13/06/'07 - Will The USD Bullish Move Continue?

[B]Economic News


Yesterday the greenback continued its bullish rampage in anticipation of key economic data releases. The US currency has been buoyed by stronger-than-anticipated US economic news, which also prompted a slump in US Treasuries as the prospects of an interest rate cut diminished. The Fed has left interest rates unchanged at 5.25% for almost a year but has recently voiced concerns over inflation and this is making traders nervous ahead of today’s Beige Book economic report and Friday’s CPI figure. The US treasury currency report will be released today and it will be of particular interest to traders which countries the report will accuse of currency manipulation. US lawmakers are due to unveil a bipartisan bill which will address the problem of undervalued currencies that harm US trade and economic interests. The main question on investors’ minds is whether China will be labeled in the treasury report as a currency manipulator. China has been accused in the past of undervaluing its Yuan currency thus making its exports cheaper and this is causing the US-China trade deficit to balloon as US exporters are struggling to compete against the Chinese on the global market. If the proposed currency legislation will look to directly effect currency markets by supporting intervention then the USD may come under widespread selling pressure.

The other significant news to be released today is the US retail sales. Last month the retail sales figures were very disappointing with the headline figure slumping into negative territory at -0.2%. This news prompted fears of a recession thus shoving the greenback on a bearish slide and it lost around a 100 pips against the EUR. These weak numbers can be partially attributed to the unseasonably cold weather that occurred in April and the early Easter holiday in March which took a large portion of retail sales. However today’s figure will paint a completely different picture as headline retail sales is expected to bounce out of negative territory to 0.6% and the core figure is forecasted at 0.7%. Last weeks’ better than expected figures of US consumer confidence and personnel spending measures also provide a strong indication that retail sales could spring a positive surprise on the market with an unexpectedly strong figure. Today the Dollar will continue on its bullish surge as the treasury report is unlikely to hold it down and strong retail sales will only add to the greenbacks momentum.


Yesterday, the EUR continued to fall deeper into the bears cave particularly against the greenback as five year high US bond yields have lured investors away from the EUR. This negative momentum was further exacerbated by the weaker than expected German wholesale price index and Euro-Zone industrial production data which were released yesterday. German wholesale prices for the month of May fell by more than expected to 0.3% m/m, and to 2.4% y/y from 0.8% and 2.9% respectively. Also Euro-Zone industrial production declined more than expected in April to -0.8% m/m, below estimates of 0.2%. The year-on-year industrial production figure was expected to rise but it declined to 2.8% from 3.7% a month earlier. However even though industrial production did not reach expectations there was still an upward revision to April’s figures. Also with recent manufacturing data such as the manufacturing purchasing managers’ survey for May indicating that this sector is still relatively robust, it is highly unlikely that the ECB’s view of tightening its monetary policy will be influenced by yesterdays disappointing industrial production figures. Investors are convinced that there will be further rate hike to 4.25% in September following last week’s hawkish comments by ECB president Trichet. Yesterday he reiterated those comments by telling the European Parliament’s economic and monetary affairs committee that the bank’s interest rate policy remains accommodative and financing conditions are favorable. He also stated that the ECB will do whatever is necessary at any given time to control the inflation risks that they see. The German DIHK research institute reiterated that they expect the ECB to continue raising rates but they do not see the need for the ECB to increase rates beyond 4.25%.

The EUR has been on a downhill slide since last week’s interest rate statement and this is mainly due to the dollar strength but we are beginning so see some weak spots in the European economy. Without any significant news expected from the Eurozone today the EUR negative momentum is set to continue, especially on the brink of today’s expected strong US data releases, however the ECB’s hawkish attitude with regards to interest rates should limit the EUR losses.


Yesterday the JPY was supported by worries about a decline in investor risk appetite. The EUR fell against the yen as the jump in bond yields pushed U.S. shares lower and prompted some investors to cut risky positions. The EUR stood yesterday at 161.78 against the yen, hovering around a one-month low and the USD also fell slightly against the Japanese currency from around 121.70 to 121.62. Yesterday the GCPI, which measures the rate of inflation experienced by corporations when purchasing goods, released at a beating expectations figure of 2.2% but this was still lower than last months figure of 2.3% indicating that Japan may not be ready for a rate hike just yet, so Japan’s central bank will probably keep interest rates unchanged as it awaits more evidence on the economy’s strength after consumer prices fell for a third month. Nevertheless the Japanese Finance Minister Omi reiterated yesterday that interest rates will have to rise in the long term. Also earlier today the JPY current account surplus released at 2.3T beating the forecasted figure of 2.0T as a result of last months downhill slide of the Yen boosting exports to Europe and Asia, thus countering slower growth in shipments to the US. Today the JPY should continue to gain on speculations that a slump in global stock markets will cause investors to sell higher yielding assets they bought with money borrowed in Japan. The slump in stock prices, caused by concern over higher yields, is triggering risk reduction and the unwinding of yen carry trades is likely to continue while stocks are sluggish. However traders should be aware that any gains in the yen could be tempered by flows from Japanese investment trusts targeting overseas assets.

[B]Technical News[/B]


The pair is floating at levels we have not seen in more than three months and is consolidating at 1.3310. The daily charts are bearish and the hourlies are slowly unwinding from oversold levels. Indicators are showing that there might be a correction up, before the move down resumes.


The current uptrend seems to be continuing, as the daily slow stochastic firms the notion that the local move will continue in the short run. The hourlies produce mixed signals and show no distinct bias. It looks as if the preferable strategy would be to wait for a clear sign to confirm the daily bullish trend.


The upwards channel pattern is very clear on the daily chart, as the slow stochastic is starting to form a bearish cross. The hourlies are still neutral with a clear direction forward overbought territory. This indicates that although the trend in the long run is up, we might see a local correction in the short run.


The pair is in the midst of a very strong bullish trend with very strong daily studies. The hourlies indicate that there is still plenty more steam to take the pair to a possible 1.2500 high. Traders must pay attention for a possible overbought sentiment that might push the pair to a local correction move before the bullishness continues.

The Wild Card


There is a very distinct upwards channel forming on the 4 Hour chart, as the pair now floats on its bottom border. The slow stochastic is bullish which allows forex traders to jump in at a very good entry point for a long position and resume the channel movement. The move up is expected to be along the width of the channel, which is about 120 pips.