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Tuesday, 6 May 2008
Will The Dollar Continue Its Fall?
Yesterday, The USD briefly extended its decline vs. the EUR for the first time in three days after Oil prices hit a record high at more than $120 a barrel. High commodity prices are only exacerbating an already weak economic backdrop, sparking debate over the strength of the U.S. economy.
Also yesterday, the ISM Non-Manufacturing Composite index showed that the U.S. services sector grew in April for the first time in 3 months. The Institute for Supply Management's Non-Manufacturing index came in at 52.0 in April vs. 49.6 in March, snapping a three-month period of contraction. A reading above 50 indicates growth in the service sector. The service sector represents about 80 percent of U.S. economic activity, including businesses such as banks, airlines, hotels and restaurants.
Nevertheless, this news was overshadowed by a Federal Reserve survey showing that the banking sector remained in the grips of a credit crunch. A quarterly Fed survey showed that 70% of U.S. banks increased loan rates due to costs from funding commercial and industrial borrowing. The credit crunch worries left investors wary of dollar fallout causing the dollar to fall against a basket
While last week's better than expected US jobs report has tempered expectations for a June Fed rate cut, the economy still remains weak and has yet to bottom out. Analysts continue to believe that there is ongoing downside risk to the U.S. economy. Nonetheless, traders anticipate that the Fed will leave its main interest rate unchanged at 2% through October, based on futures prices on the Chicago Board of Trade.
Looking ahead to today, there will be no significant news released from the U.S. markets. The greenback is expected to weaken vs. the EUR ahead of this weeks' crucial U.S. fundamental data. On Wednesday, we expect the Unit Labor Costs, the Nonfarm Productivity and the Pending Home Sales indices. Remarks from Fed Governor Kroszner, and the former Federal Reserve Chairman Greenspan will also be closely monitored
The EUR appreciated vs. the USD yesterday as the single currency tested offers around the 1.5520 and was supported around a rate1.5425.
The European currency ignored data released yesterday, that showed the Sentix Investor Confidence index unexpectedly weakened in May. This indicator measures investor confidence towards the Euro-zone economy. ECB President Trichet reported that growth, as well as the inflation in the Euro zone, remain significant. Local Consumer Prices rose by 3.3% in April, below the prior month's reading but still well above the ECB's target of about 2%.
Now, while food and energy costs are on the rise, most traders believe that the ECB will keep its benchmark rate unchanged at 4.0% this week.
The final Services PMI figures are due for release today and any revisions are likely to be negative. The central bank has a tough decision ahead of them and yesterday's record high Oil prices are not helping. Economic growth has taken a turn for the worse and if not for the strong inflationary pressures, the European Central Bank would have probably cut interest rates already. However inflation is rampant and because of that, it is not clear which way Trichet will sway on Thursday. Traders will be hanging onto his every word, looking for a hint of a possible breach in his hawkish stance.
Also today we expect Swiss Consumer Prices. The price growth is expected to have accelerated in April. The EUR may further extend its gain versus the greenback on speculation the European Central Bank will hold its main refinancing rate at a six-year high this week to control inflation.
The JPY appreciated vs. the greenback yesterday as the pair tested bids around the 105.10 level and capped out at around 105.45. Liquidity was reduced on account of the ongoing Japanese Golden Week holidays and is likely to continue to be low in Tokyo for the duration of the week.
Investors worry over a recent rise in the JPY as it makes Japanese products less competitive abroad and hurts the value of overseas sales when translated back into the Japanese currency. With steady gains primarily against the Dollar, much of the Yen's bullish movement could be contributed to the repatriation of overseas earnings by Japanese companies into the local economy. This has had a positive effect on major JPY currency pairings, as the rising turmoil in the market is leading to more investment in the Japanese currency.
Today, there is no important economic news expected to be released in Japan, however, we should see an active JPY trading in response to key U.S and Euro-zone data releases. The near term outlook for the JPY remains quite bullish as a U.S economic redemption is unlikely to occur anytime soon and recession fears will continue to drive risk aversion.
The pair is in the middle of a bullish corrective move after bottoming out close to the 1.5350 level at the beginning of the week. The 4 hour Slow Stochastic is showing positive slope with no crosses which indicate the possible continuation of the bullish trend. Going long appears to be preferable today.
The moderate bearish price movement continues within the bearish channel which still has yet to be breached on the daily chart. The RSI is floating near the 50 level and the Slow Stochastic is pointing to the continuation of the bearish movement. Next testing point should be around 1.9650. Going short appears to be preferable today.
There is a very accurate narrowing bullish channel on the daily chart, as the pair now floats near the bottom barrier of it. The Slow Stochastic is indicating that the chances of a bearish breach are quite slim and that the bullish momentum still has steam in it. A failed bearish breach through the 104.00 level will probably unleash a fresh bullish move.
The pair is still riding the bullish momentum which was created by the sharp breach through the bullish channel of the daily chart. The Slow Stochastic of the 4 hour chart is showing no crosses in the horizon, and the bullish momentum appears to be intact. Going long might be a good choice today.
The Wild Card
After a sharp correction to the 112.00 area Oil is now making a violent return. The momentum is extremely bullish again and the very strong resistance level of 119.50 was breached. This is a great opportunity for forex traders to catch the fresh bullish trend very close to the initiation signal.
|09:00||EUR||German Ifo Business Climate||110.7||110.5||111.2|
|10:00||EUR||ECB President Draghi Speaks||*||*||*|
|11:00||GBP||CBI Realized Sales||13||18||-|
|13:30||USD||Core Durable Goods Orders||m/m||0.1%||0.6%||-|
|13:30||USD||Durable Goods Orders||m/m||2.2%||2.1%||-|
|15:30||USD||Natural Gas Storage||24B||-||-|
|00:30||JPY||Tokyo Core CPI||y/y||1.0%||2.8%||-|
|00:30||JPY||National Core CPI||y/y||1.3%||1.4%||-|
|05:30||JPY||All Industries Activity||m/m||1.0%||-0.5%||-|