16/08/'07 - Will the US housing market recover?

[B]Economic News

Yesterday, the USD extended its gains across the board after a string of positive US economic data. The US Core CPI data released inline with expectations at 0.2% and overall remained unchanged since last month. The Empire State Business Conditions Index released at 25.1, surprisingly beating the expected figure of 18,which gives a strong indication that future reports on manufacturing in the US are also likely to support the USD’s rise. Housing and credit concerns are still here and the crisis hasn’t been resolved yet. In order to make cash available, central banks worldwide have pumped billions in funds to banks over the past week, but along with this, Federal Reserve officials are insisting that there are no signs that the subprime issue is harming the broader economy and an interest-rate cut is not yet needed despite the fact that the fund injection could be compared to an interest rate cut from the perspective of the market. On the back of these positive sentiments, the US currency hiked to 1.3400 against the EUR. There is no real market moving news to be released from the US markets today. The news coming out of the US will be the Housing Starts and Building Permits figures and since there are no particular expectations, these indicators will likely generate little interest. Consumer Sentiment Index is the only news release expected from USD for the rest of the week. The core figure is expected to release at 88.5 which is a slight drop from last month’s figure 90.4. Therefore, it will be crucial for those trading forex to identify how the preceding economic indicators from Europe and the UK will affect the greenback.

[B]EUR [/B]

Yesterday, the majority of news releases from the Euro zone came out quite negative. The GBP Average Earnings Index figure released at 3.3%, slightly lower than the expected figure of 3.5%. This negative momentum was further exacerbated by the weaker than expected GBP Claimant Count Change. This index measures the change in the number of people claiming unemployment related benefits over the previous month. A falling trend has a positive effect on the nation’s currency. The figure released in negative territory at -8.5K. This number didn’t beat the expected figure of -9.8K, it was still significantly lower than last month’s figure of -14.1K. Analysts continue to assert that a EUR interest rate hike is expected despite the fund injections that occurred in the Euro zone.

Today the most significant news coming out of the Euro zone will be the England’s Retail Sales. The figure is expected to release at 0.1%, which is 50% below the previous month’s figure which might strengthen the negative momentum which the GBP is suffering from.


Yesterday, the JPY rose to a 4 month high against the EUR and the USD. The Japanese Yen has enjoyed a sustained bullish run as results of the carry trade unwind which was driven by increased risk aversion. The Yen rose 0.8% to 154.99 per EUR and gained to 115.68 per USD. Yesterday’s U.S stock losses sparked speculations that the biggest mortgage lender in the U.S. may be forced into bankruptcy. Rising risk aversion caused investors to liquidate risky positions and triggered carry trades to unwind, thus the yen gained some momentum. The persistent problems in the US sub-prime mortgage market, coupled with further reports of hedge fund worries are fuelling the risk aversion sentiment, therefore we may expect the JPY to strengthen all across the board in the coming days.

[B]Technical News


The 4 hour chart implies an upcoming bullish trend with Momentum (98.6285) having a positive slope and a slow stochastic which crossed at 13. The correction will try to test the 1.3483 Fibonacci 38.2% retracement level. Going long seems like the preferable strategy today.


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. However the daily chart indicates a breakout of the bullish channel, supporting the fact that the GBP depreciation would be maintained in the long term.


The 4 hour chart implies that a tight channel is about to form which has an extreme negative slope, and a breakout is expected. A breakout will probably send this pair to test the 117.04 Fibonacci 23.6%. If a breach of the upper barrier will take place we expect a mild bullish channel and therefore going long seems preferable.


A reversal is forming on the 4 hour chart as the slow stochastic crossed already twice above 80 and this notion is also supported by the RSI which is clearly in the overbought area for a couple of days already. If this development is also supported by a cross of the MACD it seems like a preferable strategy is to enter into a short position.

The Wild Card

Crude Oil [/B]

On the 4 hour chart we can see that a channel with positive slope has been formed with an upper level which could be breached at the 74.32 (50%) Fibonacci level. If this break out takes place we could expect an incline up to the 75.22 Fibonacci level (61.8%). On the 15 minutes chart the formation of a negative wedge is about to be completed, increasing the possibility of an upcoming breakout at 74.32. Forex traders may prefer to enter into a long position when the right signal will be shown.

I think lending conditions are easing in some parts of the credit market, but it is still too early to tell if the Fed’s efforts so far will succeed in getting funds flowing normally again in the banking system.

The strong figures on durable goods orders and new-home sales on Friday stoked buying in the 10- and 30-year sectors on the notion that the Fed may stand by its mantra that inflation risk outweigh other economic concerns. I think we’ll be able to better gauge price pressures by this friday when
the personal-spending data comes out, including core personal consumption expenditure.