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Monday, 15 Sep 2008
US Bank Failures Create a Reversal to Last Week's Trends
Last week was a wild week for the US dollar as it experienced a hefty amount of volatility, before range trading to end the week's session. However, the announcement of Lehman Brothers bankruptcy pushed the USD down on fears that once again another major US bank was collapsing.
USD - USD Sees Reversal as a Result of Bank Failures
Last week was a wild week for the US dollar as it experienced a hefty amount of volatility, before range trading to end the week's session. Early in the week the greenback traded at 1-year high's versus the Euro, hitting levels below 1.40. Much of the bullish dollar movement at the beginning of the week was attributed to a combination of positive response from the Fannie and Freddie bailout, falling oil prices and disappointing performance from the Euro-Zone. By weeks end, concern over the effects of Hurricane Ike on US oil supply/demand and a batch of negative US data reversed trends and sent the US on a bearish run, closing at just over 1.43 against the EUR.
Fundamental data from the US last week was not great as a batch of major indicators, such as Pending Home Sales, Trade Balance and Unemployment Claims all disappointed. The announcement of Lehman Brothers bankruptcy pushed the USD down on fears that once again another major US bank was collapsing. Though at the beginning of the week Hurricane Ike appeared to have subsided, it gradually gained steam and ripped into the Texas area, dangerously close to precious Oil reserves. Oil prices, which had been a major catalyst in the bullish dollar movement, were suddenly threatened by rising demand and fear of loss of supply; this, however, lasted just until weeks closing as the markets opened yesterday with Light Sweet Crude selling for under $100/barrel.
Looking ahead to this week, we can expect even more volatility as we await several key US figures. Highlighting this week will be CPI, TIC Net Long-Term Transactions, Building Permits and the FOMC Interest Rate Statement. Though most are forecasted to stay inline with previous results, we can still expect the unexpected from the Federal Reserve. As in the past, Federal Reserve Chairman Ben Bernanke could surprise when it comes to the current 2.00% US interest rate, as investors should be attentive to the direction of the USD leading up to tomorrow's rate statement.
Today we await the release of the Empire State Business Conditions Index, monthly Industrial Production and Capacity Utilization. All three are expected to release with less than favorable results and will likely compete with falling oil prices in how the USD direction is determined.
EUR - Euro Gains Value as USD Takes a Hit
The Euro was revived against its major trading pair, the USD, over the weekend as the dollar felt the heat of investment bank giant Lehman Brothers declaring its intention to file for bankruptcy.
The Euro-Zone financial institutions met this past week to discuss options for reviving their regional economy. Largely opposed to the US-style bailout of failing banks, most Euro-Zone finance ministers agreed that restraining budget deficits and inflation was a far better strategy than the cutting of interest rates and lowering of taxes like that undertaken by the US. Time will tell which strategy works out best. It may be that this strategy is more prudent for the European institution because they are dealing with varying opinions of different central governments who all contend for what's best for their individual countries.
The US has the freedom to cut interest rates and lower taxes across the board purely because it is only one country. The Euro-Zone does not have such a luxury and must contend within the framework of rival nations. Traders will see the effects of last week's meetings over the next month as interest rates, inflation, and budget deficits are reviewed and revised.
Looking ahead today, the market saw a significant rise during the early trading sessions as the EUR reached as high as 1.4481, up from last week's extreme low of 1.3882. However, we are now seeing a sharp reversal this morning as the Euro fluctuates to as low as 1.4255 and now sits unsteadily around 1.43. The EUR also dropped against the rising strength of the JPY and made a quick bullish jump versus the pound, which was then completely reversed to yesterday's level. Today, traders should be kept up to speed about information emanating from the US government as the USD's value may be the most significant indicator of Euro strength today.
JPY - Japanese Economy Holding Steady in Light of Recent Figures
The market witnessed the JPY trading within a narrow range last week as the weakening global stock market encouraged stability for the Japanese yen. The economic indicators released from Japan had little impact on the JPY's movement. Machine Orders fell almost 5% from -8.9% to -14.2%; the Japanese Trade Balance rose a significant amount; and the Current Account showed a JPY surplus. The JPY continues to rise against all its rival currencies as it hit a two-month high against the USD earlier in today's trading session $105.28.
Today marks the beginning of the Bank of Japan's (BoJ) two-day policy meeting to discuss Interest Rates, which are expected to hold steady at 0.50% on Wednesday the 17th. The Interest Rate shift will be calculated into the JPY market sometime tomorrow followed by an official press conference a few hours later in which the decision is laid out in more detail. Traders may expect a small amount of volatility during that press conference. As for today, traders should keep an eye on the EUR and USD as indicators of the strength of the JPY, as there is the possibility of a significant decrease in the value of the dollar which will no doubt affect the other major currencies.
Crude Oil - Price of Oil Still Dropping as Ike Damages are Assessed
America awoke Sunday morning to a new week after Hurricane Ike passed the Gulf of Mexico as a Category 2 hurricane and slammed into the Texas coastline. Oil prices dropped dramatically during the weekend even though expectations were for the worst. It seems that damage to the area's oil refineries was limited. However, it's too early to estimate the exact damage and how much these oil companies will continue to produce in the short term. It has been nearly three weeks since the refineries shut down, delaying Crude Oil production by nearly 4.8 million barrels a day. After speculation and demand stabilize themselves in the wake of Hurricane Ike, prices continue to drop steadily and are now being traded for less than 100$ as of this morning.
As many analysts expected Crude Oil prices to rise, given the ongoing debate about market supply, the opposite still seems to be occurring. Of the many possible reasons for this laid out in Friday's analysis, another potential reason could be the U.S. Energy Department's announcement yesterday that they are willing to loan 200,000 barrels of oil from the Strategic Petroleum Reserve (SPR). The SPR is a government-controlled reservoir organization for Crude Oil as they are holding nearly 700 million barrels. In addition, demand for Crude Oil has weakened by the help of the sluggish global economy. It seems that more and more oil users fear rising prices and job security, causing them to cut expenses on gasoline. However, prices will fluctuate within the next few days as traders will try to estimate the damage to the oil refineries, and price might go volatile with the release of that information later this week.
There is a very distinct bearish channel forming on the 4 hour and the hourly charts. In addition a fresh bearish cross on the hourly chart's Slow Stochastic suggests that the bearish correction may be quite imminent. Going short with tight stops might be a good strategy for today.
The 4 hour chart is showing that the pair is still in the bullish configuration; however the RSI is already floating in the overbought territory. On the contrary, the hourly's chart Slow Stochastic is showing a bearish cross and it appears that the possible next move might be a bearish one. In that case traders are advised to swing in after the break.
The pair went through a very sharp bearish move yesterday, as it dropped over 200 pips. A bearish cross on the 4 hour chart's Slow Stochastic suggests that the bearish momentum has more steam in it. Going short appears to be preferable.
After a few weeks of bullish movement, the pair seems to be consolidating around the 1.1100 level. A bearish cross on the daily chart's Slow Stochastic implies that a reversal might be forthcoming. Traders are advised to hold for a break and then swing in.
The Wild Card
The bearish move which was initiated since last week seems to be galloping full speed ahead. The hourlies also support that notion, however according to it; the down trend is much more restrained as volatility is quite low and the RSI floats at the oversold zone implying that a reversal might be quite imminent. Forex traders have a great opportunity to join and enjoy the rest of the bearish momentum.
|01:00||EUR||German Prelim CPI||m/m||0.9%||-||-|
|01:00||EUR||Italian 10-y Bond Auction||1.36|1.5||-||-|
|01:50||JPY||Prelim Industrial Production||m/m||3.7%||-||-|
|09:00||CHF||KOF Economic Barometer||90.1||-||-|
|09:00||EUR||Spanish Flash CPI||y/y||-1.1%||-||-|
|10:30||GBP||Net Lending to Individuals m/m||m/m||2.4B||-||-|
|10:30||GBP||M4 Money Supply||-0.8%||-||-|
|14:30||USD||Core PCE Price Index||m/m||0.1%||-||-|
|16:00||USD||Pending Home Sales||m/m||1.7%||-||-|