26/09/'07 - US Durable Goods

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Economic News

USD

The greenback fell to a new all time low of 1.4160 against the EUR on the back of continued aggravation in the US economy. It seems that everybody is selling dollars as the outlook for consumer spending becomes gloomy with each passing day. Consumer confidence dropped to a 2 year low in the month of September when sales of existing homes fell to a 5 year low. The deterioration in the labor markets, tight credit conditions and rising energy prices were the major reason for the last market figures. The drop in confidence and home sales only reinforces the need for the Federal Reserve to continue lowering interest rates. We expect another 0.25% - 0.50% of easing by the end of the fourth Quarter followed by another 50bp before the middle of next year. The next Non-Farm payrolls report is not expected to be "flattering” either. On top of the layoffs that have already been announced in the financial sector, workers at General Motors held their first nationwide strike in 25 years in addition 73,000 workers have been displaced and 30,000 are expected to be fired. If this is not resolved soon, it will have a meaningful impact on non-farm payrolls which will naturally dovetail into further weakness for the US economy which only will weaken the USD even more than it has already. We think that in this case a recession is only a matter of time until we will see it on the statistics figures and the US economy won't be able to avoid this unpleasant situation. Meanwhile the only piece of good news was the Richmond manufacturing index which jumped from 7 to 14 in the month of September to the highest level since April 2006. The manufacturing sector is expected to be one of the biggest beneficiaries of the dollar weakness which is why today's durable goods may not be as bad as analysts are currently predicting thanks to the weak USD which will make the US exports more attractive then ever.

EUR

Economic data out of Europe continues to get worse and if the EUR does not stop rising, the European Central Bank will be forced to take an action and to intervene in the currency. Investors should not forget that the EUR topped out in late 2004 after Trichet called the moves brutal and he may have to do so again as German business climate fell to a 19 month low in September. This is a result of deteriorating credit conditions, a strengthening currency and tight monetary policy. As an export dependent nation, the Euro-zone has a lot to lose if the EUR continues to rise as exporters are already experiencing the negative effects because their commodities are suddenly too expensive, and buyers all over the world prefer the American merchandise to the European.

The only major benefit of a strengthening currency is lower inflationary pressures. We are already seeing the initial impact with import prices falling for the first time in nearly 2.5 years. Less inflationary pressure means less pressure on the ECB to raise interest rates. If we see a material slowdown in economic data, softer inflation may actually give the central bank the flexibility it needs to begin talking about lowering interest rates. This should still be a few months away, but it is a factor that is certainly worth watching. There is not much on the Euro-zone calendar today, but Switzerland has leading indicators due for release which are expected to be weaker.

JPY

The JPY strengthened against a basket of currencies as investors were prompted to diversify away from risky carry trades. Yesterday we saw the release of Japanese Trade Balance which failed to provide any support for the Japanese Yen. The Traded Balance rose from 671.2 bln to 743.2 bln for the month of August and did not affect the market. Tomorrow will be a significant day for the JPY as Core CPI , Overall Household Spending, Industrial Production and Retail Sales are due to be released and all of them forecasted to be better then last years figures which may strengthen the JPY against the majors .

It seems that the Japanese economy is right back on track and traders need to consider the Japanese market as an attractive alternative to invest their money in.


Technical News

EUR/USD

The pair is starting to show the first bearish signals on the daily charts as a double bearish cross combined with and the RSI breach of over 80 are forming. The hourlies support the bearish notion and a correction to the 1.4060 is quite possible.

GBP/USD

The cable is trading in a wide range lately and is showing no significant clear direction. It is now in the middle of a downtrend initiated at 2.0300. The hourlies are showing bearish momentum, as the dailies support the bearish notion. Next target price might be around 2.0080.

USD/JPY

The pair has been dropping for the past week from 116.30 to 114.00 and is now consolidating around 114.90. The sentiment is mildly bearish as the negative momentum on the 4 hour chart is growing. A violent breach through the 114.00 will validate the bearish move and probably take the pair to 113.50.

USD/CHF

After several attempts to break the 1.1640 the pair is showing local bullish momentum and is now trading around 1.1690. The hourlies are showing a bullish cross on the slow stochastic and the RSI is floating around 50 which indicate that the bullish momentum is slowly growing. Next target price should be around 1.1730.


The Wild Card

Crude Oil

There has been a massive breach through the bottom area of the channel in the 4 Hour chart. Oil is now trading at 79.80 and showing the first strong bearish sentiment in over a month. This could be a great opportunity for Forex traders to go short on a very good entry point that has potential to very profitable in the long run.