The EUR/USD has already dropped to key support at 1.4725 and has bounced back up. The pair is most likely going to continue moving in a sideways range between 1.4725 and 1.4875. If some other piece of bullish USD news does happen to come out within the next day or two, the EUR/USD may drop down to support at about 1.4625, but that is where the buck stops.
You will see similar movement with the USD versus the Japanese yen (JPY) and the CHF. Both the USD/JPY and the USD/CHF have risen to key levels of resistance and will most likely turn back around and fall back into sideways trading ranges.
Don't try and chase this bullish USD move just yet. You will find some trading opportunities as these pairs trade in their ranges, but you should keep you time horizon on your trades a little shorter.
Mid Term View
USD Drifts Lowers
The dollar traded lower against the majors at the start of the week, relinquishing the 2.07-level against the sterling and falling near the 118-mark versus the yen. Given the heightened uncertainty stemming from the ongoing credit crisis, growing fears of an imminent recession in the US economy continue to weigh on the greenback. With further deterioration in the housing market and consumer confidence, the key question among dollar bears is whether another 25-basis point rate cut from the FOMC is forthcoming.
Although the Fed adopted a neutral tone in its October policy statement while revealing an uncertain outlook in the minutes, further turmoil in the financial markets and accelerated deterioration in economic fundamentals will likely force the FOMC to ease again in December. Particularly key in the next policy decision will be the fragile combination consumer confidence, inflationary pressure, and economic growth data. In the Tuesday session, traders will focus on the Conference Board's November indication of consumer confidence, seen falling sharply to 91.6 versus 95.6 from October. Also due out this week will be October durable goods orders, existing home sales, a preliminary reading on Q3 GDP, October new home sales, October PCE and Chicago PMI. Interestingly, the data for Q3 GDP are expected to reveal resilient economic growth, expanding at a robust 3.5% y/y and 4.8% q/q, up from 2.6% y/y and 3.9% q/q, respectively. The Fed's Beige Book, slated for release on Wednesday will provide further insight into current conditions in the housing market, capital expenditures.
ECB President Jean-Claude Trichet reiterated that sharp and abrupt moves were disruptive to the global economy. He said that he was not campaigning for the international use of euros, adding that he has 'noted with great attention' the statements from US officials' such as Treasury Secretary Paulson that the strong dollar is in the interest of the US. There is no doubt that the euro's rapid ascent against the dollar and yen has started to impact the Eurozone economy. We expect more government jawboning to take place, but place little stock in any concerted intervention efforts to inflate the beleaguered greenback.
Weekend EUR/CHF
On my previous post. I stated that EUR/CHF pair should continues its bear trend once price on 4h chart closed below the 74.6% Fibo of its major swing up at around 1.6330.
I have to make a correction there. Since the Fibonacci we are looking at is from a major swing, it is appropriate to check the price action at a bigger time frame.
Price did closed below that level on 4h chart, but on the daily chart... it didn't. The last candle/bar on the dailies ended with a pin bar. If on monday, the closing bar is higher than last friday's closing price. The pin bar will be confirmed.
However, I also placed a sell stop order 5 pips below friday's low. This is to safeguard if ever EUR/CHF continues to drop on Monday.
On friday, the fundamental standpoint supports the further carrys unwinding view. However, just yesterday I heard Brazil central bank start to intervene by purchasing massive quantities of Dollar-denominated assets in the open market. Canada and Japan are at risk, hope they follow suit.
Carry Trade Continues to Suffer
The carry trade is still unwinding, if not coming to an outright end; the result is that the Yen is belatedly joining the ranks of the rest of the world's major currencies, which have risen tremendously against the Dollar. The reason for the sudden weakness in the carry trade (i.e. Yen strength) is volatility. The US "credit crunch" began to significantly effect US bond and stock market valuations almost four months ago, but the full impact still hasn't been felt. The latest development concerns the quarterly earnings release for Freddie Mac, an American company whose main purpose is to provide liquidity to the US mortgage market, through the buying and selling of mortgage-backed securities. However, Freddie Mac is now bleeding money, and while it is unofficially guaranteed by the federal government, investors are seriously questioning its ability to prop up the ailing market for housing CDOs. And this uncertainty is causing investors to eschew risk, in short, to abandon the carry trade in favor of more traditional forex strategies.
EUR/CHF 1h just closed below the 74.2% fib (1.6330) While 4h chart haven't confirm it yet but probably will. I'm looking at 1.6176 as the target if ever bear momentum increases. Though 1h and 4h chart now is at oversold level, so its hard to tell.
If anyone out there hedging long on EUR/USD against USD/CHF. You may consider cut some losses and hold the remaining, or directly short the EUR/CHF pair if you think it will fall using technical analysis.
Will the Fed Hold Rates on their Next Meeting?
In a recent speech, a prominent Federal Reserve Board governor strongly hinted that the Fed would maintain US interest rates at current levels at the Fed's next meeting. The Fed is caught in the delicate position of trying to balance economic growth with the specter of inflation. While technically the Fed is always trying to meditate between these two outcomes, its current position is especially tenuous since the US economy is trending downward while inflation trends upward. Despite the emphatic claims to the contrary, futures markets are still pricing in a rate cut, setting the stage for a showdown with the Fed. As usual, the Dollar's fate hangs in the balance.
Read more at msnbc
Yen Carry Trade: Going Strong or Coming to an End
Yesterday, the Financial Times ran two stories on the Japanese carry trade, painting a seemingly contradictory picture. The first article profiled the rise in the number of retail forex accounts in Japan, projected to reach 1 million by year-end. More amazing is the fact that many of these traders are actually quite sophisticated, taking long and short positions in multiple currencies, though of course the most popular bet remains the carry trade, which involves going short the Yen and long a higher-yielding currency. Meanwhile, as the second article expounded, the Yen carry trade is under pressure, having appreciated nearly 5% against the US Dollar, Euro and Australian Dollar. The cause is certainly volatility in global capital markets, precipitated by what has been termed a "credit crunch," itself caused by the slump in housing prices. The hoard of Japanese retail investors may have to reverse their positions...
Read More: Pressure grows on yen carry trades
Data Caps USD Gains
The greenback posted its largest weekly gain on a trade-weighted basis in a month despite relinquishing its grip in Friday trading. Nevertheless, lingering fears over credit conditions and the credibility of banks' balance sheets continue to plague the currency. Accordingly, the currency market will continue to be closely correlated with equity market moves - particularly the trajectory of the carry trade pairs, amid times of heightened volatility.
Economic data released earlier in the session derailed the dollar's rebound against the majors, pushing it toward session lows versus the euro and sterling.
Fed Board Member Kroszner downplayed the prospects for another FOMC rate cut over the coming year, saying "the current stance of monetary policy should help the economy weather the rough patch during the next year, with growth then likely to return to its longer-run sustainable rate". Fed members have been tempering market expectations for another 25-basis point rate cut at the December FOMC meeting particularly after market sentiment in October fully discounted an ease despite the actual decision being much closer than expectations suggested.
