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Monday, 14 Mar 2011
Yen Strengthens in Response to Nation's Worst Disaster since WWII
Speculators have flocked to the yen following the devastating earthquake and Tsunami that struck Japan on Friday. The yen is expected to continue to strengthen as insurers are forced to repatriate funds to pay billions of yen in insurance claims.
| EUR/USD | GBP/USD | USD/JPY | USD/CHF | AUD/USD | EUR/GBP | |
| Daily Trend |  | | |  | | |
| Weekly Trend | | | | | | |
| Resistance | 1.4035 | 1.6170 | 83.30 | 0.9400 | 1.0190 | 0.8765 |
| 1.4000 | 1.6135 | 82.85 | 0.9365 | 1.0145 | 0.8735 | |
| 1.3965 | 1.6100 | 82.50 | 0.9320 | 1.0110 | 0.8700 | |
| Support | 1.3910 | 1.6040 | 81.80 | 0.9250 | 1.0050 | 0.8645 |
| 1.3875 | 1.6005 | 81.45 | 0.9215 | 1.0015 | 0.8605 | |
| 1.3850 | 1.5975 | 81.10 | 0.9180 | 0.9990 | 0.8570 |
Economic News
USD - US Dollar Volatility Continues
In Friday's volatile trading the US dollar showed that it is still a currency that traders use as a safe haven asset. Traders' knee jerk reaction to the devastating earthquake was to buy dollars and yen as market participants attempted to assess just what type of impact the devastation would have on the both the Japanese and the global economy.
As the day progressed and equity markets recovered from the initial shock, the dollar began to ease and released its gains versus the majors. Following the announcement from Europe to increase the size of the European bailout, the dollar fell sharply and closed down for the day.
This week's trading should continue the trend of increased volatility in the major pairs. In the US, traders will be focused on Tuesday's Federal Open Market Committee Meeting. The Fed is not expected to make a change to the ultra-low US interest rate.
We may expect a continuation of the current Fed comments with little changes to the Fed's statement. The Fed is expected to remain dovish on monetary policy, a stark contrast their European and emerging market counterparts. Other notable events that may impact the dollar will be US inflationary data released both on Wednesday and Thursday.
EUR - Euro Builds on Friday's Gains
The euro began the week on a strong note following the European Summit that ended with mixed results to address the European debt crisis. One takeaway from the meeting of European leaders was an increase of the lending ability of the EFSF to 500B euro.
However, the European Central Bank (ECB) was disappointed by the outcome of the meeting as EU leaders refused to begin buying previously issued sovereign debt of EU nations that the ECB has previously purchased. The group did agree to purchase new debt issues only.
The refusal of the EU leaders to begin buying previously issued debt will leave the burden on the ECB as the central bank continues to buy bonds on the open market at times when buyers are scarce and yields are rising. This may put more pressure on Portugal to seek assistance from the EU in order to stem the rising yields in Portuguese sovereigns.
Also disappointed from the meeting was Ireland. The recently bailed out nation was unable to convince the stronger EU nations of Germany and France to lower the interest rate charged unless Ireland reduced its ultra-low corporate tax. Ireland refused to budge on this issue. On the contrary, Greece was able to obtain a 1% reduction in the loans it is receiving from its bailout.
This week traders will continue to eye the European debt markets for rising yields on sovereign debt. The Eurogroup will also meet this week.
JPY - Yen Strengthens in Response to Nation's Worst Disaster since WWII
The yen has significantly strengthened since earthquake struck Japan followed by devastating tsunami on Friday as speculators bought the yen with expectations for insurers to begin repatriating yen to pay billions in insurance claims. Traders were also purchasing yen as a safe haven currency in response to the heightened risk aversion in the markets.
The yen was the strongest performer in the FX markets on Friday and that trend looks to continue with the opening of trading in Asia as the USD/JPY is currently trading down at 81.30 from Friday's close of 81.84.
While the knee jerk reaction of the market was to buy yen on expectations of insurers repatriating funds back to Japan, a larger looming issue may be lurking should the major credit rating agencies begin to further downgrade Japan's sovereign credit rating.
The Japanese government already shoulders a debt burden of 200% of GDP and the debt should increase as the government deals with the fallout and cleanup efforts from the country's worst crisis since WWII. Government debt levels may rise if the government is forced to raise new funds to finance the aftermath of the disaster.
This morning the USD/JPY breached the 80.90 level and last bastion of support is the October 2010 low of 80.20. A move below this price would test the all-time low for the pair at 79.75. The pair last traded at this price in 1995.
Crude Oil - Crude Prices Drop on Demand Outlook
The price of spot crude oil continues to fall and is trading at its lowest level since the beginning of March. The most recent decline comes on expectations of reduced demand from Japan following the earthquake and tsunami.
Following the shutdown of Japanese factories and refineries, Japanese demand for crude is expected to drop dramatically and traders have been quick to sell crude oil short.
Also affecting the price of spot crude oil are limited protests in Saudi Arabia. A day of rage was planned but was prevented by Saudi security forces and police. This is in contrast to last week's protest that erupted in gunfire to disperse the banned protests.
Traders should expect further easing in crude oil prices as tensions cool in the Middle East. However, increased fighting in Libya may prompt a rebound in spot crude oil prices.
Technical News
EUR/USD
Despite last week's declines in the value of the pair, the trend appears remain intact with a bias to the upside. The weekly chart shows the weekly low at 1.3750 coincides with the rising trend line off of the January low. This level should serve as the initial support for any decline. To the upside, resistance is found at the overnight high of 1.3980 and this year's high at 1.4035.
GBP/USD
Thursday's close below the February through March uptrend signals more weakness for the pound. Support levels that stand out are at 1.6030, followed by 1.5970. Further declines could lead to the weekly support at 1.5750. Resistance is located at 1.6120 and the high of 1.6340.
USD/JPY
High volatility characterizes the pair. At the opening bell the USD/JPY touched as low as 80.63, then moving higher to 82.43. The pair's Average True Range is typically only 50 pips. Resistance is found at Friday's high of 83.30 which is reinforced by the 200-day moving average. This level should be a good opportunity for an entry short.
USD/CHF
A bearish flag pattern has formed on the daily chart and a false breakout occurred earlier this morning. Traders should be looking to short the pair below 0.9250 with an estimate of the move based on the chart pattern suggesting a move lower to the 0.8975 level.
The Wild Card
Crude Oil
The commodity is off of its yearly high by 7% and could continue to fall. Should the price move below the $99 support level, forex traders may expect further declines to the $96.30 mark with a possible extension to $93.
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Print| # | Time | $€£¥ | Event | Per. | Prev. | Fore. | Act. | Imp. |
|---|---|---|---|---|---|---|---|---|
| 05/28 | ||||||||
| 00:30 | JPY |  Household Spending | 3.4% | 2.5% | - |  | ||
| 00:30 | JPY | Unemployment Rate | 4.5% | 4.5% | - |  | ||
| 00:50 | JPY | Retail Sales | 10.3% | 6.2% | - | | ||
| 05/29 | ||||||||
| 07:00 | CHF | UBS Consumption Indicator | 1.22 | - | - | | ||
| 07:00 | EUR | German Import Prices | 0.7% | - | - | | ||
| 11:00 | GBP | CBI Realized Sales | -6 | - | - | | ||
| 14:00 | USD | S&P/CS Composite-20 HPI | -3.5% | -2.7% | - | | ||
| 15:00 | USD | CB Consumer Confidence | 69.2 | 69.6 | - |  | ||
| 23:45 | NZD | Building Consents | 19.8% | - | - | | ||
| 00:15 | JPY | Manufacturing PMI | 50.7 | - | - | | ||
