Special Consultant to the FPA
EUROPEAN FOREX PROFESSIONAL WEEKLY
September 11, 2009
September 11, 2009
There were no major changes were in fundamentals during the last week. The same thoughts are prevalent and are repeating just in another way:
- Reiteration that US dollar LIBOR is the lowest amongst the G10s making the dollar the newest carry currency;
- UN calls for a new global reserve currency (not the first time they have done this but definitely the most recent);
- G20 communiqué reassuring the markets that the global monetary and fiscal stimulus will continue to run on all cylinders, prompting risk taking;
- US Manpower Survey providing a negative outlook on US employment situation;
- Congress returned to session elevating concerns over what they will do regarding the budget deficit;
- Chinese officials restating their intent to keep policy loose.
One thing that was relatively new is the Beige Book report. Although some Districts have reported that they see some improvement – the inflation expectations and employment situation are both still poor. During the week we’ve seen how the expectations of investors turn to decision making. The market was in consolidation since April 2009. During this time market participants have accumulated necessary information to make a decision for the nearest future (one month, maybe 2). It seems that market has needed a trigger, because it was ready for breakout. Also the breakout is coinciding with ending of vacation period.
I think that nearest couple of weeks (maybe month) can be bearish for dollar. Now we know, that rates remain low for a considerably long time, we do not see any improvement in consumer credit, spending, wages, unemployment, inflation; Fed is messed up with the short-term results of their TARP program. Beside that, we see a great budget deficit and attempts to start reforming the Healthcare sphere, which will need very big sums of money.
Next week macroeconomic data can have influences on the situation. The market will be quite volatile – (CPI, Capacity utilization, Production on Tuesday, FOMC on Wednesday, real estate market reports on Thursday).
Concerning th longer period, the situation is not so simple. There are some events that could lead he USD to become stronger during the autumn.
First, is the stock market, seasonally it goes up. If this will happen, then interest for more risky assets will grow, and this will push demand for USD.
Second, the end of the vacation period and the beginning of a school period can stimulate consumer spending. That may have positive impact during September-October. Since it may change or alter expectations for the short-term.
Third, there is a problem with banking corporate loans in Europe. German officials continue to reiterate the idea that a credit crunch is looming. This has already lead to grow in European bond and external loan issuance of $1.23B.
Résumé: I think that nearest week will be bearish for USD but not too much. Even as we talk about poor situation in USA, it not much better outside. There are no huge imbalances. The EUR/USD pair has all possibilities to reach August maximum 1.4720. The additional headache is that we will receive from important market data during the week. Concerning September-October, not all things look obvious; there are some moments that can lead to stronger USD, even for a short period of time.
Previous “trade possibilities (1)”:
1. May be a buy opportunity near low border of the wedge with profit around 1.43-1.4350. S/L should be placed under the border
2. Look at the way that situation with Gold will progress. If bullish breakout will be true, then keep out from short positions on EUR/USD pair. Otherwise short as higher to upper border of the wedge as possible, I think it will be real near 1.44-1.45 level. Stop 1.4725, profit 1.42-1.4250.
Monthly (EURO FX all sessions CME futures)
There are more bearish signs have appeared for the USD during the week. We have mentioned in previous research some movements - overbought levels are beginning to fade. Another movement that can reduce the force of a bearish signal is crossing of MACD lines. The Long-term line was not able to hold the downtrend. The crossing is under solid angle, and this is adding some worry about the future bearish perspective for the EUR/USD pair. Besides, price is over long-term 25-MA. But when the crossing is just near important Fib retracement level, we need to wait for real confirmation of a true MACD crossing – breakout of the 0.618 Fib retracement (look at the graph). During the previous up move (to 1.4720 level) price couldn’t hold above this level. The monthly period is long enough and the situation rarely changes dramatically. So, the most important thing now on the monthly basis is to watch for behavior of the market near the level 1.4620. Obviously that market-makers will be penetrate 1.4620 to clear orders around and we need some patience to get a real confirmation of a breakout if it happens.
I prefer to be out of the market on monthly basis during the next week. The signal for a down move of EUR/USD is still working (because 0.618 is still holding), but there are many signs that could lead to breakout of this level.
Concerning the weekly basis, we’ve got an upside break of the wedge. If we take a look on gold, then we’ll see that trade volumes support triangle upside break – volumes go up when price rises, and vice versa. During the breakout volumes were high. Also we need a Dollar Index graph. All these three graphs have a movement that confuses me a bit. Specifically – we do not see a volatility breakout. Look at the oscillator – it shows divergence on all three graphs. Usually, when a volatility breakout occurs, it can be a predictor of a strong move, and when we see an important breakthrough and th oscillator shows nothing, it can be a sign of potential to backward move. Besides, on the Dollar Index graph the 0.618 level is already broken.
Because of signals that we can not interpret sharply enough, it will be better if we can wait for some additional signals. From the one side – we see breakout on gold (that are confirmed with volumes), on the Dollar Index (and 0.618 break also). But from the other – divergence on the oscillator, strong resistance (Fib 0.618) and many macroeconomic data during the next week.
Daily (EURO FX all sessions CME September futures)
There is no much to add, except solid overbought. The level of overbought is not a record one, but still… Prices are just under the Fib 0.618, so it can add some resistance. But it not worth to paying too much attention to this movement.
Trade EUR/USD possibilities(1):
Monthly - Out of the market.
I think that market has a momentum to reach a 1.4720 peak, but there are circumstances that will make pressure in the other direction. If we take into consideration weekly economic data, it could be very volatile. Even today, the USD can become stronger if Chinese economic data will be awful. It could be a chance to close non-profitable short positions if you already have them.
The same as a weekly. Maybe it would be better to concentrate on possible short moves on the 1-hour or 4-hour trades until the situation becomes clearer and not to try to catch solid moves. Be cautious during macro data releases.
1. “Trade possibilities” are not detailed trade signals. They are expectations about possible moves of the market during the week. One must learn to exercise judgement.
General Notice: Information has been obtained from sources believed to be reliable, but the author does not warrant its completeness or accuracy. Opinions and estimates constitute author’s judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein.