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Monday, 21 Jul 2008
USD Continues To Be Under Pressure
When glancing back at a weekly chart several months from now, one will look at the change in the market last week and consider it a normal one. The greenback ended the trading week last week virtually unchanged against its major rivals from the levels it began the week with. A closer look into last week's trading however will show a much different picture. The greenback saw record lows against the EUR crossing 1.6035 before regaining nearly 200 pips to close the week. The same was the case for the USD/JPY shooting back up to over 106 after flirting with 103.80, as the GBP also added to the volatile conditions. The market fluctuations seen last week were caused by a host of key events, most notably the sudden drop in Oil prices that occurred mid week. As late as Tuesday afternoon Light Sweet Crude Oil was selling at $146 barrel and the EUR/USD pair had broken record highs above 1.60. By the end of Tuesday, Oil prices had dropped by as much as $10/barrel and EUR/USD was back trading near 1.58. Testimony from Federal Reserve Chairman Ben Bernanke in front of the Senate Banking Committee and a simultaneous economic speech by President George W. Bush drove Crude Oil prices down and sent the dollar on a bullish path that carried on until the end of the week. When it was all said and done by Friday's closing the USD had regained ground from the week before and Crude Oil had shed nearly $20 off of its peak price.
This week should be equally intriguing as investors juggle whether the US is really out of the "recession" it has been suffering lately. As has been the case before, bullish runs by the dollar sometimes extend themselves beyond what fundamental and technical data would allow, mostly on default investor speculation that the dollar will always recover. With news from the housing and credit markets still disappointing it is hard to logically defend the positive movement in the dollar. This week the dollar is absent from any relevant market making news until Thursday and Friday when we can expect the Unemployment Claims, Existing Home Sales, Durable Goods Orders and New Home Sales. These events will almost certainly contribute to volatility in the market as any positive figure should spark even more market wide speculation on the dollar. The dollar will be absent from the news today and won't appear until tomorrow when we will await the words of Treasury Secretary Henry Paulson and Federal Reserve Bank of Philadelphia President Charles Plosser.
Today, the US will produce a single calendar event, the Leading Index. Expect the markets to be calm today as the soft news day will likely provide little market movement.
The Euro is beginning to feel the effects of breaking record highs versus its major currency rivals and then losing them back hard and fast. The 15 Nation currency set highs against the USD and JPY this week to no avail as shortly after setting the marks it lost over 200 and 400 points respectively before range trading for the rest of the week. The big problem in the Euro-Zone is that to add to already poor consumer confidence numbers, exports, manufacturing and production are all taking a hit. The cost of parts and labor has risen dramatically in comparison to other export heavy nations like the US and Japan largely due to the inflated currency in the EZ. The ZEW Economic Sentiment and German ZEW Economic Sentiment numbers both showed that the rise in interest rates and the high cost of the EUR have severely hurt the most economically sound nations in the EZ, and in turn affected the EZ as a whole in the same way. Most of the movement against the USD and JPY last week which brought about these records was due more to negative info from the US and global stock markets as opposed to real Euro generated movement.
This week, news from the EZ could contribute even more to a bearish move in the EUR as the week will be highlighted by French Consumer Spending, German Ifo Business Expectations Index and Manufacturing PMI. Germany and France will also release some important material all of which is forecasted to disappoint the Euro yet again.
Today the EUR is absent from the economic docket, as investors will look toward the equities market and the price of Crude Oil as indication to the direction of the European currency.
The Japanese look to be stuck in a precarious position lately, as poor local economic data has added more concern to the already fragile inflationary issues in the country. Still, the JPY was up within its crosses in response mostly to the rise in US stocks over the last half of last week. The JPY experienced strong volatility during the week as Crude Oil price movement drove the stock markets mad. The Asian currency saw 200+ point swings against the USD and the EUR last week, en route to closing the trading session within single digits of the week before. Last week the release of the Bank of Japan's meeting minutes showed that the country faces a risky downside to growth even more now than that of inflationary concerns.
This week the Japanese will provide several indicators to the economic calendar which will likely contribute to some JPY volatility. The Tokyo Core CPI, National Core CPI and CSPI are all expected to see small gains, and alongside any bearish USD or EUR news could prove key in adding much needed points to the JPY.
Today, the Japanese observe Marine Day and local markets will be closed. Keep close eye on USD/JPY, EUR/JPY and GBP/JPY as three pairs which will see movement this week.
Crude Oil -
Crude oil rose from a six-week low in New York as a storm headed toward Mexico and tensions with Iran threatened to escalate after the world's fourth-largest oil producer resisted demands to suspend nuclear research. The Crude for August delivery rose as much as 1%, to $130.13 a barrel on the New York Exchange after earlier hitting the low of $129.70 during the Asian session.
Prices have plunged more than $17, or 12%, from the record $147.27 a barrel reached on July 11. While signs of weakness in the U.S. economy played a role, the pace of the decline may reflect investor concern at Petroleos Mexicanos offering oil ``several years'' into the future at current prices.
Rising demand outside Europe and the U.S. and the threat of supply disruption from hurricanes will probably keep oil prices in triple-figures for the foreseeable future.
The trendless tight 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 1.5850 as the volatility is beginning to decrease. Indicators are giving mixed signals although there is still a lot of positive momentum. Traders should wait for a clear signal on the hourly level before entering the market today.
Bollinger bands are widened indicating increased volatility. Both the hourlies and the dailies support a bearish signal. This pair is still within a steady downward channel which is evident from the 4 H chart. Going short still seems to be the preferable strategy.
The pair is still traded within the bullish channel as the direction is currently unclear. No significant breach has been made in either direction, yet there is a bearish hint in the form of a cross on the 4 hour Slow Stochastic. The hourly chart's Bollinger Bands are tightening which indicates that the break is near. Going short with tight stops might be smart today.
The range trading continues without a distinct breaking direction. The daily chart is giving mixed signals and is mostly floating in neutral territory. The hourlies are showing moderate bearish momentum. It appears that going short with very tight stops might be a good decision today.
The Wild Card
The pair has been trying to massively correct the intensive bullish move, and is now trading around 104.50. The sharp bearish channel is in a high spot at the moment and together with a strong bearish cross on the slow stochastic. This represents for forex investors a very good potential for a short position.
|10:00||EUR||Italian Monthly Unemployment Rate||12.3%||12.4%||12.6%|
|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%||-||-|