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Monday, 24 Mar 2008
Will the USD Corrective Move Continue?
Last week, the greenback recovered against all of the major currencies. The USD touched a two week record against the EUR and finished Friday's session close to the key psychological support level of 1.54 USD. The greenback appreciated generously against the JPY as it added 3.1% to its value from the previous week of trading. The cable (GBP/USD), also had its turn to feel the dollar bullishness as the pair depreciated 2.7% from the starting rate from one week ago.
The Greenback recovered mainly as a result of the Federal Reserve's act of cutting the key interest by 0.75% despite analyst's expectations of a slightly more aggressive cut. Interestingly enough there were some members of the FOMC board who voted for a less aggressive cut than the one which resulted in the new "slim" 2.25% rate, which gave the investing public an alternative picture of the US economy; one that might not be in as much trouble as initially forecasted. Surely, with the horrid state of the housing and credit markets in the US in the recent future, any bullish behavior from the Dollar is welcomed with open arms. More surprising than the change in the greenback trend was the rate at which it occurred. The currency essentially erased three weeks of significant losses in just over 4 days of trading, proving once again that investors still have some belief in the American juggernaut.
The greenback boom was also boosted by the release of many other positive figures last week. The TIC Net Long-Term Transactions report of Monday came back at a 9% improvement from last month at 62B. Also the monthly Philadelphia Fed Manufacturing Index showed a good improvement from last month and the CPI did not disappoint forecasters. Those and other positive figures released indicate a serious improvement in the biggest economy in the world. It could be the Fed's interruption which began last month, it could be the sweet positive silence before the volatile storm to come as recessionary expectations still linger, but one thing is almost certain, positive indicators will continue to push the USD up for the short term. Looking ahead, US Existing Home Sales is due to be released today at 14:00 GMT to a small drop from last years figure. Today's trading is expected to stay calm as a result of the Easter holiday.
Last week, most of the EUR behavior came from reactions to the news released from the United States. The 15-nation currency is riding a bearish trend since the announcement of the US rate cut. The greenback recovery after the rate cut encouraged many investors to short the most traded pair trying to benefit from the psychological impact of the positive news from the US. As a result of that, the EUR/USD pair closed the trading week very close to the rate of 1.54. The falling trend continued at the start of this week's subdued holiday session as the pair traded below the rate of 1.54 USD.
Adding to the dollar bullishness was the lack of important news from the European market last week. Eurozone news might have offset the bearish trend, or at least slowed it down. Instead the only significant European event (EU Trade Balance) came back well below expectations and only legitimized the falling trend of the pair.
Looking ahead, traders should pay close attention to this week's economic news and figures released from both Atlantic coasts. Expectations show two differing trends as there are positive figures from the US expected, which will help push dollar buying. Speculation about the deep damage of the exporting sector in the Eurozone is gaining steam as a result of the rising volatility in the slumping EUR. Moreover, there are many worries in the EUR regarding the current interest rate and the inflation level. Still though, without fail, ECB President Jean-Claude Trichet was steadfast about his hawkish stance and took no action.
Most of the figures due to be published this week are related to the German export/import sector and economy. The German Ifo Business Climate Index is to be released on Wednesday and the German Import Price Index m/m release on Friday should supply much needed information about the short term direction of the European currency which we expect to see hold its bearish course at least for the next few days.
The JPY stopped gaining ground last week due to positive figures released from the US. The Japanese currency was forced into a losing trend against the greenback, like most of the major traded currencies, with the Fed's announcement of the new 2.25% interest rate. Carry trades halted and the JPY fell from its 12 year record seen at the beginning of last week. However, while the other currencies influenced by the greenback recovery stayed flat, the JPY continued to gain ground against the EUR and GBP and a basket of other currencies.
The JPY has become hard to predict for analysts, as the general global market has proven difficult to understand lately. It is safe to say that Japan, the world's second largest exporter will be the country whose currency is most affected by the global economic outlook over the next few weeks, as it tries to maintain some stability in this uncertain time.
This week, the yearly Core CPI and the yearly Retail Sales are due for release. The core CPI is forecasted to rise to 0.9% showing an expected increase in the nation's inflation. The yearly retail sales report is forecasted to show a reading of 2.1% which is a step up from the last reading of 1.3%. This rise shows that people in Japan are buying more goods, which feed the worries of stagflation. The Japanese economy and the JPY were extremely sensitive last week to global economic news and should be no different this week as traders should follow news coming from the US in particular.
There is a bearish channel forming on the 4 hour chart, as the pair now shows moderate bearish momentum and is floating in the middle of the channel. The slow stochastic is pointing on additional room, for the correction, and the next target price might be 1.5300.
The cable has breached through the 1.9810 which a key Fibonacci level and has validated the next bearish move. The RSI is heading to the 20 level and the slow stochastic shows no cross. It appears that going short with tight stops might be a good choice.
The pair is showing a strong bullish break on the daily chart and the RSI is floating at 50. The Bollinger bands are still very wide, and no crosses are seen on all time scales of the Slow Stochastic. This indicates that there should be no up coming reversal move, and that the bullish trend might continue. Next target price might be 100.50.
There is a very tight bullish channel forming on the 4 hour chart as the pair now floats in the mid section. The slow stochastic is showing a positive slope formation and the daily chart is showing very wide Bollinger bands. It appears that the bullish momentum will continue, probably up to the top level of the channel at 1.0230.
The Wild Card
Gold is in the middle of a very violent corrective move and is now traded around the 909.00 level. The hourly oscillators are extremely bearish, and the daily studies are showing that there is much more room to run. forex traders can use this strong bearish momentum to swing into the very strong corrective move with relatively big profit potential.
|23:30||USD||FOMC Member Williams Speaks||-||-||-|
|00:30||AUD||AIG Construction Index||53.8||-||-|
|01:01||GBP||BRC Shop Price Index||y/y||-1.4%||-||-|
|02:00||AUD||HIA New Home Sales||m/m||-1.8%||-||-|
|02:01||JPY||Monetary Policy Statement||-||-||-|
|08:00||EUR||German Industrial Production||m/m||0.7%||-||-|
|08:01||JPY||BoJ Press Conference||-||-||-|
|08:45||EUR||French Trade Balance||-3.3B||-||-|
|09:00||CHF||Foreign Currency Reserves||540B||-||-|
|10:30||GBP||Manufacturing Production m/m||m/m||-0.8%||-||-|
|10:31||EUR||German 10-y Bond Auction||0.69|1.2||-||-|
|16:00||GBP||NIESR GDP Estimate||0.5%||-||-|
|16:30||USD||Crude Oil Inventories||4.0M||-||-|
|19:01||USD||10-y Bond Auction||2.24|2.7||-||-|