corrections during this uptrend. forex traders can maximize profits by buying on a dip and taking advantage of a sharp bullish trend.
|13:30||USD||Core PCE Price Index||m/m||0.1%||0.1%||0.1%|
|13:30||USD||Employment Cost Index||m/m||0.7%||0.6%||0.7%|
|14:55||USD||Revised UoM Consumer Sentiment||86.4||86.4||-|
|14:55||USD||Revised UoM Inflation Expectations||2.8%||-||-|