Special Consultant to the FPA
EUROPEAN FOREX PROFESSIONAL WEEKLY
Analysis and Signals
October 8, 2009
Analysis and Signals
October 8, 2009
Because of the lack of macro data during this week, we didn’t see any strong move. Investors are taking a pause for making decisions. First, look at the US stats. Although we see signs of growth in the economy, the pace of activity is anemic. Auto sales fizzed in September as the “cash for clunkers” program was over and there is chatter about new home sales having eased in recent weeks. Furthermore, there is a meaningful slack in the labor market with unemployment at about 17%, including part-working employees. Hours worked are not significantly expanding, and it appears that solid income growth and employment are a number of months away. It was also reported that labor service firm Manpower believes the job market will not improve until Q2 2010. Slack in the labor and product markets will keep inflation low. All basic sentiment and confidence indexes had eased also – PMI, ISM.
These circumstances confirm our assumption that the Fed just has made a shock start push to economy, but momentum was bearish, so the pace of growth will pick up speed slowly. I can’t say definitely how and when it will be, but there is a still risk for the second leg of recession in 1st half of 2010. Banks still hold solid reserves and the loan market still anemic due to delinquencies and unemployment. US LIBOR is still very low (about 0.28%), and carry trade against USD will continue. It seems that the most favorable currencies are the CAD and AUD.
Besides, banks still hold toxic assets on balance sheets and, due to new FASB rules, they can value them practically as they wish, because there is no market price for these assets due to its illiquidity. Nobody yet knows how many of these assets are on the balance sheets and what real losses banks will hold in future.
Although we see a USD positive rhetoric from ECB and Fed leaders and it can influence on the market in short term, investors will be looking for real changes in growth perspectives and a rate hike. Keep in mind that after the recession in the early ‘90s in the US, the Fed did not hike rates for 35 months after industrial production Y/Y bottomed.
In Europe there is also some data that shows improvement – declining unemployment in Germany and sufficient liquidity and reserves in the banking sector. But the main risk – Eastern Europe countries in EU that can add headwind to European economy on the way to recovery in long-term and uncertainty with Q3 earnings. Besides, the ECB intends to continue its program of buybacks of corporate debt and rhetoric that it is too early to exit from stimulating activity - personal consumption is low; savings are high and the banking consumer credit programs are still depressed.
Finally, it must be mentioned that fundamentals will take a back seat if global equities robustly set back. Third quarter earnings will be in focus and a potential lack of revenue growth and poor guidance will challenge equity strength. Such a challenge will force the dollar and the yen higher. I think that particularly these data (earnings reports) will have the dominate influence on the currency market in the nearest future.
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 strengthen till next year (or till first signs of 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 recovering;
When EU rates hike expectation appear, the dollar will return to weakness;
We can see temporary USD strengthening from time to time due to some technical movements (risk aversion, stocks buying etc) until the first signs of rates hike possibility appear.
The primary US economic data that will be under scrutiny are personal credit, spending, wages and employment, and inflation. This is the final segment in the chain, and it’s very important.
Previous “trade possibilities(1)”:
I expect that the market should retrace lower in October. 1.4150 is nearest target.
I expect that market can reach 1.4350 level during next week.
Today-tomorrow (1-2 Oct) market will reach 1.4480 level, then it should retrace higher. After that look for the possibility to open a short with 1.4350 target.
Monthly (EURO FX all sessions CME futures)
In September he market reached an overbought extreme (look at the line on Osc graph) sharply on the OP target from EYX movements at the 1.4817 level. Moreover, the market is just above 0.618 level currently, so I suppose that this will put pressure on it during the October. Nevertheless, the trend remains bullish, so, if market will retrace, it shouldn’t be too deep.
Let’s look at the next chart, also monthly. 1.4150-1.4200 is a strong support level – long-term moving average (MA), short-term MA, 0.382 retracement and bullish trends should help the market to stop there. Besides, overbought will correct on that move. I do not know for sure, will the market stop there, and turn up, but there is a meaningful support. Monthly OB/OS prices are 1.5200/1.3500.
Taking into consideration a failing attempt to go lower on daily chart, it is possible, that the market can move higher during the month and even touch 1.52 level, but I think that during October down moves can happen. The market is limited to upside move with 1.52 overbought level, it has reached OP =1.4817 target, it has reached extreme overbought level in September and should retrace. Taking into consideration the bullish trend, I do not expect a deep retracement – 1.4150-1.4200 is where the market should get meaningful support.
Weekly (EURO FX all sessions CME futures)
Not many changes from the last week…On the weekly chart trends remain bullish for now. Earlier I took into consideration only the 1.4350 level as a meaningful one for the weekly chart, but today we should pay attention to 1.4530 also – this is a nearest weekly 0.382 support and nearest target if a down move will take place. This is important because of strong upside retracement on daily chart that I didn’t expect to see.
Second meaningful support level is 1.4300-1.4350. There is a 0.382 retracement and 7-day MA. I think that market surely retrace from there if it will reach it, not necessary during the next week, it’s just a strong support. OB/OS level for next week is about 1.5200/1.4000. Overbought for the week is coinciding with the monthly overbought level.
Daily (EURO FX all sessions CME futures)
Daily price moves had brought some surprises during the week. Price has reached our predefined level 1.4480 and retraced. Usually between first target and second target (1.4480 and 1.4350) there should not be a deep retracement when downtrends are real and strong enough. But we had it. The market has retraced much higher than expected and this is a sign that the daily downtrend is under question. In current conditions there still may be down move because, formally, we do not see MACD crossing yet, but I prefer to stand aside till the situation becomes clear – I can’t recognize a trend yet.
Because of deep retracement, my nearest target is 1.4535 and I think that it will be risky to hold a position till 1.4400 level for now. If daily trends will be broken and turn bullish, the nearest target is 1.4840, the previous maximum. Now I do not see extreme oversold/overbought level, so market can reach it easily.
Trade EUR/USD possibilities(1):
Pressure from the overbought level and reaching important targets will press on EUR/USD during the month, but there are no turnaround signs on the weekly chart still. That’s why the extreme price for October is 1.52-1.5240 level. If we see a signs of a down move, I do not expect deep retracement - 1,42-1.4350.
Today I can’t identify the trend. Deep upside retracement, after 1.4480 was reached, shows that daily downtrend not strong enough for now, so recommendations twofold:
If downtrend holds and there will be signs to down move on 1H-4H charts, then nearest target is 1.4530-1.4540. Because of deep upper retracement there is a possibility that market not reach 1.4400.
If daily trend will turn bullish – looking for possibility enter long with 1.4840 nearest target. I expect that market will not go up to more than 1.52-1.5240 in October.
(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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