16/10/'07 - Crude oil and Greenback flying in opposite directions.
Yesterday the greenback slipped sharply against the EUR on the back of significant US stock market losses. Nevertheless it managed to gain back some much needed ground against the EUR. The USD was trading at 1.4241 against the EUR yesterday but it managed to rally later on and break the key 1.4200 mark. The main driver of this small greenback recovery was the release of the Empire State Business Conditions Index which surprised on the upside coming in at 28.8, beating the expected figure of 13.0. This Index measures the general business conditions of manufacturers in New York State and it was the only significant US economic event that was released yesterday. This positive data also helped the greenback find some reprieve against the GBP, as although it did not strengthen against the British currency it did manage to hold its ground which is a positive sign as the GBP has been on a sustained bullish rampage against the greenback. On Friday, there was also a string of positive US data, however the greenback fell sharply as the unexpectedly strong PPI figure once again raised inflation concerns for the Fed. However it will be important to monitor inflation as the previous rate cut by the Fed seems to already be bolstering producer prices, so it will be a major concern for the US economy if this results in a significant rise in consumer prices. On the back of last week's FOMC meeting the Fed was expected to once again slash its key interest rate. However, this expectation has been offset by the latest string of robust US data. Yesterday's strong Business Conditions Index reinforced the sentiment that the Fed will not cut the interest rate at the end of this month thereby boosting the greenback.
Looking ahead to today, there is more significant news to be released from the US, kicking off with Industrial Production which is expected to release slighlty lower than last month's figure of 0.2% at 0.1%. Also, Treasury Secretary Paulson will speak today about the housing market, which will be closely followed by investors for hints on the Fed's future monetary policy as a another monetary easing may be what is necessary to help the struggling housing sector. If the recent trend of US data is anything to go by then today's news events, including the Capitalization Rate and the NAHB index, may very well spring another surprise on the upside. However with the current negative USD sentiment and with the ever rising Oil prices, the greenback is likely to remain under pressure.
Yesterday, the EUR maintained its bullish surge against the USD and the JPY in particular; however it did lose some of its gains on the back of the positive US data. The strong EUR is definitely beginning to be a concern for the European economy as it will dampen growth in the long run and it seems that this topic will be raised in the upcoming G7 meeting. The main reason why the strong EUR will dampen growth is due to the fact that European exporters are finding it harder to compete against the US and the Chinese in the global trading market. Therefore cracks are beginning to appear in the European economy as indicated by recent data because the German economy, which is a major player in the EU, is heavily dependant on exports. Today, the most significant news to be released from the Eurozone will be the German ZEW Economic Sentiment, which measures institutional investor sentiment, this figure is expected to release lower than last month's figure of -18.1 at -22.0. However any negative data is unlikely to cause the EUR to reverse as it has shown its resilience in recent weeks and with the greenback under pressure, the EUR should stay on its bullish path.
The JPY experienced a whipsaw trading day yesterday, as it fell to 117.91 against the USD on the back of stronger equities. However as stocks began to experience significant losses the JPY recouped and it touched the 117.09 level against the greenback. The US stock market took a tumble yesterday after fresh concerns were raised about global credit. The way the JPY traded yesterday gives a strong indication that there is once again a correlation between equities and the JPY crosses. The fall of US stocks caused investors to drop their carry trade strategy and seek a safe-haven investment, thereby causing the JPY to rally after being sold-off sharply. However in the longer term all the JPY crosses should remain bullish as it seems that carry trades will remain the preferred strategy by investors, as the BoJ is no position to hike its interest rate in the near future. Nevertheless, traders should closely monitor the performance of equities as the correlation between stocks and the JPY crosses has been evident over-and-over again and the future direction of the JPY may very well depend on the performance of US stocks.
The pair is floating in a relatively tight range for several days now, as can be seen on the 4 Hour chart. No significant break through the 1.4240/1.4260 range has occurred, and the hourlies continue to deliver mixed signals. The daily chart is giving a moderately bullish sentiment with a bit more room to run.
The 4 hour chart notes that a tight bearish channel is forming and traders should seek the breakout to get into the market at a good entry point for a long position. The daily charts are delivering mixed signals.
There is a local consolidation around 117.40, after a moderate rally. On the daily and 4 H chart indicators seem to be sailing in neutral territory as usually indicates an upcoming breakout of the neutral channel barriers which is located at 117.00 - 117.60. Hedging seems to be the right strategy until the breakout direction will be determine.
USD-CHF has had a sharp fall during the day and it is coming close to its important Support of 1.1760-50, the lower end of the 1.1900 and 1.1750 range within which the pair has been trading in the last two weeks. The pair could hold at its Support near 1.1760 for the next few hours, however a break below that would result in the pair becoming bearish. If that is seen, then there could be a fall towards 1.1710-00 later on in the day or tomorrow.
The Wild Card
Over the past two weeks there is an extremely accurate upwards channel forming on the 4 Hour chart. Oil has made a significant move and is displaying a healthy consistent move up with plenty of room to run. The next significant resistance level is around 88.00 which provides forex traders with a great opportunity to jump in to this massive uptrend with large momentum still steaming.