20/08/'07 - How Will The Currencies React Post The Rate Cut?

[B]Economic News

USD [/B]

Last week’s news releases were mixed with positive outcomes like the better than expected Core Retail Sales at 0.4%, a PPI which grew from 0.1% to 0.6%, a decrease in the Trade Balance (-58.1B), and an increase of TIC Net Long-Term Transactions (120.9B), and on the other hand negative results such as an unchanged Core CPI at 0.2% and a CPI which decreased to 0.1%, Housing Stats as well as building permits also decreased while unemployment claims rose. Then on Friday the news showed an erosion of consumer sentiment from the previous value of 88.5 to 83.3 and could therewith indicate a reduction of consumer spending that could potentially weaken the USD. This week will be relatively on news releases with only the Unemployment Claims on Thursday and Durable Good Orders and New Home Sales on Friday. A release of Core Durable Goods has an expected value of 0.6%, and a positive surprise on the site of Home Sales Value (above 826K) could strengthen the dollar.

To get hold on the liquidity shortage on the financial markets the Fed surprisingly cut the discount rate - the rate it charges banks for direct loans - on Friday in order to improve liquidity, it also issued a statement accrediting that besides inflation concerns the situation on the financial markets is posing a possible threat for the US economy. With this turnaround of the Feds perspective on the US economy, the discussion about an interest rate cut is newly ignited and we could probably see the beginning of smoothening monetary policy with a cut in the interest rate.

As for today the greenback is expected to float low post the negative releases of last weeks end and growing concerns about inflation.

[B]EUR [/B]

Last week’s German GDP was released below expectations at 0.3% (previous 0.5%) and the French Nonfarm Employment was released with a disappointing 0.0% compared to the previous 0.8% and the expected 0.5%. This week will be very light on market moving news from the Euro-zone with only German ZEW Economic sentiment on Tuesday, expected to come out at -1.0. This negative value indicates that the majority of investors have a negative outlook on the economical situation in Europe during the upcoming 6 months; an upward surprise could have an important psychological influence on investors who are still shaken by the dimensions of the US credit crisis.

After the announcement of the discount rate cut by the Feds on Friday, financial markets worldwide rallied and the EUR to strengthen against the USD for the first time in the last week. If investors’ fears recede and European financial markets will see a recovery, the bullish trend that was set off on Friday could continue today.

Other news expected to come from Europe this week are the Swiss PPI on Monday (expected 0.3%), UK’s CBI Industrial Trends Orders on Wednesday (expected -4), and the UK GDP (expected 0.8%) on Friday.

[B]JPY [/B]

Last week ended the impressive JPY rally that showed an unbelievable dip from 123.77 to 112.72, a stunning 1105 pip increase against the USD, during the last 4 weeks. The JPY rally went on fairly independent from any Japanese News releases last week and was pushed by an intense unwinding of the carry trades which climaxed on Thursday and Friday last week. With carry trades unwinding, we should see JPY fluctuations being dollar centered today.

This week’s interest announcement followed by a speech of BOJ Governor Fukui is expected to stay unchanged, as the BOJ is not able to justify such a move by underlying economical reasons.

Even with an approximation of Japan’s interest rate to 1.0%, differences between the JPY and high yielding currencies like the AUD and NZD as well as most of the majors stays significant, and with a return of risk seeking in the global markets we will see carry trades returning in the medium-term.

[B]Technical News


The pair is in the midst of a correction move initiated at 1.3400 and is now consolidating around 1.3500. the slow stochastic together with the RSI on the 4 Hour chart indicate that there is still more momentum in that move, and the next target price now stands at 1.3550.


There is a bullish cross forming on the slow stochastic of the daily chart, and a breach thought the 20 level on the RSI. Both indicators are showing a positive reversal with great momentum that might take the pair back to the 2.0000 levels.


The incredible unwinding move seems to have bottomed at 111.60 and is going up since Friday. The daily studies are bullish, and the hourlies support the bullish notion. A breach through 115.60 will validate the move, and create a great opportunity for a long run buying position.


The pair is in consolidation at the 38.2 level of the 1.2450/1.1820 move, after a touch at the 61.8 level and a bounce back to 1.2060. The daily studies show strong bullish momentum, as the hourlies support. The next target price might be 1.2200.

[B]The Wild Card

Crude Oil [/B]

There is a bullish cross forming on the 4 Hour chart, and together with a breach beyond the 20 level on the RSI a strong bullish notion is created. This provides those rading forex with a great opportunity to enter a long position with good momentum and a very low entry point.