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…)

The dollar index is down by 0.3% at the start of North American trading still typified by thin trading conditions. The underlying theme remains intact. Investors expect to build on the closing arguments from 2009 and see better things happening next year. There is building anxiety in the bond markets tipping off investors that the period of ultra-low monetary policy is likely to disappear from the agenda in 2010 and like it or not, a higher and steeper yield curve is but one of the ingredients of recovery. The dollar’s recent rally in line with that view has come to a sharp halt as investors realize that there will be no jump in short rates, just a gradual rise. Meanwhile the Japanese yen continues to play second fiddle to the dollar as investors figure it will be left in the dust as and when global interest rates finally budge.

U.S. dollar – With interest rate sentiment shifting markedly during the past several weeks, many investors were forced out of dollar-short positions given the speed and ferocity with which the dollar rebounded. According to fed funds futures contracts trading in Chicago there is more than a 60% chance that the FOMC will raise official rates by a quarter point before June. At the end of November those odds were 48%. With greater prospects for rising yields investors were either scared out of their initial rationale for seeking a lower dollar or have since embraced the chance to hold an asset that might soon carry a meaningful yield.

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Looking at the US economy in isolation, the dollar outlook is certainly not encouraging as it will remain weighed down by fears over reserve diversification and rising government debt. If the perspective widens to the global economy, then the outlook looks more encouraging. The European economies will under-perform while fears over a lack of sustainability in the global economy are also liable to increase. In this environment, there should be only limited net capital outflows from the US and the dollar will also gain support on valuation grounds. Overall, the dollar should strengthen towards 1.39 against the Euro early in 2010, although probably for the wrong reasons.

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It Is The Treasury Market Now

Forex Trader Note: The global equity markets have moved higher in recent trade and have been backed by strong oil ($79) and hard commodity moves. The ‘Long Equity-and-Oil/Short Usd’ correlation is not in play due to the fact that U.S. Treasury yields (dollar denominated) are paying close to 4% per year interest, and looking to increase that return in advance of any overnight or discount interest rate increases from the Federal Reserve.

The imbalance between the Fed’s 0.25% overnight rate, and the 4% 10 year Treasury note yield is creating a unique near-term situation that will have the dollar pulled around a little, until fair value is ultimately found against the major pairs.

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Daily Technical Analysis

EURUSD Outlook

The EURUSD didn’t make significant movement yesterday, moved in only small range of 60 pips. On h4 chart below we can see that after the bearish scenario was interrupted by violation to the bearish channel, price seems to consolidating in a range area with 1.4420 area as a key resistance level and 1.4250 as key support level at this phase. The bias remains neutral and we need a valid break from the range area to see clearer direction. Break above 1.4420 should trigger further bullish momentum towards 1.4585 while break below 1.4250 should trigger further bearish momentum testing 1.4170 – 1.4127. We will have US consumer confidence data today which expected to be the market mover which can take us out from this ranging market and give clearer direction. A better than expected number should be good for the Dollar while a worse than expected number should weaken the Dollar.

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EUR/USD closed higher due to short covering on Monday as it consolidated some of this month’s decline. The mid-range close sets the stage for a steady to higher opening on Tuesday. 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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Momentum Remains Light

The currency market came to a standstill during European trading hours, after a smoothly trending Asian session that had the dollar sold. The range-bound trading pattern is in-line with the light trading volumes observed overnight, which did not allow the market to move anywhere decisively, or at least to test any important price points. Ahead, the market is expected to pick up some additional momentum during the U.S. open, but nothing out of the ordinary that could test easily the 4 Hour chart ranges that will need to break if a trend reversal can follow through.

Dollar Index Technical View: TheLFB Member Charts

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Daily Technical Analysis

EURUSD Outlook

The EURUSD attempted to push higher on Thursday, topped at 1.4417 but closed lower at 1.4353. This fact lead me to a conclusion that price might be in consolidation phase. It’s too early for bullish scenario, but the bearish scenario is not over yet, not until we have consistent move above 1.4420 area. Break above that area should trigger further bullish momentum towards 1.4585 area. The bias is neutral in nearest term. Immediate support at 1.4250 area. Break below that area should continue the bearish scenario testing 1.4170 – 1.4127 area and keep the bearish scenario intact.

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