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Tuesday, 8 Jul 2008
Volatile Trading Leads to Major Sell-Off for the USD.
The USD saw a bearish trading session yesterday. Although no economic data was released with an impact, the USD was mostly affected by speculations. Impacting the greenback was the wary economic outlook from a Federal Reserve official and the possibility of more financial troubles of the Federal National Mortgage Association commonly known as Fannie Mae and Freddie Mac - the largest corporate funder in Washington. The USD lost value against its major crosses, most notably vs. the EUR as the pair was once again being at just above 1.57.
As stated previously, no economic data was released yesterday; however there was plenty of volatility in USD trading. Traders noted that the Crude Oil prices dropped quite dramatically to around $141 a barrel, however the USD did not strengthen. The main reason for the greenback's weakness was San Francisco Federal Reserve Bank President's speech regarding U.S. Interest Rate policy, in which she noted that since the worse-case scenarios for growth have been skirted by the Fed's aggressive string of rate cuts, the Interest Rate policy is "nearing a crossroads". She also said that the headline inflation is likely to run much higher than desired for the next few quarters. Further hurting the USD was Lehman Brothers analysts' assessments that Fannie Mae and Freddie Mac may need to raise more capital as the credit crisis continues.
A batch of economic releases and announcements are expected for the USD today. The day will start with a speech by Fed Chariman Bernake regarding financial regulation and stability at the Federal Deposit Insurance Corporation's Forum on Mortgage Lending. Volatility will continue after Bernake's speech as Pending Home Sales are forecasted to be released at a negative rate and hurt the USD. Wholesale Inventories are expected to slim down, which should help the USD as companies are more likely to purchase goods when they have depleted inventories, but then Consumer Credit is expected to decrease and once again depreciate the USD. Overall, traders might expect the USD to further devalue against its top currency rivals with a weak economic data releases expected today.
After going through a bearish trading trend last week, the EUR is starting off strongly this week as it gained strength yesterday against its main currency crosses. In terms of economic data releases, the only two new releases yesterday were actually disappointing. The EUR took advantage of its currency rivals' bearishness and assuring comments by Euro-Zone finance ministers. Against the USD, the EUR rebounded back above the 1.57 range and traded in the mid 0.79's against the GBP.
The Sentix Investor Confidence, which measures investor confidence towards the Euro-zone economy, was released with a negative value while it was forecasted to be positive. The German Industrial Production experienced the exact same type of disappointment and was released at -2.4%. On the other hand, EUR traders regained confidence with its rivals' weaknesses, the hawkish notes coming out of the meeting between the EU finance ministers, and ECB president Trichet. Juncker said the Euro-Zone must "avoid second-round effects that could lead to an inflationary spiral," and that the ECB's decision to hike therefore "was not criticized."
No economic data releases are expected today from the Euro-Zone. All eyes should be on Bernake's speech and the Pending Home Sales, as both will cause volatility for the USD and the EUR will be affected accordingly. The other wildcard will be the Crude Oil prices which have decreased by nearly $4 yesterday.
After a slow start, the JPY finished yesterday's trading session versus most of its currency pairs. The Yen's bullishness was ignited by the yerly M2+CD Money Supply release. The JPY gained strength from this data as it beat the forecast, which triggered the commonly held theory that elevated currency levels spur growth and have an inflationary effect, leading to higher interest rates. The decrease in Crude Oil prices also helped the Japanese economy and as both the EUR and GBP had disappointing economic data releases, traders looked to the JPY for bullishness. For this trend to continue, the Economy Watchers Current Index which is expected to be released at 5:00 GMT has to beat its negative forecast.
On tap for the JPY today will be the monthly Core Machinery Orders. Compared to the previous value of 5.5%, this month is forecasted to decrease to 1.1%, which indicates that the manufacturers have slower their purchasing of machinery and the manufacturing industry is in a slower expansion phase. Japanese Yen traders should also keep an eye on the Crude Oil prices as the Yen will get support from a decrease in the prices. It seems like the JPY will see bearishness today as the most impactful event will be the Core Machinery Orders which is predicted to decrease.
Crude Oil -
Oil eased to near $141 a barrel yesterday. However, its losses were limited by concerns over Iran's dispute with the West over its nuclear program. Iran on Saturday vowed to pursue its enrichment program, stating that it had no intention of discussing its "right to enriching uranium". Such a statement indeed keeps political tensions alive further adding to supply worries.
Geopolitical concerns are still supporting oil prices and apart from Iran, oil prices very much dependent on the U.S. dollar movements and the U.S. equity markets levels. As low as the USD stays low, the Crude Oil depreciating scenario is highly unlikely.
The pair began to appreciate after last week's devaluation. On the 4 hour and daily charts the indicators are giving mixed signal. However, the Slow Stochastic on the hourlies shows a bullish momentum. Going long with tight stops could be a good strategy today.
The bearish trend continues with plenty of steam.On the daily chart the bearish momentum is still intact as the cable now floats in the middle of it. The hourlies also support that notion, however the RSI implies that in the near future the ongoing bearish correction might run out of steam. Traders are advised to take advantage of the cable bears.
The sharp bullish channel on the daily chart continues with no signs of a stop. The Slow Stochastic is showing a triple top formation with a positive slope, which indicates the possible continuation of the trend. Going long appears to be the right move today.
The float within the narrowing bearish channel on the daily chart continues, as no significant breach has been made. The negative slope on the 4 hour chart's Slow Stochastic indicates the continuation of the bearish movement within the channel. Going short with tight stops appears to be the preferable strategy.
The Wild Card
On the daily chart all indicators are showing a bearish movement. The Slow Stochastic of the hourlies is showing that silver still has plenty of steam in this move. Forex traders have a great opportunity to join and enjoy the rest of the bearish momentum.
|10:30||AUD||AIG Construction Index||54.4||-||-|
|11:15||GBP||Autumn Forecast Statement||*||*||*|
|12:00||GBP||Asset Purchase Facility||375B||375B||-|
|12:00||GBP||Official Bank Rate||0.50%||0.50%||-|
|12:30||USD||Challenger Job Cuts||y/y||-4.2%||*||-|
|12:54||EUR||Minimum Bid Rate||0.25%||0.25%||-|
|13:30||EUR||ECB Press Conference||*||*||*|
|13:30||USD||Prelim GDP Price Index||q/q||1.9%||1.9%||-|
|15:00||USD||Natural Gas Storage||-13B||-||-|
|07:45||EUR||French Gov Budget Balance||-80.8B||-||-|
|07:45||EUR||French Trade Balance||-5.8B||-5.1B||-|
|08:00||CHF||Foreign Currency Reserves||434.7B||*||-|
|09:30||GBP||Consumer Inflation Expectations||3.2%||-||-|