Special Consultant to the FPA
EUROPEAN FOREX PROFESSIONAL WEEKLY
Signals and Analysis
September, 17, 2009
Signals and Analysis
September, 17, 2009
The central moment for past week was macroeconomic data, particularly – the reaction of the market on that data. We’ve seen quite positive numbers – jumps in Retail sales, PPI, Empire Manufacturing index, Industrial production and Capacity Utilization – all data was positive, but the EUR/USD goes further. If the greenback can’t rally on a sweeping improvement in macro data in addition to Chairman Bernanke hinting that the recession is in the rear-view mirror, what will help to change this situation, why does the dollar continue to fall?
First, LIBOR rate continue to decline, and dollar turns to another funding currency with JPY in a row. The weakening of USD exacerbated by government uncertainty (Health care reform, Fed policy, results and duration of TARP program etc.) and growing appetite of investors for risky assets – corporate bonds and equities, especially if you take into account the absence of any inflation. Besides the positive macroeconomic data, we see some problems also. According to reports of international payment systems – VISA, AMEX, there is a large percent of delinquency on consumer credit card debts, and it didn’t become smaller during the last period. The great correlation with Budget deficit is also pressuring the USD.
Second, the current recovery has an important nuance - people are spending in a line with their income. In previous recession periods and during the first phase of recovery in the past, they’ve spent more than their income due to consumer credits. This can put pressure on the recovery pace in the future and make it more fragile with a probability of second leg for recession still holding.
So, here is how it can be:
The normal sequence of the repairing of the economy, that we are already in – first, we’ve seen a reduction in inventories, second – growth in Production and Utilization. Now, we have to wait for extension of average work week, then growth in wages, consumer spending and reducing in unemployment rate. Usually this system is self supporting. But in the current recession cycle (people are spending in a line with their income) the growth can hold with this limitation. Besides, there are no precise perspectives with personal tax credits and other movements, this exacerbates uncertainty.
Also we should point out at the moment, that in general, investors have a short-term view. The prospect of rates tightening is too blurring, and that is pressuring the dollar despite positive macro data. This situation could change when this perspective will be close enough to feel it. And, to my mind, that will not happen until next year. This does not mean that dollar will decline all the time - situation in EU is not much better (they have their own problems), but, I think, that we should not expect any meaningful strengthening in USD till that moment comes. We can only expect permanent USD strengthening from time to time due some technical movements – corrections on equity markets, sudden spark from macro data without tendency, etc.
We have talked about many different movements, concerning USD in researches, so I decided to pack most important thoughts and track them across researches.
Let’s call them Current Basic Macroeconomic Issues:
- Investors basically pay attention only to nearest perspective. Since FED rates tightening is too blurring, we should not to expect meaningful USD strength till next year (or until first signs of a rates hike possibility);
- USD will become stronger when investors will see these signs, so the expectations concerning EUR/USD rates parity will change;
- We can expect growth in USD, if the possibility of second leg of recession will grow, and if investors will have large borrowing positions in USD;
- EU economic recovery will have a time lag about 1-2 quarters compared to the US recovery;
- When EU rates hike expectation appear, the dollar will return to weakening;
- We can see temporary USD strengthen from time to time due some technical movements till first signs of rates hike possibility appear.
- The primary US economic data that will be under scrutiny – personal credit, spending, wages and employment, inflation. This is a final segment in chain, and it’s very important.
Previous “trade possibilities (1)”:
“I think that market has a momentum to reach a 1.4720 peak, but there are circumstances that will make pressure. If we take into consideration weekly economic data, it could be very volatile.”
Monthly (EURO FX all sessions CME futures)
During the last week we’ve got a breakout of important resistance level. So the trends turned upward, although we should to wait for a monthly closing price higher than 1.4620. But if we take into consideration macro data that will hold until the end of the month, we can make a conclusion that there is not as much space for uncertainty (there will be PMI, Existing home sales, and FOMC meeting that are most interesting). The main thing that could somehow break upside move, at least for some time is an overbought situation. I think that market will feel a downward pressure at the 1.4850-1.50 level, if market will reach it during current month.
Weekly (EURO FX all sessions CME futures)
The same thoughts are applicable on weekly chart. The overbought level allows reach as far as 1.52 level. But I think that most reliable target is 1.4950. We surely will pass 1.4820, and can touch the 1.52 level.
Trade EUR/USD possibilities (1):
For those, who is already had long positions: hold them surely till 1,4820. But I think we will reach 1.4950 and even can touch 1.52. You may tight stops a bit, when market will be closer to 1.4900.
For those, who out of the market: may be there will be an opportunity to go short in 1.49-1.52 range. Looking for signs of correction. But such kind of deal should be short-term. You can go long using your own entry technique until 1.4850 level is reached.
(1) “Trade possibilities” are not detailed trade signals with specific entries and exits. They are expectations about possible moves of the market during the week based on market analysis.
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