The greenback struggled against the yen and euro at the start of the week amid a dearth of fresh US economic news. The currency also tumbled to a new all-time low against the Swiss franc. Speculation that the Fed may step in to cut interest rates before the next policy meeting at the end of the month dragged the dollar lower. The market is now fully pricing in a 50-basis point rate cut after last week’s dovish tone from Chairman Bernanke, in which he said that the FOMC would adopt “substantive additional action” to prop the economy.
US economic reports and Fed Chairman Bernanke’s Congressional testimony will drive the markets this week.
Fed Chairman Bernanke testifies before Congress on Thursday and will be questioned about his comments last week, which signaled aggressive rate cuts were imminent. Given the current outlook for inflation and growth, the Fed still runs the risk of sparking inflationary pressure by easing interest rates to jumpstart the faltering economy. With the FOMC stuck between a rock and a hard place, it remains to be seen how much ammunition the Fed has to ease policy in light of further increases in oil and commodity prices.
Greenback Woes Linger
USD Draws Support from Abroad
2008 is still in its infancy, which means the self-proclaimed forex experts can be excused for offering their projections on what the year has in store for the Dollar.
If currencies were traded in a vaccum, the Dollar would probably trend upward, since many technical factors suggest it is oversold. From a fundamental standpoint, however, it is probably overvalued, per the laws of interest rate parity and purchasing power parity.
Relative to other countries, though, it may be undervalued. From this standpoint, argue some analysts, the biggest impetus for a Dollar upswing will come not from good news emanating from the US, but rather from bad news emanating from the rest of the world. For example, the British economy, balance of trade, and monetary policy outlook is even more bleak than the US. The CEO of Airbus, one of the EU's most important companies, has threatened to shift production away from the EU if the Euro remains expensive. Finally, the Central Bank of China is allowing the Yuan to appreciate at a faster pace against the Dollar. As far as Dollar bulls are concerned, it might be best if the US government simply sits tight.
Read more on BBC.
I'm expecting the US dollar to drop more, down to 1.5 against the Euro before a recovery up to 1.4 or 1.3 by year end.
On the eur/chf side. after a small rebound, it dropped below the lower trendline before the market close last friday. Maybe due to the war tension building between US and Iran. Bullish is off for a meantime for the carrys, probably will plunge same number of pips from the neck to the head of previous swing up, unless we hear some good news from US. Again, I might be wrong...
Forex Themes for 2008
A week ago, we recounted what happened across forex markets in 2007, in all of its drama. Now, we would like to offer a nice counterpoint, in the form of the major themes expected to dominate forex headlines in 2008, courtesy of Dow Jones. The list includes eight distinct themes, though there is some overlap. Three of the themes pertain directly to the USD, which is the currency most worth watching in the upcoming year. The fundamentals bode well for the Dollar; the economy has not suffered from the credit crunch nearly as much as economists feared; the cheaper currency has boosted exports; foreigners have proven surprisingly willing to finance the twin deficits.
Then, there is inflation, which has reared its ugly head in the US as well as abroad. Foreign Central Banks, especially in Asia, may have to tighten monetary policy in order to maintain price stability. Those countries with already-high interest rates, such as Australia and New Zealand, are expected to keep rates high. The next theme, accordingly, is the carry trade, which should continue its run due to the aforementioned high interest rates. Next is China, which will be watched on two fronts: its economy and its currency, both of which are expected to continue rising.
The final two themes pertain especially to the Middle East: currency pegs and Sovereign Wealth Funds. As the Dollar declined in 2007, several nations in the Mid East mulled the possibility of de-linking their respective currencies from the Dollar, but thus far, the status quo has obtained. Sovereign Wealth Funds also made a big splash in 2007 with several high-profile investments in the US, implicitly underscoring their their commitment to the Dollar. They represent a growing force in global capital markets, and will be watched vigilantly in 2008.
1.9.08 Multi-Pairs Analysis
EURO (eur/usd)
Bullish above 1.4594, rising support coming in at 1.4386. and resistance at 1.4830 (friday's high). Look for a buy opportunity on a dip.
Support: 1.4594 (trendline support), 1.4520, 1.4386 (ky rising support).
Resistance: 1.4830, 1.4880
Cable (gbp/usd)
Resistance at 1.9886 and support at 1.9650. The pivot 1.9652 has been support point on several occassions and I think we will either see a run higher or a breakdown over the next 2 days to decide where we are heading next. Still bearish on the sentiment as long as falling resistance line hold at 2.0060. Have another falling resistance at 2.0138.
Support: 1.9700, 1.9652 (August key low)
Resistance: 1.9886 (falling resistance), 2.000 (phychological level), 2.0072 (former rising support from 1.86 area), 2.0060 (falling resistance, 2.0138 (falling resistance), 2.0503 (key level)
Swissy (usd/chf)
Bearish outlook below 1.1200
Support: 1.1100, 1.1074, 1.0950
Resistance: 1.1205 (previous support level), 1.1350 (previous support), 1.1630 (previous support), 1.1538 and 1.1631 (falling key resistance)
Nippy (usd/jpy)
Bearish below 110.00 level and any approach looks like a decent sell. 108.00 is the downside key support.
Support: 109.02 (previous falling resistance), 108.70, 108.00 (key level), 107.20
Resistance: 110.00, 110.70, 112.80 (key support) 114.60 (key level), 114.73 (high of Nov. '07)
Loonie (usd/cad)
Key rising support at 0.9876 and key support at 0.9703 (any approach towards this level should provide a decent buy set up). Falling resistance coming in at 1.0103 that should hold on the first test.
Support: 0.9876 (rising support from low) 0.9703 (1 month low)
Resistance: 1.0103 (key level, overhead resistance), 1.0330 (overhead resistance)
Risk Warning: The usual drill. Any information in this post is based on data considered to be reliable, but no representations o guaranteed regards to the accuracy of the data. Neither the information nor any opinion expressed shall be construed to be, or constitute an offer to sell or a solicitation of an offer to buy any investments mentioned herein. There are risks inherent in trading, including the risk of loss greater than the original capital. Past performance is no guarantee of future results.
1.9.08 EUR/CHF Analysis
From my last report, EURCHF bounced off the lower trendline as expected. Supported by the news announcement the US will soon cut their tax rate, and a possible 50 basis point cut on interest rate next meeting, which help the carrys make a nice rebounds after last friday slump.
The above chart is EURCHF dailies at 1.6400. I'm expecting it to touch the upper trendline or at least in the middle of the last swing down in the a couple of days to come. Breaking of the upper trendline will confirmed a bull trend, which is good for truenorthfx hedge. While a bad news can pull the price down to at least 1.6200 or even lower.
1.4.08 EUR/CHF Analysis
EUR/CHF Daily Chart
A side by side double top that I missed. Dragging the price down to the lower trendline. Stoch & CCI both are oversold but ADX showing strong bearish volume. Are we gonna see a reversal here?
If it bounced, expect price to touch the upper trendline. If it broke below, expect target or reversal at 1.6218. 2nd target or reversal point is at the round number 1.6000.
The above chart is a daily chart for long term view. Don't expect to see price reached targets in a single day trade.
2007 Recap
Forex market will start again tommorow. Lets do a summarized recap of 2007 before we move on to 2008.
During the early part of 2007, evidence mounted that the current US economic cycle had peaked, and analysts began to speculate that the US Federal Reserve Bank would cut interest rates. Nonetheless, the Dollar traded sideways for months until the housing bubble burst and the ensuing credit crisis quickly metastasized to the rest of the economy. The Fed responded by cutting interest rates by 50 basis points, and the Dollar began to unravel, losing 10% of its value in a matter of weeks. After that point, the bad news began to pour in.
The oil-exporting countries delivered a one-two punch to the Dollar, first by announcing that the possibility of accepting payment for oil in other currencies, than hinting towards a collective dissolution of their respective Dollar pegs. The Canadian Dollar reached parity with its counterpart to the south shortly thereafter. Countries in the developing world, including Brazil, Russia, and India, also witnessed surges in their respective currencies. The Chinese Yuan continued its slow climb, rising over 6% for the year, though this figure is probably closer to 2-3% in real terms. Even the Japanese Yen, previously held in place by the carry trade, notched an impressive performance as the credit crunch touched off a cascade of risk aversion. Then, of course, there was the interest rate story: by the end of the year, US interest rates were only 25 basis points above EU rates, and Dollar bears were licking their lips.
The news was not all bad, however. Foreign investors proved that they were willing to continue to finance the US twin deficits, though perhaps to a lesser extent than before. There were even several high-profile investments in US financial institutions, led by Sovereign Investment Funds, which collectively claim hundreds of billions of dollars at their disposal. In addition, the world's Central Banks announced plans to pump over $500 Billion into global capital markets, which should especially benefit the Dollar since the US bore the brunt of the credit crunch. Finally, economic data now indicate that US exports have been helped by the declining dollar.
All things considered, it could have been worse.
