Saturday, May 23, 2009
EUR/USD rose in the week 4% and ended above 1.4000 (highest since December). The pair has been rising after bottoming on Monday at 1.3425. Since then the pair has been moving in an up trend. Against the Pound, the Euro rose today but not enough to erase weekly losses.
GBP/USD is ending the week above 1.5900. With today increase of 0.33% from opening price, the Pound has completed five consecutive days of gains against the Dollar. During the American session the pair tested the 5-month high at 1.5940 reached during the European session but failed to break above.
USD/CHF has ended the week below 1.0800 for the first time since December. The pair also fell the five days of the week completing a rally of almost 400 pips. Today the pair has fallen 0.66% from opening price.
The Dollar could only make progress against the Yen rising modestly 0.49% but not enough to recover of weekly losses. This is the third consecutive week with negative results for the Dollar. Yen lost across the board during the week but in a smaller scale compared to the greenback.
The yen is weaker across the board. Against European currencies is losing for the day. GBP/JPY broke an important resistance and now is at 150.85 (one-month high). EUR/JPY is above 132.00 rising 1.27% since the begging of the day.
Against the Yen, the Euro is also stronger. EUR/JPY broke above 132.00 rising to 132.70 which is the highest of the week. So far today the par has risen 1.11% from opening price.
The current week, Euro has won 4.0% against Dollar from 1.3480 Monday opening price to reach 1.4040, 4-month high.
Despite signs advancing a correction lower, the Euro bullish trend is strong enough: "Pair reached 1.4000 and at the time, rebound there yet bullish trend is strong enough for another peak higher. Current candle open under previous doji close, suggesting the beginning of a short downside correction as long as maximum remains unbroken, that could reach the 20 SMA that’s losing steam around 1.3935."
GBP/USD is trading its fifth consecutive positive day after trading in Monday low at 1.5115 to win 850 pips to reach fresh 6-month high at 1.5945. The current week the Sterling is gaining almost 5.0% against Greenback from 1.5170 Monday opening to the current 1.5910.
Uptrend in cable could be focusing in 1.60 zone: "Bullish momentum continues slowly addressing to the key 1.60 zone. Hourly indicators suggest more upside bias in the pair, while price remains well bid above 20 SMA. Expected acceleration above 1.5950. Support levels: 1.5890 1.5840 1. 5770. Resistance levels: 1.5950 1.6000 1.6030."
The Euro has been rallying continuously for the whole week and from 1.3425 low on Monday EUR/USD has reached a 4 month high at 1.4030 ahead of Friday's U.S. session opening.
Affirms that, despite signs advancing a correction lower, the Euro bullish trend is strong enough: "Pair reached 1.4000 and at the time, rebound there yet bullish trend is strong enough for another peak higher. Current candle open under previous doji close, suggesting the beginning of a short downside correction as long as maximum remains unbroken, that could reach the 20 SMA that’s losing steam around 1.3935."
Currently the pair is trading around 94.60/70, 0.80% above today's opening price.
"Pair seems to be forming a floor in the hourly chart, consolidating between 93.85 and 94.30. Now attempting to break above 20 SMA at 94.15, pair needs to break range to confirm further bias. Hourly indicators suggest upside continuations as the pair seems to not have enough sellers at actual levels. Bigger time frames also suggest pair is exhausted to the downside, daily close could be key for the pair. Support levels: 93.83 93.48 93.10. Resistance levels: 94.30 94.60 95.10."
Resistance levels lie at intra-day high at 1.4030 and above here, 1.4055 (January high) and 1.4145, (Dec 31 high). On the downside, immediate support level remains at the 13925/40 area, and below there, today's low at 1.3895 and 1.3865.
According to Valeria Bednarik, collaborator at FXstreet.com, affirms that, despite signs advancing a correction lower, the Euro bullish trend is strong enough: "Pair reached 1.4000 and at the time, rebound there yet bullish trend is strong enough for another peak higher. Current candle open under previous doji close, suggesting the beginning of a short downside correction as long as maximum remains unbroken, that could reach the 20 SMA that’s losing steam around 1.3935."
Dow Jones Industrials Index drops 0.20% while the Nasdaq index falls 0.60% and the S&P Index sheds 0.40% in the first half hour of trading.
The financial sector is mixed after the failure of Bank United Financial, the 34th bank failure this year so far, which reminds the delicate situation of the baking sector, despite the satisfying performance of the largest banks on the recent "stress test".
Euro Pound and Yen at mid-term highs
The Euro has strengthened further ahead of the U.S session opening and the pair has reahed levels above 1.4000 for the first time since early January, hitting 1.4030 so far.
GBP/USD has advanced to levels above 1.5900 ahead of the U.S. session opening to hit a fresh 6-month high at 1.5945, ti ease to levels right above 1.5900 later on. At the moment, the Pound moves around 1.5880.
USD/JPY is testing resistance level at 94.25 after having bounced at 2-moths low 93.85 ahead of the U.S session opening.
The monthly increase has been substantially lower than the 0.5% increment expected by the market. Year on year, retail sales have increased 4.8%.
The USD/CAD decline from 1.1815 high on May 18 has extended to a fresh 7-month low at 1.1203 shorly after the release of Canadian retail sales.
According to Anna Coulling, technical analyst at Master the Markets, indicators show the poair pointing down to 1.1000: "With all three moving averages bearing down on the chart this price action has continued in early trading this morning with a further steep decline which now brings the 1.1 into view and given the present rate of fall this target could easily be reached in the next couple of days, at which point a return to parity becomes a distinct possibility in the medium term, and the only area of resistance now likely to impede this target lies at 1.08."
This uptick in sentiment is somewhat unspectacular, since “The Bloomberg-JPMorgan Asia Dollar Index, which tracks the 10 most-active regional currencies,” has now risen for almost three consecutive months [See chart below]. Leading the pack are the Taiwan Dollar and South Korean Won, which recently touched five-month and seven-month highs, respectively. “The Korean currency has climbed 28 percent since reaching an 11-year low of 1,597.45 in March.”
Investors are now pouring money back into Asia at rapid clip. “Asia ex-Japan received $933 million in the week ended May 20, the most among emerging-market stock funds, bringing the total this year to $6.9 billion.” Meanwhile, the “The MSCI Asia Pacific Index of regional stocks climbed 22 percent this quarter” while Chinese stocks are up 45% since the beginning of 2009.
But it’s unclear - doubtful is a better word - whether this rally is supported by economic fundamentals. One commentator summarized this contradiction as follows: “Improved sentiment has led to a massive resurgence in flows to emerging markets, irrespective of the underlying data, which remains weak. Investors are going out of dollars to riskier markets, riskier currencies.”
Let’s drill down into some of the data. Chinese exports fell 15% in April. Japan’s economy contracted 15% in the most recent quarter. Singapore’s exports are down 20% on an annualized basis. The South Korean economy is projected to shrink by 2% this year. The Central Bank of Thailand just cut its benchmark interest rate to an unbelievable 1%. The only bright spot economically is Taiwan, which is benefiting both from improved economic ties with China and a healthy current account surplus. I suppose everything is relative, as “developing Asian economies will grow 4.8 percent in 2009, even as the world economy contracts 1.3 percent” according to the International Monetary Fund.
The notion that the rally is not rooted in fundamentals is shared by the region’s Central Banks, which clearly realize that economic recovery will be much more difficult in the face of currency appreciation. One analyst argues that, “Until the signs of global economic recovery become more convincing, central banks will unlikely tolerate significant currency appreciation.” The Central Banks of South Korea, Taiwan, and Indonesia have already actively intervened to hold their currencies down, while Malaysia and Singapore (discussed in a Forexblog post last week) have also intervened for the sake of stability.
As a result, this rally could soon begin to lose steam. “A ‘correction’ in regional currencies is ‘appropriate’ following recent gains,” said one analyst. Another has called the rally “overdone.” Still, Central Banks and economic data pale in comparison to capital flows and risk/reward analysis. In short, these currencies (and other investments) will continue to find buyers for as long as there are those hungry for risk. Citigroup, whose “Asia-Pacific foreign-exchange volume may rise about 10 percent from the first quarter,” is bullish. A representative of the firm declared: “Fund managers are still ’sitting on lots and lots of cash’ so the pickup in volumes will continue.”
Over the last couple months, the Euro has thoroughly outperformed the Dollar, which recently fell to a five-month low on a trade-weighted basis. Over the same period, global stock and commodity prices have also risen quickly, which is not a coincidence.
In other words, investors are allocating capital on the basis of risk, rather than in accordance with (economic) fundamentals. For example, “ICE’s Dollar Index and crude oil have a correlation of minus 0.61 in the past two months, compared with minus 0.26 since the start of the year,” as rising oil prices and the declining Dollar feed back into each other.
Meanwhile, “Implied volatility on major currencies, which reflects investors’ expectations of currency swings, fell to 13.96 percent yesterday, from…17.22 percent at the end of March. A drop in volatility tends to signal less demand for options to protect investors from currency swings.” This indicator is now at its lowest level since the days preceding the Lehman Brothers bankruptcy and subsequent stock market collapse. One would normally expect a correlation between risk and return, but in this case, rising returns have been accompanied by lower risk.
Even more unbelievable is that this decline in risk is taking place against the backdrop of declining economic fundamentals. “Risk appetite in the currency market is nothing short of impressive considering the fact that the Fed reduced their growth forecasts,” said one analyst. However, “The euro-area economy will contract 4.2 percent this year, according to the International Monetary Fund, more than the projected 2.8 percent contraction in the U.S. and 4.1 percent slump in the U.K.” If investors were focusing on this divergence in economic growth, one would expect the Euro would be falling.
One hypothesis is that inflation-conscious traders are flocking to the Euro, since the ECB remains vigilant about fighting inflation, even in the face of declining prices and aggregate demand. After cutting rates to a record low 1% earlier this month, the ECB unveiled its own version of a quantitative easing plan, involving the purchase of 60 billion euros worth of low risk securities. But this is a pittance, both relative to the size of the EU economy (it represents a mere .6% of GDP) and compared to the Trillion Dollar Fed program. This led one analyst to call the ECB’s plan “chicken feed.” While all of this is noteworthy, it’s unlikely that this is having a meaningful effect on forex markets, which still remain focused on (avoiding) deflation.
If the Euro is to continue rising, it must overcome some technical obstacles. “The euro could hit a ceiling if the recent resilience of U.S. stock markets faces headwinds. ‘At some point…stronger nongovernment growth has to show up to sustain and justify these moves in equities.’ ” It’s interesting that the fear of Euro bulls is not that the EU economy won’t recover, but rather that US stock prices are overvalued. Given recent market movements, however, their concerns are reasonable, and “any disappointment [in corporate fundamentals] could provide an excuse to take profit [this] week — benefiting the dollar.”