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Monday, 3 Nov 2008
The USD is Expected to Extend Recovery
The USD has been slightly more volatile over the past week than usual, and the explanations for this have been getting trickier by the day. Most analysts are now predicting the USD to begin making strong bullish moves against at least two of the major European currencies.
USD - USD Set to Make Gains against European Currencies
The USD has been slightly more volatile over the past week than usual, and the explanations for this have been getting trickier by the day. Traders saw erratic behavior by the USD towards the end of last week when its value spiked below 1.3200 versus the EUR on Thursday, then hiked its way back up to the 1.2700 level by Friday. This came despite receiving mostly positive news from the U.S. economy, and mixed news from the Euro-Zone. It would appear that the market has not been driven by economic indicators as much as it has been in the past; investor confidence in the economic stimulus packages and bailout plans has played a far more significant role lately, not to mention the effects of an upcoming presidential election in the United States on future investment strategies.
Most analysts are now predicting the USD to begin making strong bullish moves against at least two of the major European currencies: the EUR and the GBP. The U.S. Federal Reserve announced over the weekend its new plan to allow a $30 billion currency swap with Mexico, South Korea, Brazil, and Singapore in order to help their economies fill the recent demand for USD, as well as lend aid to their foreign investment capabilities.
This was merely one more move in a series of similar actions taken by the Fed to increase market liquidity. Other actions include cutting interest rates, bailing out financial giants, pouring billions of dollars into the market to buy up bad mortgage debt, and also provide unlimited access to dollar funds across the globe.
Recent headlines have even begun declaring the Fed as a worldwide central bank as it has taken a leading role in providing what it believes to be sound steps in correcting the recent financial crisis. One of the most positive factors to emerge from such leadership is the image of confidence which the Fed has been providing. Amid mixed results from global economic indicators, the Fed has remained relatively stable in its decision-making and has appeared confident during its press releases. These two factors are what the USD needs the most to continue gaining strength: confidence and stability. While the U.S. manufacturing industry is forecasting a contraction in this past month's manufacturing activity, the Dollar may still outpace most of its rivals and climb steadily throughout the day.
EUR - Euro-Zone Currency Struggling to Stay Afloat
After suffering a steady depreciation, the EUR saw some sporadic jumps in value last week as the U.S. Dollar faltered from negative economic data releases. While failing to reclaim its previous strength, it nonetheless jumped high enough to spark some short-lived confidence in the 15-nation currency. Last week, the EUR grasped at the 1.3200 level against the USD before tumbling back down. The EUR also witnessed rather intense volatility versus the GBP as a result of the pound's shaky trading week. This volatility may also continue throughout the coming week with significant data being released from the UK about the health of the British economy.
The European Central Bank (ECB) is staring in the face of difficult times. With the broader European economic zone going into recession, and a lack of consensus about how to go about solving it, the ECB appears to be the safety net on which the entire region imagines itself falling back on. However, the ECB may lack the funds and economic influence to impact significant change to the system. As such, we may indeed be witnessing the beginning of a collapse to the European Monetary Union (EMU).
With East European countries, such as Hungary and Poland, relying on the ECB to provide bailout funds, despite not being a part of the EMU, the European Central Bank is being confronted with more and more challenges which it may not be capable of solving. As a result, ECB President Jean-Claude Trichet may announce a slash to Euro-Zone interest rates later this week. This would be the fastest pace of interest rate cuts for this region in almost 10 years!
Looking ahead, the Euro-Zone is set to have a quiet news week with no major economic indicators arriving until Thursday's ECB Press Conference where a decision regarding the future of its interest rates will be discussed. Until then, traders would be wise to tune in to the British economy as it will likely cause the majority of this week's volatility.
JPY - JPY Loses Value as a By-Product of Reinvigorated Carry Trades
The JPY's recent strength has been momentarily curbed these past few days. As Asian stock markets rally, investors are beginning to re-open their carry trades by buying up higher yielding currencies, funded with Japanese Yen. These carry trades have become more attractive following the Bank of Japan's (BoJ) decision to cut interest rates from 0.50% to 0.30% last week. As a result, traders have witnessed a steady depreciation in the value of the JPY.
As for the coming week, traders have little news emanating from the Japanese economy. As such, it would be wise to pay close attention to the European Central Bank's interest rate decisions as this may affect the direction of JPY-funded carry trades, and as a by-product, could also alter the movement of the JPY against the EUR in a bullish direction. The Yen could then lose value consistently to the greenback as traders invest in the USD with their JPY, instead of investing in the shaky European economies.
Oil - U.S. Dollar's Sudden Weakness Generates Rally for Crude Oil
Marking one of the largest price jumps in a single day, the price of Crude Oil spiked over 400 points towards the end of Friday's trading session. Not necessarily indicative of anything sinister, the price jump can simply be correlated with a sudden depreciation of the USD. This came after Federal Reserve Board Chairman Ben Bernanke indicated a willingness to back-up home loans, but warned of a slow moving economic turn-around. Stocks saw a sharp decline shortly thereafter, followed by a significant devaluation of the USD.
Since the price of Crude Oil is indirectly correlated to the value of the Dollar, when the USD drops, the value of a barrel of Oil rises, as traders saw last Friday. So far today, the price for a barrel of Light Sweet Crude holds its recent gains and sits patiently near $69. Unless the greenback gets back its lost momentum, traders might see the price for a barrel of Oil continue to rise to as high as $80. The USD is the currency to watch this week for those trading Crude Oil.
The pair has been range-trading for the past few days, and is now been traded around the 1.28 level. Currently, the Bollinger Bands on the hourly chart are tightening, indicating that a sharp movement is quite imminent. Traders should wait for the breach and swing.
According to a daily chart this pair is still floating in a neutral territory with no distinct price direction. However, hourly charts' Bollinger Bands are tightening, indicating that a sharp movement is impending. Traders should wait for the breach and swing.
The pair has been range-trading for a while now, with no specific direction. The Daily chart's Slow Stochastic providing us with mixed signals. All oscillators on the 4 hour chart do not provide a clear direction as well. Waiting for a clearer sign on the hourlies might be a good strategy today.
Ever since bottoming at the 1.1200 level, the pair is galloping upward with full steam ahead and is currently traded around the 1.1500 level. The daily chart is providing exclusively bullish signals; implying that another bullish session is forthcoming and the 1 hour chart support that notion. Going long seems to be the right strategy today.
The Wild Card
Crude Oil is currently traded around the 68.00 level. A cross above the 70 line on the hourly chart's Slow Stochastic is indicating that the next move is likely to be bearish.
Moreover, a breach through the 66.70 support level might validate another sharp price drop, providing
forex traders with a good entry point to join the trend.
|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%||-||-|