The U.S. dollar was mostly lower against other major currencies in Wednesday’s late European trading, and remained flat against the yen in Asian trading Wednesday as the market took a breather from the recent bout of yen-selling. Also yesterday, the dollar weakened against the British pound, which rose to $1.9929 from $1.9869 after the latest Bank of England meeting which showed that it’s Monetary Policy Committee would keep interest rates unchanged at 5.5% earlier this month.
Yesterday at 15.00GMP, the Treasury Secretary, Henry Paulson spoke. In his testimony the main guide line was base upon the idea of searching new ways pressing China to increase flexibility in its currency. He made the remarks in testimony on the international financial system to the House Financial Services Committee.
Paulson also told legislators the U.S. economy is
strong'' and said that core inflation wascontained.’’ Businesses are
starting to invest again'' and consumersare spending at a healthy pace,’’ he said. Improving growth abroad also means ``the global economy is now firing on all engines".
China’s currency has advanced about 8.6% the dollar since the government ended a strict peg to the U.S. currency in July 2005.
Paulson told the committee that he didn’t know how much the Chinese currency was undervalued. While it’s an
unnatural act'' for an economy that trades as much as China's to have a rigid exchange rate, the U.S. would still have a large deficit with China even if the Yuan traded freely because ofstructural’’ issues.
In addition, yesterday New York Federal Reserve President Timothy Geithner argued for greater exchange rate flexibility in emerging Asian economies as part of a path to economic stability. Geithner claimed that there are existing different problems with countries which try to maintain a currency regime, and this inflexibility makes it difficult for emerging market economies and create a risk of future financial volatility.
Yesterday, the EUR was flat against USD due to a lack of information which made the USD the trend movement leader. The EUR has become the perfect currency for those who prefer to trade ranges and the worst for those who like action. For the past month, the currency pair has remained contained within a 300 pip trading range. Economic data has been mixed, but comments from ECB officials suggest that the central bank is still on track to raise interest rates ,the market reaction was characterized by mild strengthening among the majors.
The ECB (in the person of Trichet and Weber of Germany) figures to keep stressing the use of monetary aggregates for setting policy, although a battle seems to be shaping up. Sarkozy and the Italians seem intent on placing less importance on aggregates for setting policy.
German producer prices were stronger than expected in the month of May, however on contrary Italian industrial orders and Euro zone construction output were weaker. Interestingly enough, the bigger surprise in data and currency reaction was the CHF which was effected by mostly positive figures in the past days when Swiss producer prices jumped 0.9% in May, bringing the annualized pace of growth up from 2.6% to 2.8 %. The market was actually looking for a slowdown in growth, so the surprise certainly brings inflation pressures back to the forefront. This reinforces the Swiss National Bank’s need to raise interest rates again this year which should put a cap to the impressive rally in EUR/CHF.
I want to emphasize the fact that EUR/CHF hit a 9 year high yesterday. Generally the EUR seems to be gathering some new forces before his next bullish movement .
During the last two days the Japanese currency has been traded against the American dollar in the range of 123.45 to 123.66, which is almost the weakest level in more than four years and the currency added to its multi-year low against the British Pound. The expectations for the JPY are to keep getting weaker to 123.75 per dollar and 165.10 per EUR. At the same period The Japanese currency has been weakened against 16 most active currencies this year. The yen has fallen 5% versus the EUR and 3.7%against the dollar. As it seems, based upon the forecasts of the major banks is that the Japanese currency will continue to adopt this trend for the mid term.
This situation consists mainly on the very low interest rate in which the BOJ has to compete with the other major currencies. At the moment the bank of Japan keeps the interest rate on 0.5% compare with 5.25% in the U.S., 6.25% in Australia, 8% in New Zealand and 5.5% in the U.K. till the next interest rate raise, any dramatic and positive correction is not expected for the JPY short term. Yesterday the yen slid across the board as the Monetary Policy Meeting Minutes from the Bank of Japan showed policy makers were uncertain about the trend of consumer prices in the short term. It has been agreed that the inflation will be increased in the long term, but as it seems, the BOJ may raise the rate in August after its quarterly Tankan business confidence survey, a second-quarter economic growth report and Upper House elections in July., however, consumer prices may fall in the short term.
Today, at 00.50 GMT, Japan’s Trade Balance surplus was published. Japan’s trade surplus rose for a seventh month in a row in May. The surplus gained 9.3% from the same month the previous year, adding 389.5 billion yen (US$3.15 billion; euro2.35 billion) in May. Imports rose 15.5% on year to a record 6.176 trillion yen (US$49.98 billion; euro37.22 billion) in May. Exports gained 15.1% to 6.565 trillion yen (US$53.13 billion; euro39.57 billion) which is the highest ever for the month. Meanwhile, Japan’s surplus with the U.S. fell 12.9% on year in May to 543.7 billion yen (US$4.4 billion; euro3.28 billion) the second straight month of decreases. Exports to the U.S. rose only barely, increase of only 0.4% on year in May.
[B]Technical News [/B]
Daily charts show the beginning of a bearish trend which might breach the bearish channel boundaries and then a reversal will take this pair to consolidate at 1.3640 (long term). Meanwhile a bearish falling wedge is observed on the 4 H chart however there is an upcoming reversal which is expected to test the 1.3420 today when breakout will take this pair to test the 1.3440 (Fibonacci) level.
On the daily charts, this pair may move up to test the 1.9950 in the upcoming days which is a significant resistance level, a breakout would take this pair to test the 1.9983 and may even reached the 2.0050, meanwhile on the 4 H chart the bears had started their way and they might take this pair to 1.9880 in case of breaching the 1.9916 support level.
Preferable strategy today is going short from 1.9895.
Daily chart imply on an upcoming reversal when momentum seems to be out of steam there is a Doji observing RSI at 86 clearly overbought and Slow Stochastic had crossed at 91 . This upcoming reversal will take this pair to test the 1.2300 in the upcoming weeks.
Today this pair will reach the 1.2340 when Slow Stochastic was crossed at 85 on the 4 H chart ,unless we will witnessed a breakout of the resistance value which is located at 1.2363 that might cause the USD to strengthen ,however unlikely .
A bearish channel is observed on the 4 H chart ,and we are on a critical point right now ,when this channel is tending to be breached .
In case of a breakout we will see this pair strengthening to the 1.2405-1.2418 and then a reversal may occur.
[B]The Wild Card
It seems that this forex pair has experienced a reversal that took place approximately 2 weeks ago and established a mildly bullish channel which is to maintain the USD strengthening in the upcoming weeks.
Today, after the bullish channel which was breached we are expecting the USD to maintain its recovery and expected to be range traded between 1.0640 - 1.0700