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Monday, 7 Jul 2008
Will the G8 Summit Help Strengthen the USD
The USD had a trading session last week that could be classified as many different things. Volatile, bearish, bullish, liquid, or just plain lucky are all correct for defining last week's dollar activity. At the beginning of last week's trading, investors hinted at the possibility of a weakening dollar, as rising oil prices and growing US recessionary trends were hurting the dollar. The shortened holiday week, along with a batch of important and unimpressive US data, headlined by Non Farm Payrolls (NFP) heightened concerns that the USD was headed for some bad territory. Wednesday's release of ADP's estimate of NFP sent waves throughout the market and pushed many traders into long Euro positions as the oft traded EUR/USD pair marched toward record highs to 1.60. Also adding to the bearish trend in the dollar, was the anticipated rate hike for the Euro. The Euro-Zone interest rate was to be released on the same day as NFP along with the US unemployment rate and an ECB Press Conference following the rate statement. NFP returned for the 6th straight month with negative numbers as 62,000 jobs were reported lost in June. The number, though poor was 17K less than the ADP figure which one day earlier single handedly moved the market in a bearish dollar direction. Then luck kicked in as a very 'tentative' ECB president announced that another EUR rate hike was not feasible anywhere in the near future, and suddenly 62K job losses in America didn't mean much as the dollar within minutes took a complete 180 degree turn and by days end the EUR/USD dropped by 200 pips. While America celebrated the 4th of July, its seemed like the rest of the world spent Friday unwinding long EUR positions, and the EUR/USD closed just under 1.57.
The question now becomes if the current Dollar "strength" will continue, despite the worrying outlook of the US economy. An optimistic Dollar trader will look at the uneasy situation with the EUR and GBP as an indicator for positive USD movement. Though there is still plenty of important US data to be released in July, the greenback has already proven it can take bad data and still make gains, as long as its major rivals are stuck in a similar predicament. On tap this week we can expect another mediocre set of US data, with Pending Home Sales, Unemployment Claims, Trade Balance and the Preliminary Michigan Sentiment all expected to be released. The first big test for the Dollar will be the housing numbers released on Tuesday as Pending Home Sales is set to drop 2.5%. If the USD can pull through poor results and continue to move against its rivals, it will likely do so throughout the week.
Today the USD is absent from scheduled news, however with energy prices and the US stock market driving much of the financial speculation worldwide, it is safe to say that the dollar will contribute a lot to market volatility. Look to the full day G-8 summit for clues into the future monetary policy from Fed Chairman Ben Bernanke.
The Euro took a big hit last week both fiscally and psychologically in the minds of many traders. It has been well documented over the last year or so that the stance of the European Central Bank and its president jean-Claude Trichet has been a hawkish one. Throughout the latter portion of 2007 coming into the current calendar year the hawkishness built a strong investor confidence in the EUR as it broke record highs versus several currencies most notably against the USD where it seemed to break new highs each week in certain stages. With the rising concern over inflation in the Euro Zone in recent months, officials from the ECB began to change their tone, hinting at a possible rate hike. When Trichet announced his intentions of a 'possible' cut, investors awaited an even bigger EUR push. What at first looked to be a bold change in monetary policy eventually became so predictable that every day the ECB waited the implementation of such a hike became less affective. On Thursday the ECB raised the interest rate to 4.25%, and the market barely moved an inch, even with the report of 62,000 more jobs lost in the US economy in June. Following the rate statement Trichet spoke at an ECB Press Conference and put to rest any chance of the EZ seeing another hike any time soon. The market responded with a bang, only it was to the harm of the EUR, as it lost over 40 pips versus the GBP and the JPY and over 100 pips against the dollar as the pair sank to 1.5780. Friday was no better as the important German Factory Orders came back at a unexpected1% loss last month, 2% down from expectations, as the EUR.USD pair ended the weeks trading just under 1.57
The 15 Nation currency now looks primed to lose a bit more, as fundamental data expected this week from the Euro Zone is expected to be less than favorable. German Industrial Production, German Trade Balance and French Industrial Production along with two more key speeches by Trichet will headline an important week for the EUR, as it looks to prevent any further damage from last week. Overnight trading didn't help much either as the market opening brought with it a 65 point drop within the first 6 hours of trading against the Dollar.
Today, we can expect Sentix Investor Confidence and German Industrial Production as well as news from the G-8 summit. Confidence numbers are forecasted to fall off from last months mark, and Industrial info will likely change with a very small gap. If numbers are worse than expected it will only add to the already bearish Euro.
The JPY saw mixed results last week, as the main focus for Forex traders was directed toward the EUR and the USD. The Japanese currency saw gains against the Euro and the Swiss Franc, while seeing bearish trends against the Pound and the Dollar. The JPY had a full week of news that did little to improve upon the already tenuous Japanese economic outlook. Results were mixed as the Tankan Large Manufacturers and Non-Manufacturers Indices both saw gains along with the annual monetary base figures, while Manufacturing PMI, Housing Starts, Average Cash Earnings and Leading Economic Index all saw negative results. The Bank of Japan faces a real problem as commodity and material prices rise worldwide and consumer confidence falls. Japan's exporting business is crucial to the country's financial success and in turn to the JPY. With a low dollar and thus high local production costs that it will take some time before the Japanese economy will gain positive ground once again.
The commonly held theory is that elevated currency levels spur growth and have an inflationary effect, leading to higher Interest Rates. Meanwhile, the BoJ officials remain reluctant to increase liquidity in fears of fueling further inflation.
Further this week a few Nippon's indicators will shed light on the state of the economy: The M2+CD Money Supply, Household Confidence, Industrial Production, CGPI, Current Account and Core Machinery Orders. Will these indicators have the desired effect on the Yen or overlooked as last week, is up for the traders to decide.
Crude Oil -
Towards the end of the previous week the Crude Oil futures climbed to a record $145.85 a barrel on speculation tension in the Middle East may worsen.
Such high Crude prices affected the US consumers. The fewest Americans in 3 years will traveled over the July 4th weekend as record gasoline prices and a slowing economy force consumers to cut spending. U.S. gasoline demand, which typically rises at this time of year, fell a 10th time during the previous week.
This Monday, however, Oil dropped below $144 a barrel in Asia on signs of easing tensions over Iran's nuclear program. Iran on Friday gave an undisclosed response to an international offer of incentives if it suspends uranium enrichment, a central part of its nuclear program that can produce either fuel for a nuclear reactor or the material for a warhead.
A positive response could open the way to renewed negotiations that might help cool tense exchanges over the possibility of a military strike by Israel or the U.S. on OPEC's second largest oil producer. Traders worry such a strike could disrupt already tight oil supplies.
The pair is in the middle of a very strong downtrend and is testing fresh lows on a daily basis. The support level of 1.5650 has been breached and a bearish cross on the 4 hour cart's Slow Stochastic suggests further bearish move is impending. Going short might be preferable today, as the next target price might be around 1.5550.
There is a very accurate bearish channel forming on the 4 hour chart, as the cable is now traded around 1.9750. A breach through that level will validate a very strong bearish move with a potential target price of 1.9670. Going short might be a wise choice today.
After a moderate bearish correction, the pair has resumed its bullish trend. The Slow Stochastic on the daily chart is showing that the trend has plenty of room to grow, and a fresh cross on the 4 hour's Slow Stochastic supports that notion. Going long appears to be the right strategy for today.
The pair has breached through the Fibonacci key level of 1.0310, and all oscillators on the 4 hours chart are indicating further bullish movement. The hourlies Bollinger Bands are showing that the price has crossed its upper border, signaling that the current trend should continue, as the pair's new target price might be 1.0370.
The Wild Card
The very accurate bullish channel has been breached, and gold is now in the middle of its bearish corrective journey. All oscillators on the daily chart are indicating that gold prices should further drop Forex traders have a great opportunity to enter a very promising bearish movement.
|09:00||CHF||KOF Economic Barometer||99.8||99.9||-|
|10:00||EUR||Italian Retail Sales||m/m||-0.1%||0.1%||-|
|11:00||EUR||CPI Flash Estimate||y/y||0.2%||0.2%||-|
|11:00||EUR||Italian Prelim CPI||m/m||-0.1%||0.2%||-|
|00:45||NZD||Overseas Trade Index||q/q||1.5%||-||-|
|01:00||NZD||GDT Price Index||14.8%||-||-|
|01:00||USD||Total Vehicle Sales||17.6M||-||-|
|01:30||AUD||AIG Manufacturing Index||50.4||-||-|
|03:35||JPY||Final Manufacturing PMI||51.9||-||-|
|05:45||JPY||10-y Bond Auction||0.40|2.8||-||-|
|06:30||AUD||RBA Rate Statement||-||-||-|