FOREX TRADING

The general consensus of economists is that the US will experience 2 to 2.5% growth in 2010 with equity market gains limited to single digits and the USD likely to post a modest recovery. Aggressive fiscal and monetary stimulus from the Fed and US government helped to stabilize the financial markets and end the US recession. The USD posted 2.2% growth in Q3. The rise in US Q3 growth reflects an increase in consumer spending sparked by government programs like the cash for clunkers and tax credit for first-time homebuyers. The rebound in US GDP was primarily fueled by government action. It is not clear that the recovery can be sustained when these government programs expire and the Fed begins to withdraw stimulus. There is a great deal of uncertainty about the outlook and sustainability of the recovery for GDP in 2010. In the past, deep recessions historically lead to strong recoveries. Financial crisis produce weak recoveries. Because the global recession was caused by a financial crisis the GDP recovery may be weak.

One of the major headwinds to US growth is the risk that the US unemployment rate will remain elevated throughout most of 2010. According to Blue Chip Economics 1.1mln jobs will be created in 2010. Because the population is growing at a rate of 2mln per year 1.3mln jobs are needed just to keep up with population growth. This means that the US unemployment rate may hover around 10% for most of 2010. According to Career Builder.com one-fifth of US employers plan to add full-time jobs in 2010, this is up 14% from last year, just 9% said they plan to cut headcount in 2010 and 61% plan no change in staffing. A number of economists suggest that the headline unemployment rate may actually continue to rise as the labor pool is shrinking and many unemployed who run out severance try to come back into the workforce. Continued high unemployment will limit consumer spending. There is doubt of whether the increase in consumer spending during Q3 will continue in 2010 as government support plans expire. The US savings rate has been rising as consumers try to reduce debt burdens and fear becoming unemployed. If consumers continue to increase saving it will add an additional headwind for the US recovery.

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EUR/USD closed lower on Wednesday as it consolidated some of the rebound off last week’s low. A short covering rally tempered early session losses and the high-range close sets the stage for a steady to higher opening on Thursday. Stochastics and the RSI are turning bullish signalling that sideways to higher prices are possible near-term. Closes above the 20-day moving average crossing are needed to confirm that a short-term low has been posted. If its renews this month’s decline, the 38% retracement level of the 2008-2009-rally crossing is the next downside target.

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Daily Technical Analysis

EURUSD Outlook

The EURUSD attempted to push lower yesterday, bottomed at 1.4272 but closed higher at 1.4338. The pair is still consolidating in range area. I think we are in no trading zone now as direction is not clear in nearest term. Another way to trade in this kind of market is to short around 1.4420/50 or long around 1.4250 with a tight stop loss. We need a break from the range area to see clearer direction.  Break above 1.4420/50 area should be seen as bearish failure and trigger further bullish momentum towards 1.4600 even 1.4800 area. Break below 1.4250 should trigger further bearish momentum targeting 1.4170 – 1.4130 before testing 1.4000 area.

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USD Higher on Surge in Chicago PMI

• USD: Higher, stock rally stalls, optimism about US recovery fuels debate over timing of Fed tightening
• JPY: Lower, fiscal worries and widening yield gap pressure JPY, fear JAL will file for bankruptcy
• EUR: Lower, EU M3 unexpectedly declined in November, Madrid downgrade by S&P
• GBP: Higher, concern about UK debt, sharp rebound in cross to EUR and JPY
• CAD and AUD: AUD & CAD lower, tracking the decline in the price of gold and equities

Overview

USD traded higher Wednesday supported by fiscal worries in Japan and the UK and optimism about the US recovery. S&P warns that Japan’s sovereign debt rating may be cut if Japan does not take action to reduce its debt. The Telegraph reports that UK debt is worse than Italy’s. Weaker equity market trade and a Moody’s downgrade of Abu Dhabi Commercial Bank rating sparked safe haven demand for the USD. JPY was also pressured by report and Japan Airlines may be on the verge of filing for bankruptcy. EUR was pressured by report of an unexpected decline in EU M3. The decline in M3 generates concern about economic recovery in the EU. GBP experienced a sharp rebound in cross trade to the EUR in reaction to report that S&P has downgraded too regions in Spain. The downgrade raises the risk of a downgrade of Spain’s sovereign debt rating. Commodity currencies were pressured by weaker equity market trade and decline to one week low the price of gold. USD is supported by optimism about the US recovery and speculation that improving outlook for the economy will cause the Fed to begin to withdraw stimulus. US economic data was positive with Chicago manufacturing PMI rising more than expected. The Chicago PMI rise fuels optimism about the recovery in the US manufacturing sector. The direction of equity markets and sovereign debt risks are the main drivers for this week’s FX trade. (more…)

Daily Technical Analysis

EURUSD Outlook

The EURUSD attempted to push higher yesterday, topped at 1.4457 but further bullish momentum was rejected as price whipsawed to the downside, bottomed at 1.4331 and closed at 1.4353. On h4 chart below we can see that was a case of a false breakout from 1.4420 – 1.4250 range area which usually trigger significant bearish momentum, at least testing 1.4250 area. Break below that area should trigger further bearish scenario towards 1.4170 – 1.4130 area. Immediate resistance at 1.4420 – 1.4450 area.

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Majors Form Important Swing Points

The dollar index was sold during the overnight session, but as U.S. trade approached, the major pairs started losing ground gained earlier in the day. This move was widely expected because the uptrend of the last few days came on very light trading volumes, and more importantly, against the near and medium term trend reads. Looking ahead, the dollar index is expected to continue its uptrend, breaking free from its correlation with S&P futures and to some extent, with the commodity market. For the major pairs, the next important support area is to test lows set in pre-Christmas trading.

Dollar Index Technical View: TheLFB Member Charts

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• USD: Mixed, pares looses as consumer confidence rises more than expected
• JPY: Lower, US/Japan 10 year bond yield spread at widest level in two years
• EUR: Lower, downside limited by gains in cross trade to JPY and GBP and improving risk appetite
• GBP: Lower, concern about UK debt and election uncertainty
• CAD and AUD: AUD higher & CAD mixed, improving growth outlook, cooper prices at new highs for 2009

Overview

USD opened lower Tuesday pressured by improving risk appetite as global equities rally to their highest level for the year. As markets reopened from Christmas holiday in the UK and Australia, GBP continued to underperform pressured by concern about UK debt and AUD rallied more than 1% supported by surge in copper prices to a new high for 2009. USD consolidated recent gains versus the JPY as the US/Japan 10 year bond yield spread rose to its widest level in two years. There was limited reaction to report that Japan’s Finance Minister Fujii has been hospitalized. (more…)

€

The euro moved higher vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.4455 level and was supported around the $1.4355 level. U.S. equity markets were marginally stronger through mid-day North American trading. Data released in the U.S. today saw December consumer confidence improve to a weaker-than-expected 52.9 from a revised November reading of 50.6, the third consecutive monthly increase. Also, the October CaseShiller home price index was off 7.28% y/y, an improvement from September’s -9.27% decline. Nonetheless, this represented the fifth consecutive month of increases in housing prices. Tomorrow, the December Chicago purchasing manager index will be released followed by Thursday’s data releases of weekly initial jobless claims and continuing jobless claims. Yesterday, the Federal Reserve announced measures to absorb some of the US$ 1 trillion in excess reserves in the U.S. banking system. The program would involve selling term deposits in which excess cash would be put aside, easing downward pressure on the federal funds rate. (more…)