30/08/'07 - Is it going to be all doom and gloom for the greenback?

[B]Economic News

USD [/B]

Yesterday the greenback continued on its bearish decent as it lost ground against most of the majors. Earlier in the week investors were expecting the FOMC minutes to give some indication as to when the Fed will cut rates, however the FOMC minutes did not reveal much and this created uncertainty in the forex trading market as to whether the Fed is actually planning to cut rates. There was no significant economic news released from the US yesterday, so the bearish momentum that was created by the discrete FOMC minutes continued throughout yesterdays trading. The main market movement today can be attributed to the US equity markets rebound after Teusday’s large sell off. This caused the USD to weaken sharply against the high yielder’s as carry trades were back in action but on the other hand the carry trade winding caused the USD to gain some lost ground against the JPY, so it was not all doom and gloom for the greenback. The US markets sudden rebound yesterday can be attributed to the leaking of a letter by Fed Chairman Bernanke where he explicitly stated that the Fed is keeping a watchful eye on the financial markets and that it will intervene in order to mitigate the negative impact that the problems in the financial markets may have on the economy.

In US news today we are expecting the GDP annualized and deflator annualized figures which are forecasted to release at 4.0 % and 3.7 %, respectively. The previous quarters GDP annualized figure was 3.4 %, so we are expecting a 0.6 % increase in growth which would reaffirm the Fed’s view that the economy is expanding at a moderate pace. However these figures are not expected to cause any major movements and the source of today’s volatility will be the equity markets. The rebound in the US markets may spillover into Europe and Asia today, so if this occurs the carry trade resurrection will cause the greenback to depreciate against the high yielders but gain against the JPY. If the GDP figures do not surprise the market the greenback is likely to continue on its bearish path against the EUR and GBP, as there is no other data to give the USD some reprieve.

[B]EUR [/B]

The only news released out of the Eurozone yesterday was the German Consumer Confidence which came in below the expected figure of 8.5 at 7.6. It was a day light on European news so the EUR movement was mainly pegged to the USD and it continued its bullish rampage against the greenback which started on the back of FOMC minutes release. Investors have been expecting the ECB to hike the interest rate in early September as President Trichet stated on August 2 that the ECB had adopted a stance of �strong vigilance’ regarding inflation. However earlier this week Trichet stated in his speech that the ECB will actually make its decision on whether to raise the interest rate at its next meeting. This gave a strong indication to the market that the ECB may keep the rate hike on hold in September. The gradual shift in investor sentiment regarding the rate hike has been putting pressure on the EUR recently.

Today the only news expected from the Eurozone is the German Unemployment Rate and Italian Retail Sales which are forecasted to release at 8.9 % and 0.2 %, respectively. This news is not likely to cause any sharp movements in the EUR, so the direction of the EUR today will remain dollar centric and it should be able to maintain its bullish momentum. Also a rise in carry trades will push the EUR higher against the JPY as European and Asian markets react to yesterdays rebound in US stocks.

[B]JPY [/B]

Yesterday, the Japanese currency recovered from its previous losses and rose 0.3% to 115.81from 116.17 against the greenback late into yesterday’s New York trading session. As a matter of fact, it posted its biggest daily percentage gain since January 2005 due to an incline in U.S. stocks. The JPY also advanced 2.2% against the EUR, to 158.13 from 158.89 yesterday, as rallying U.S. stocks prompted investors to resume so-called carry trades.

In addition, an Australian hedge fund filed for bankruptcy protection yesterday goading investors to sell riskier assets purchased with loans from Japan. Worries that more financial institutions will suffer from the U.S. subprime mortgage meltdown caused investors to halt risky positions in high-yielding currencies.

Looking ahead to today, there are several news releases expected today from the JPY market. The first one will be the Tokyo CPI which is expected to release in negative territory at -0.2 %. Later, the Manufacturing PMI is expected to be released without a significant change at 50.0 and the Japanese Industrial Production is also expected to release in negative territory at -0.4%, down from last month’s figure of 1.3%. Nonetheless, these weak figures are expected to generate small interest as they would be overshadowed by the direction of the carry trades which will heavily depend on today’s performance of the global markets. It is also very important for traders to monitor whether yesterday’s boom in the US stock market will have a ripple effect on the European and Asian markets.

[B]Technical News [/B]


Bollinger bands are widened indicating increased volatility. On the 4 H chart the slow stochastic is crossing above 80 indicating that we are in overbought territory but the momentum and RSI are both relatively flat. The hourlies give us a bullish signal with strong positive momentum. The relatively weak bearish 4 H chart and weak bullish 1 H chart give us a strong indication that this pair will range trade today.


This pair has breached the key 2.0150 resistance level with resilient positive momentum. The RSI and slow stochastic confirm that this move is indeed validated and it is now targeting the significant 2.000 level and we may see it head even further north in the near future.


After a strong but brief bullish run this pair has been on a steady decent falling from 116.21 to the 115.18 mark. The slow stochastic indicates that there is still room for this pair to move down but according to the dailies a correction is imminent.


This pair is in the middle of a clear channel that seems to be heading south. The upper level of this channel is located at the 1.2030 level and it now indicates a key resistance level. If it is breached then the pair will begin target the 1.2100 mark. However if this pair continues to float in this channel then this pair will continue on its bearish path.

[B]The Wild Card

Silver [/B]

The hourlies are very bullish as the slow stochastic is crossing just above 20 and there is strong positive momentum. Also the RSI indicates that this pair should continue to head north. However there will be an opportunity for profit taking as the 4 H chart gives a bearish signal all round so taking all factors into account the preferable strategy for Forex will be to buy on dips and sell on highs.