03/07/2007 - REVERSALS? We think not!

[B]Economic News [/B]

[B]USD [/B]

Yesterday was a particularly quiet day on the release front with the stats published being the June ISM Factory data which came out positive; above the forecast of 55.0 at 56.0. The orders index rose 0.7 to 60.3 and prices paid dipped nicely to 68.0 and just below forecasts of 69.0. The 3-month average is now rising and there are early signs of the recovery that had been forecast for Q3-Q4 but production is still around 13% lower than a year ago and the housing market is obviously a lot lower. The USD continued to sell off overnight against most of the currencies on lingering concerns that problems in the sub prime mortgage market would spill over into the rest of the economy and will significantly affect traders’ mindset. Concerns were also raised that rating agencies were masking losses in the market by not cutting credit ratings; the highest default ratings on home loans in a decade have reduced the prices of some bonds by 50%. The fall in the USD was particularly notable against the GBP which rallied to a 26-year high, while the EUR also rose to within half a cent of its record high against the USD. However, the USD ignored the June ISM data which showed the manufacturing index rose to 56.0 from 55.0 the previous month, slightly higher than forecast. With tomorrow being a U.S. bank holiday we shouldn’t get the same degree of weakness, when tomorrow’s trading , should provide consolidation and most probably at Thursday we will wait for the BOE and ECB rate decisions. Who knows this could even last into next week given that the pullbacks since the Dollar highs have been so rare which tends to point that might bring us a large correction now before the next USD drop .

[B]EUR [/B]

After breaking out to the upside on Friday, the Euro ended the US trading session approximately 50 pips away from its all-time high. So even though the European manufacturing PMI numbers were net disappointing with only Germany putting in a positive number to save face, the level of growth still remains stronger. This allowed the EUR to resume the uptrend directly and approach the 1.3681 level against the USD. The GBP pushed above the 2.0131 high and this keeps the medium term targets at 1.40-1.41 EUR/USD and 2.0505 GBP/USD well in-line to be met later this month before the August summer doldrums take us into a correction. Euro zone June PMI manufacturing was revised up to 55.6 from 55.4, which had already beaten expectations. However, both France and Italy reported declines, with Germany responsible for the overall increase. UK June house prices (Nationwide) rose a higher than expected 11.1% yr, up from 10.3% in May. This is the highest rate since January 2005, however house price growth is expected to slow later this year. UK June PMI manufacturing fell to 54.3 from 54.7. Export orders improved but overall new orders fell. Generally it seems that we are in the middle of a significant positive move of the EUR and GBP against the USD however we are already near records which might be breached. In contrast to the US dollar, traders were committed to buying the British pound today and nothing could stand in their way. Despite news that a burning car hit an airport terminal in Glasgow London this weekend and manufacturing conditions deteriorated in the UK, yesterday the GBP managed to hit a 26 year high. Part of that strength is certainly a result of dollar weakness since the GBP is down against the CHF, JPY and EUR, however the GBP would not be able to hit the highs that it did yesterday without a positive outlook for the near the future. Of all of the central banks meeting this week, the Bank of England is the only one that is expected to raise interest rates. With oil hovering near $70 a barrel, the world’s concern for inflationary pressures will not be going away anytime soon. The interest rate curve is already pricing in 6 percent interest rates by the end of the year.

[B]JPY [/B]

Japanese earnings data decelerated in May. Ordinary earnings fell 0.6%yr in May, against a revised pace of -0.2%yr in April. Overtime earnings grew 1.1%yr, down from 1.5% in the prior month. Japanese Q2 Tankan was moderately better than expected. Large manufacturers’ business conditions were unchanged at +23. The large non manufacturing headline was also stable at +22. Small firms saw conditions deteriorate slightly, while medium sized non-manufacturers saw conditions improve. Labor shortages remain broadly evident. The Tankan based output gap remains positive, but resource pressures were reduced slightly in the quarter. Capex spending plans for FY07 were revised up across the board. The sales and profit projections may portray an impending accommodation of wage increases. We must notice that even though the JPY strengthened against the USD and GBP, carry trades are still playing a major part in the market and the aggressive reduction caused also since of the profit taking which is compared to an aftershock reaction in those pairs especially the USD/JPY. We might see a continuation of those the JPY tendency to strengthen however the reversal is waiting few steps a way.

[B]Technical News [/B]


The daily chart implies another test of the 1.3678 which may determine a new record . On the 4 H chart a stamping is reflected which might eventually become a reversal. Slow Stochastic crossed at 91 and Momentum at 101.324 with a negative divergence implying a clear bearish trend which is due to be establish. Going Long seems risky at this point.


A 25 year record was broken yesterday and the 4H chart reflects more room to go . There are no signs for a reversal yet, however those will be shown when this aggressive bullish trend will be out of steam. Our opinion is that this reversal will take place in the next 8-12 hours and then we expect this pair to test 2.0063.


The 4 H chart implies the end of the bearish trend and the reversal signal has already appeared so we expect this pair to test the 122.70…


A reversal has taken place over the last 12 hours in the pair after the 4H charts provided signals as such. We expect the down-move to continue but only after a correction takes place. Look for 1.2150 to be tested in the next 24 hours.

[B]The Wild Card


After a 4 day uptrend, GOLD prices have been moving sideways. Forex traders may find themselves looking for a direction but without momentum, this will be difficult. Look for a clear reversal signal to support a downward move towards 650.