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Tuesday, 13 Jan 2009
Weak Risk Appetite Helps Strengthen Low-Yielding Currencies
Trader's aversion to risk has continued to push safer currencies higher as global equity markets continue to trend lower. Traders have been unraveling riskier investments financed with loans from currencies with ultra low Interest Rates, predominately in the USD and the Yen. As risk aversion heads higher, so does the value of these two currencies. Traders may look this week to a strengthening USD and JPY which could last until this global recession receives some containment and stabilization.
USD - Dollar Rises on Risk Aversion
Trader's aversion to risk has continued to push safer currencies higher as global equity markets continue to trend lower. Both the Nikkei and Dow Jones Industrials ended lower yesterday and that has been influencing the currency markets. The financial markets show the concerns of a global recession. Traders have been unraveling riskier investments financed with loans from currencies with ultra low Interest Rates, predominately in the USD and the Yen. These two currencies may continue to see support in the short term as investors lose confidence in riskier assets.
The Dollar continued a 3-day rally against the EUR, finishing the day up at 1.3328. The Dollar also posted significant gains against the GBP, sending the pair down 2% to finish the day down 1.4774.
Trading today and tomorrow may be based on fundamental data coming from the United States. The U.S. trade balance report will be released today at 13:30 GMT and is expected to show a decline in the difference between U.S. exports and imports. Tomorrow the monthly retail sales report will be released. This report has proven increasingly difficult to accurately forecast. Traders will be looking for these reports for positive economic data to give direction for the struggling U.S. economy.
EUR - EUR Stops its Slide against the GBP
The EUR continues to lose ground against the Dollar as added market risk weighs on the European currency. However, the currency did break a 4-day losing streak against the GBP to close the day up at 0.9020.
The EUR/GBP, which last year saw an appreciation in excess of 26%, has given back some of those gains so far this year. The drop in the GBP's valuation stems from an ever more deteriorating economic situation. The Bank of England (BoE) has slashed Interest Rates, at times cutting rates much faster and steeper than forecasted. British Interest Rates are predicted to fall close to 0% in the near future, and the next step of action perhaps could be the printing of new money or the purchase of commercial debt to stimulate the British economy.
The economic downturn has been very sharp for Britain and currently Interest Rates stand at an all time low. Despite the British recession, the Pound may be poised to head higher against the EUR on future European Interest Rate moves later this week.
Most traders are anxiously awaiting the Interest Rate decision by the European Central Bank (ECB). In this Thursday's meeting, the ECB is expected to cut rates by 0.50%. So despite the recessionary trends, we may see the EUR/GBP head lower on ECB rate cuts, with perhaps a return below the 0.8900 mark.
JPY - JPY Breaks Support Line
As risk aversion heads higher, so does the value of the Yen. Yesterday the JPY strengthened across the board and dropped below a significant support line. At one point in yesterday's trading the USD/JPY fell to a low of 88.86 before ending the day at 89.27. The large price swing may be attributed to low levels of liquidity as Japanese markets were closed yesterday for a bank holiday.
This is the fourth consecutive day for a strengthening Yen. The renewed gains sparked further speculation of Japanese government intervention in the currency markets. A strong Yen hurts Japanese exports, a major component of the Japanese economy. The government has made pledges to intervene in the open market, but we have yet to see a firm commitment to help weaken the currency.
Traders may look for the Yen to perhaps continue its bullish run. Keep an eye for the U.S. trade balance report today. This may help to send the JPY higher against the Dollar, possibly below the 89.00 level.
Oil - Crude Drops below $40
Crude Oil continues to head lower for the 4th day in a row. The driving factor is concerns of the slowing global economy. Rising supplies and lower demand has pushed the price of Crude below the $40 level. This was a support line that many analysts said could not be broken.
The end to a gas feud between Russia and Ukraine did little to lower the risk tolerance in the market and traders continued to move out of equities and riskier commodities throughout the day. This spat was the start of the Crude rally at the beginning of the year. Now the price of Crude Oil stands below this psychological mark. Many of the concerns are on the demand side due to a global recession.
Some are calling for Oil to be priced at $25; however this figure may be a bit to bearish, even for the most skeptical of Crude Oil traders. A $35 mark could be reachable by the end of today's trading.
It appears that the bearish trend may have run out of strength as the current price level has dropped the pair into the oversold territory as the 4 hour chart's RSI reveals. The pair also currently floats near the bottom barrier of the daily chart's Slow Stochastic, suggesting a bullish correction may be imminent. In that case, going long with tight stops may be the correct strategy.
The typical range trading on the hourly chart continues. Both the daily RSI and Slow Stochastic are floating in neutral territory. However, the 4 hour chart's RSI can already be seen in the oversold territory. It appears that the possible next move might be a bullish one. When the upwards breach occurs, going long with tight stops appears to be preferable strategy.
The daily chart is showing mixed signals with its RSI fluctuating at the neutral territory. However, the 4 hour chart's RSI is already floating in the oversold territory indicating that a bullish correction might take place in the nearest future. When the upwards breach occurs, going long with tight stops appears to be preferable strategy.
Narrow range trading continues as the pair did not make a significant move in either direction, and is currently traded around the 1.12 level. The 4 hour chart's RSI is already floating in the overbought territory indicating that a bearish correction might take place in the nearest future. When the downwards breach occurs, going short with tight stops appears to be preferable strategy.
The Wild Card
Gold prices are once again dropping, and it is currently traded around $821 per ounce. And now, the 4 hour chart's Slow Stochastic is giving bullish signals, indicating that gold prices might go up. This might give forex traders a great opportunity to enter a very popular trend.
|23:50||JPY||BSI Manufacturing Index||15.2||17.2||-|
|23:50||JPY||Tertiary Industry Activity||m/m||-0.2%||0.3%||-|
|23:50||JPY||M2 Money Stock||y/y||4.1%||4.3%||-|
|00:01||GBP||RICS House Price Balance||57%||59%||-|
|00:30||AUD||NAB Business Confidence||5||*||-|
|03:45||JPY||30-y Bond Auction||1.62|4.4||*||-|
|06:00||JPY||Prelim Machine Tool Orders||y/y||8.4%||-||-|
|07:45||EUR||French Industrial Production||m/m||-0.5%||0.2%||-|
|09:00||EUR||Italian Industrial Production||m/m||0.2%||0.3%||-|
|15:00||GBP||NIESR GDP Estimate||0.7%||*||-|
|23:30||AUD||Westpac Consumer Sentiment||1.9%||*||-|