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Monday, 6 Oct 2008
U.S. Economy Rescued; Euro-Zone Economy in Dire Straits
Last week investors focused on the bailout package for the U.S. financial sector. This week the big news seems to have shifted to the large number of bank failures across the Euro-Zone. Now that the USD has been "bailed out" by government funds, investors are looking to the central governments in Europe to do the same. But will such a move prevent a European recession, or merely slow its approach?
USD - Dollar Shows Sustained Strength in a Volatile Week of Trading
Last week, the USD went through one the most volatile weeks of trading that has been seen for some time. It experienced a bullish trend against almost all of its currency counterparts and hit a 13-month high versus the EUR. The greenback gained around 800 points versus the EUR, trading under 1.38 on Friday and dropping below 1.36 in today's early trading session. The USD did experience a drop against the JPY, as the Japanese currency gained 1.5% against the dollar by week's end, settling near the105 mark last Friday and trading under 104 today.
A majority of the previous week's headlines focused on the U.S. government's approval of the financial system's bailout plan. After the bailout passed successfully through Congress, the USD held its gains against its currency rivals and Forex traders began looking to other weaknesses in the global economy, particularly the Euro-Zone. The U.S. economy appears to be a bright spot when compared to the economies of the other developed nations. The combination of global weakness and the large demand for cash by financial institutions have pushed the dollar to record levels recently.
Fundamental data for today is sparse and has largely been ignored since traders are focusing on the U.S. bailout plan and European bank failures. Looking forward to the week ahead, we may expect the USD to continue its bullish trend against the EUR and GBP. A correction in the value of the EUR/USD has been sustained and we may see the pair trading at 1.3250 by weeks end.
EUR - EUR Suffers one of its Worst Trading Weeks
The Euro-Zone's economic woes don't seem to be running out of steam as the EUR continued its fall over the weekend against all its currency counterparts and has yet to show any signs of stopping. Overall there seemed to be a lack of impactful data releases coming out of the Euro-Zone compared to the average week. Despite the fact that most economic indicators came out slightly better than forecasted, the EUR continued to fall. Similar to the U.S. economy, these indicators are not driving the market as much as news surrounding the bank failures across the region, and negative speculation about a downtrodden economy.
The EUR was also hurt by the USD's recent success, which caused the pair to trade in the mid 1.37 range, a price that had not been reached in over 3 months. The pair now sits, for the moment, at 1.3560, and is still giving off bearish signals. Unless the bank failures in Europe are addressed in the near future, traders could see a further decline to the value of the EUR this week.
This week could be a little more interesting for EUR traders. We may see some volatility throughout the week with such events as the G7 Summit on economic problems to be held Thursday, as well as another speech by Jean-Claude Trichet, the ECB President, tomorrow. Also look for more German economic data to come out as the German Factory Orders and German Industrial Production will be released on Tuesday and Wednesday respectively. Both figures are forecasted to be higher than their previous values and this should help the EUR rebound against its currency rivals. For today, however, there is only one minor data releases expected from the Euro-Zone. The Sentix Investor Confidence report will be released and is expected to be lower than its previous figure. This means the EUR could fall even lower today if no other significant data affects it otherwise. As with last week, the USD will be one of the biggest motivators in today's trading.
JPY - As Global Economy Takes Plunge, JPY Rises in Value
How can the Yen be gaining so much strength with the recent economic crisis running at full speed? The Yen experienced a bullish trend versus the major currencies during last week's trading sessions, and was the only currency to outpace the rising USD. The Japanese currency gained over 150 pips against the USD when it closed trading at 104.61 last Friday, and opened today at 103.71. As the world's largest economies face difficulties, investment firms, such as Morgan Stanley, are telling their clients to buy up JPY, calling the Yen a "counter-cyclical currency." What this means is that as the world economy does poorly, the Yen tends to rise in value, as analysts are now forecasting a 5% rise in value over the next month for the JPY.
This week Japan will provide even more indicators to the economic calendar and will likely contribute to its currency volatility. The Overnight Call Rate, Core Machinery Orders, Leading Indicators, and Economy Watchers' Sentiment are all indicators which are expecting mixed results this week. However, traders should pay closer attention to the Bank of Japan's (BoJ) Press Conference, Monthly Report, and Monetary Policy Meeting this week for any hawkish indicators from Japanese officials, as they could define the JPY's direction this week more than the economic indicators. As for today, with no news being expected from Japan, speculation about the Overnight Call Rate, to be delivered tomorrow, combined with world economic news, will be the pilot of today's market movement.
OIL - Crude Falls below $90 as Credit Crisis Spreads Out
While the United States has managed to buy some breathing room in this credit crisis with a series of takeovers and bailouts, Europe is now fighting in order to contain its financial fallout. Oil prices are falling for a fourth consecutive day as traders feared efforts to contain the spreading credit crisis would fail to stave off a deeper decline in Oil demand. The price of Crude Oil has fallen almost $3.50, to $90.12 a barrel in today's early trading session.
It was a relatively quiet weekend in the U.S. financial sector after Friday's passage of the $700 billion bailout bill. In Europe, however, officials scrambled to save three banks, underscoring the creeping effect of the credit crisis. With the widening signs of slowing global economic growth, which reduces demand for Crude, it's highly likely that the market is going to slow even more over the next few months. There are risks that the prices could move down to as low as $60 a barrel.
Following the approval of the bailout bill the dollar rose to a 13-month high against a basket of currencies. The higher dollar, also weighing on Oil, reflects expectations that the slowdown is spreading to the Euro-Zone. However, concern remains that the U.S. bailout may add stress to the rest of the U.S. economy, and the country may fall further into a recession. This will eventually cool demand for Crude Oil even more. As Oil prices decline, the Organization of Petroleum Exporting Countries (OPEC) may be prompted to cut output in order to provide support to the price of Crude Oil. The uncertainties in the market are extremely high and traders should remain cautious.
As the trading week began, the pair has significantly extended its bearish trend as it dropped around 300 pips in only a few hours. Currently, the daily chart shows that the pair's price is still floating beneath the Bollinger Bands' lower boarder, suggesting that further bearish movement might take place. Going short might be the right choice today.
After experiencing a mild bullish correction on Friday, the cable has fully resumed its general bearish trend. The RSI on the 4 hour chart is now floating around the 40 line, indicating that the bearish momentum still has more steam in it. Going short seems to be preferable.
There is a very distinct bearish channel forming on the 4 hour chart, as the pair is now floating in its lower section. However, as a bullish cross took place on the hourlies' Slow Stochastic, it appears that a bullish correction might be imminent. Going long with tight stops could be a good strategy today
After a few failed attempts, the pair has successfully breached through the 1.1415 level. However, the bullish trend is currently losing momentum, and the pair has dropped below the 1.1400 level. Should another breach of the 1.1415 level will occur, it might be a sign for another strong bullish movement. Traders should wait for the breach and swing.
The Wild Card
Wild - Crude Oil
After testing the 90.00 level, Crude Oil is currently traded around the 90.40 level. And now, as all oscillators on the daily chart are pointing down, it seems that Oil might face another bearish session. A breach through the 89.80 level might validate the bearish move, and forex traders could enter a very popular trend.