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Wednesday, 24 Dec 2008
Weak Dollar to Continue into 2009
The weak U.S. economy continues to preoccupy investors as the economic outlook is bleak. Analysts believe that the Dollar will continue its downtrend deep into 2009, despite the recent Interest Rate cuts and stimulus packages.
USD - Dollar Goes Bearish on Weak U.S. Economic Data
The U.S currency continued to slip against the EUR, dropping 0.2% to as low as 1.3970. It also lost ground against many of the other currencies as investors continue to worry about the depth of the U.S. recession.
The U.S. Existing and New Home Sales figures showed a further deterioration in the housing market, while the Gross Domestic Product (GDP) data confirmed the forecasted 0.5% contraction in the 3rd quarter, which marked the sharpest fall in 3rd quarter GDP since 2001. These weak data readings reveal that it may be a long time until the U.S. recovers from her deep recession. This is likely to push the Dollar even lower against its major currency pairs, especially during the year-end holiday season, as low liquidity may lead to more selling pressure on the U.S. currency.
There was however a miner bullish correction on the Dollar's part during mid-day trading as investors who needed to close the books on 2008 bought back Dollars to rebalance their portfolios, lending the U.S. currency modest support. Despite this, analysts predict that the long-term prospects for the U.S. economy and currency remain worrisome. After the release of the poor GDP figures, some analysts say that the economy may contract by even more in the 4th quarter.
Moreover, a further decline in New and Existing Home Sales in November implies that the combination of a weak labor and employment market will keep consumer spending and growth subdued well into 2009. Economists say that the Dollar's bearish momentum since the summer is due to demand from U.S. portfolio managers receding, and hedge funds liquidating assets and boosting cash holdings before year-end as the global financial crisis deepens.
Concerns over a grim U.S. economic outlook continue to preoccupy investors. Rating agencies recently dropped their ratings on debt held by U.S. automakers, even though they recently received rescue packages from the U.S. government. Analysts remain of the view that the Dollar will continue its downtrend, and it becomes more and more clear that the Fed's policy in the U.S. will continue to be ultra-aggressive.
EUR - The European Currency Gains Ground Against the USD
The Euro-Zone currency recorded another day of gains against the Dollar and a basket of major currencies. The EUR gained on Tuesday after the release of data confirming that the U.S. economy contracted in the 3rd quarter. This stoked concern that the U.S. is in a severe recession. Government data showed the U.S economy shrank 0.5% between July and September, as consumers and businesses cut spending.
The European currency was up 0.4% vs. the USD at $1.3995. The EUR also rose 0.3% versus the JPY to 126.08. The British Pound slid to 94.72 pence per EUR amid speculation that the Bank of England (BoE) will cut Interest Rates at a faster pace than its Euro-Zone counterparts. Analysts speculate that the aggressive cut in Britain's Interest Rates will occur in January. The GBP also slipped versus the Dollar to $1.4738 after a report showed Britian's economy shrank more than forecasted in the 3rd quarter as the service industry fell the most in nearly 18 years.
Meanwhile the governments of France, Germany, and the U.K announced stimulus packages in order lift their countries out of recession. Germany, the largest economy in the Euro-Zone, said that its stimulus plan amounts to 1.3 percent of the Gross Domestic Product (GDP). Across Europe, consumer morale and spending data on Tuesday showed some unexpected resilience, suggesting shoppers' gloom about the economic downturn is being tempered by the steep fall in inflation.
Many analysts expect consumer morale to spiral sharply downwards as job losses gather speed and offset the positive wealth effect which the dive in inflation has produced. So far this has not happened, and on Tuesday the United States also reported a bounce in consumer sentiment this month due to declining prices. There is little doubt that if GDP depreciates further in the Euro-Zone, then Europe may find herself in a more prolonged recession than originally anticipated.
JPY - Yen Falls to One Week Low Against the Dollar
The Yen fell to a 1 week low versus the Dollar, and also declined against the EUR, as some investors returned to carry trades, selling low-yielding currencies and using the proceeds to buy higher-yielding assets. This comes about as the Bank of Japan (BoJ) cut its benchmark Interest Rate last week to 0.1% from the previous 0.3%. Apparently the market has pulled back from extreme risk aversion levels at the expense of the Japanese currency. The JPY declined 0.7% to 90.87 against the Dollar, and also declined 0.9% to 126.92 vs. the EUR; following a 1.3% loss on Monday's trading.
The Japanese Yen has gained 24% against the Dollar this year, heading for its largest annual increase in more than two decades amid speculation that the credit crisis will deepen. According to analysts the JPY is likely to continue depreciating as the market moves away from extreme risk-averse tones into more safe assets. On Tuesday, the JPY drifted lower against the USD, as investors continued to lock in profits on the Japanese currency's recent steep gains, cautious not to push the pair lower in case Japan's government intervenes.
Japan, which is battling a recession, is concerned with stemming the appreciation of the Yen in order to protect the competitiveness of its exports. Analysts' prognosis is that the risk for now is a less than prior the rate cut, because the Dollar is above 90 Yen. Therefore intervention from the Bank of Japan seems to have worked. However, traders as a whole are not willing to push the Dollar lower, and this is likely to support a further decline in the Yen.
OIL - Has the Record Oil Slide Reached Its Bottom?
On Tuesday the Crude Oil prices declined as much as 2.3% to below $39 a barrel, extending its slide from a record $147.27 a barrel in July. The primary factor that has been guiding the market is the concern about Oil demand amid the global recession. Tuesday's losses came after weak U.S. government data showed the economy of the world's biggest energy consumer shrank 0.5% in the 3rd quarter as the credit and housing crisis continue to worsen.
The United States Energy Information Administration (EIA) expects global Oil demand to shrink in 2008 and 2009 due to the financial turmoil, marking the first decline in Oil demand since 1983. Previously, the demand from emerging markets such as China had pushed Oil prices to their peak of above $147 a barrel in July. However today, even the Asian economies appear to be suffering from the global recession.
The Organization of Petroleum Exporting Countries (OPEC), which has already agreed to slash global Oil supplies by 5% in response to collapsing demand as a result of the economic slowdown, may hold an emergency meeting before its next scheduled gathering in March 2009. The cartel's President Chakib Khelil said on Tuesday that the organization will review the market again and cut supply again if Crude continues its slide.
The daily chart's RSI signals that this pair is being over-bought and will likely see a downward correction in the near future. The Bollinger Bands on the 4-hour chart are also tightening indicating that a volatile movement is imminent. Going short appears to be the right strategy today.
The price is trading near the lower border of the 4-hour chart's Bollinger Bands, which are also beginning to tighten, indicating that a volatile upward correction may occur today. The 4-hour chart's RSI supports this notion as it floats just inside the over-sold territory. Going long might be the right choice today.
It appears that a bullish cross has occurred on the hourly chart's Slow Stochastic, indicating an upward movement is imminent. However, the 4-hour chart's RSI is floating in the over-bought territory, signaling that a correction to the recent upward movement may occur. Forex traders should wait for a clearer signal before choosing a direction on this pair today.
The RSI on both the 4-hour and daily chart is showing that this pair is floating in the over-sold territory, indicating an upward correction may occur in the near future. The Bollinger Bands on the hourly and 4-hour chart are also tightening meaning a volatile price movement will likely occur. Going long might be a good strategy today.
The Wild Card
It appears that a bearish cross has occurred on the hourly chart's Slow Stochastic, indicating a downward correction is imminent. In support of this, the pair also floats in the over-bought territory on the daily chart's RSI. Forex traders can benefit by entering sell positions early and riding out this downward correction.
|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%||-||-|