FOREX TRADING

EUR/USD closed higher on Monday as it extends the rally off June’s low. The high-range close sets the stage for a steady to higher opening on Tuesday. Stochastics and the RSI are overbought but remain neutral to bullish signalling that sideways to higher prices are possible near-term. If it extends the aforementioned rally, the 38% retracement level of the 2009-2010-decline crossing is the next upside target.

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The EURUSD didn’t make significant movement yesterday. The bullish momentum so far unable to make a break above 1.3000 resistance area but the bullish phase remains intact. The bias remains neutral in nearest term. As you can see on my h4 chart below we have a flag formation indicating potential bullish scenario especially if price break above the flag and 1.3000 area targeting 1.3120. Immediate support at 1.2900. Consistent move below that area could trigger further bearish pressure testing 1.2750 region.

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Bond prices are generally lower as investors seem a little less pessimistic towards risk to start the week. The burning question appears to be whether the notable slowing in economic activity justifies the plunge in yields.

Eurodollar futures – A three day rally for bonds last week saw 21 basis points shaved off the cost of government borrowing as investors rushed headlong into the safety of fixed income. The 10-year note faces a weaker start today even ahead of an expected decline in home builders’ confidence later this morning. September notes are a couple of ticks lower to stand at 123-04 yielding 2.95%. Meanwhile nearby Eurodollar contracts have made minor gains while contracts maturing from June 20011 onwards have declined by one or two pips. (more…)

EUR/USD closed higher on Friday extending the rally off June’s low. The mid-range close sets the stage for a steady opening on Monday. Stochastics and the RSI are overbought but remain neutral to bullish signalling that sideways to higher prices are possible near-term. If it extends the aforementioned rally, the 38% retracement level of the 2009-2010-decline crossing is the next upside target.

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The EURUSD attempted to push higher on Friday but found good resistance around 1.3000 psychological/key level, closed lower at 1.2926 and hit 1.2882 earlier today in Asian session. The bias is neutral in nearest term but overall we are still in upside correction phase. Immediate resistance at 1.2950 area.  Consistent move above that area could trigger further upside momentum re-testing 1.3000 before testing 1.3120 region. On the downside, initial support at 1.2840. Break below that area could trigger further bearish pressure testing 1.2750.

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U.S. Review

Slower Growth, Low Inflation with Big Budget Deficits

• Retail sales and industrial production set the tone for the economic outlook as momentum has slowed to a three month pace of 4 percent compared to a 7 percent year-over-year gain. This slowdown outlook was reinforced by comments by the Federal Reserve.
• Inflation, meanwhile, measured by the Consumer Price Index, is now up just 1.1 percent over the past year. Substantial slack in the economy will likely continue to put downward pressure on core CPI inflation. Slow growth and low inflation suggests big federal fiscal budgets persist for the outlook horizon.

Moderate Paced Recovery with Low Inflation

A Dose of Reality from the Fed: Participants generally anticipated that, in light of the severity of the economic downturn, it would take some time for the economy to converge fully to its longer-run path as characterized by sustainable rates of output growth, unemployment, and inflation consistent with participants’ interpretation of the Federal Reserve’s dual objectives; most expected the convergence process to take no more than five to six years.

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This week, the greenback continued to weaken after fighting back a bit last to end last week and the start of this week. However, we saw it slide across the board. Even more pressured were the CAD and AUD. Perhaps global growth concerns are stabilizing the EUR and GBP which has been almost singled out in April and May. The Japanese yen on the other hand is benefiting from this risk aversion.

EUR/USD Approaches Heavy Resistance Above 1.31

Daily: Yesterday’s EUR/USD and GBP/USD update noted that the EUR/USD was targeting 1.30/1.31 area. The 1.30 area has already been reached. The pair now enters an important resistance zone.

For this to be a wave 4 to be followed by a bearish wave 5, it can not cross above the 1.3250 level. I am anticipating some topping action coming out of next week’s open.

If the RSI rallies above 75 though, the momentum is too bullish to consider the bearish scenario.

I don’t have an opinion other than watching for reactions coming out of this resistance zone.

Weekly: Thee weekly chart offers a different look and fibonacci study from a larger swing. We see that the 1.31/1.32 area is 38.2% retracement here, and 78.6% retracement of the swing measured in the daily chart.

Also, the RSI is still below 60, and below 50 as well. The weekly shows strong momentum, but overall bearish mode. Therefore, until the momentum can be shown to have decelerated and turning, I have no opinion on this until probably after next week.

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HIGHLIGHTS OF THE WEEK

• Data releases this week have suggested a downgrade to our estimate for Q2 GDP growth in the U.S. from 3.6% to the range of 2.0-2.5%.
• This decline in our estimate is primarily driven by much stronger import growth than previously anticipated, and an earlier than expected slowdown in consumer spending.
• That said, it appears domestic demand growth will still accelerate in Q2 as businesses continued to invest heavily in new capital equipment.
• Core consumer prices surpassed market expectations and grew by 0.2% M/M during June, keeping the annual growth rate steady at 0.9%. All and all, expect markets to remain wary of the potential for future deflationary pressures.
• Canada’s trade deficit widened to $500 million in May. Although trumped by a 4.2% real import advance, exports volumes still rose a robust 3.9% M/M.
• Canadian manufacturing shipments gained by a respectable pace of 0.4% M/M in May. Although inventories contracted on the month, draw-down pressures have largely abated, and new and unfilled order both rose.
• The Bank of Canada’s Business Outlook Survey for Q2/2010 revealed that businesses remain optimistic and more firms are reaching capacity. However, fewer businesses plan to invest than in the previous quarter.
• Canadian housing data for June showed that cooling is underway, with a 8.2% M/M tumble in sales and a 2.5% M/M decline in the seasonally-adjusted average price.

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Wherever traders looked for signs of strength in the American economy this week all they could discern was slippage or stasis. From the national Federation of Independent Business Index (NFIB) on Monday to the University of Michigan consumer Sentiment Survey on Friday every major US measure depicted a recovery fast losing steam, dragged down by unemployment, weak consumption, lack of wage growth and a moribund housing market.

The inventory rebuilding that powered expansion in the fourth quarter of last year and the first three months of 2010 has run its course. In May inventories gained only 0.1%, the smallest amount this year and the weakest since turning positive in October of last year.

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FX Briefing

Highlights

• US growth slower; retail trade and manufacturing sector weaker
• Fed sees growth risks return, puts exit discussion on hold
• Money market rates in eurozone climb further, liquidity withdrawal continues

US Growth Doubts Weigh on Dollar

This week the euro continued its rally against the US dollar and against most commodity and emerging market currencies. The majority of European currencies have managed to hold their ground versus the euro – some (such as the pound Sterling and the Scandinavian currencies) more than others (e.g. the Czech koruna, the Hungarian forint and the Swiss franc). The yen, like the latter, has slipped somewhat against the euro.

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Overview

Stocks tried to rally for a second consecutive week, subsequently giving up those small gains, to end unchanged (though the Nikkei and Shanghai Composite lost 1.85%). Rather than the usual ‘risk on/risk off’ knee-jerk reaction investors seem to have become a little more savvy; they continue buying top-quality bonds, so that US benchmark two-year TNote set a record low yield at 0.58%, UK five-year Gilts matched 2009′s record low 1.985%, while ten-year BBB+ rated Mexican ones set a new record low at 6.64% as did Brazil’s BBB- at 4.34%. Peripheral Eurozone Treasuries remain under pressure trading at or close to record spreads with the ECB’s reluctant quantative easing in place. While buying yen, taking it to 86.50 per USD, they sold dollars against most currencies taking the Euro to $1.3008 and Cable $1.5473, an increase of 2.5% in five days leaving consensus opinion (for a stronger greenback) head-scratching calling this a ‘technical short-covering rally’; previous ‘darlings’ are lagging well behind. CBOT Wheat rallied strongly again for a third consecutive week, caused by the heat wave in Europe and parts of North America, reaching 598.5 cents per bushel and its most expensive in a year, dragging Corn up to 397 cents.

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Total CPI was bang-on expectations at -0.1% m/m, resulting in a y/y growth rate of 1.1%. The closely watched core measure came in above expectations with a 0.2% m/m gain, holding the annual rate steady at 0.9%.

The annual growth rate in total CPI dropped significantly from 2.0% in May, but this was due to baseyear effects from large energy price increases this time last year.

In recent months, a largest single downward influence on the core measure was owner’s equivalent rent (OER), which edged up 0.1% m/m in June. After six months of continuous declines, this subcomponent has finally held its ground in the past two months. Nevertheless, OER still shaved half a percentage point from the annual growth rate of the core measure. (more…)

The EURUSD continued its bullish momentum yesterday, topped at 1.2953 and closed at 1.2946. The bias remains bullish in nearest term targeting 1.3000 and 1.3125 region. Immediate support at 1.2850. Break below that area could lead us into neutral zone in nearest term but the we are still in a strong bullish phase now and only a movement below the minor bullish channel (red channel) and 1.2750 area could diminish the current strong bullish momentum testing 1.2650 area.

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EUR/USD closed higher on Thursday extending the rally off June’s low. The high-range close sets the stage for a steady to higher opening on Friday. Stochastics and the RSI are overbought but remain neutral to bullish signalling that sideways to higher prices are possible near-term. If it extends the aforementioned rally, the 38% retracement level of the 2009-2010-decline crossing is the next upside target.

USD/JPY closed lower due to short covering on Thursday as it consolidates some of last week’s rally. The low-range close sets the stage for a steady to lower opening on Friday. Stochastics and the RSI are turning neutral to bearish signalling that sideways to lower prices are possible near-term. If it renews the decline off May’s high, last November’s low crossing is the next downside target. Multiple closes above the 20-day moving average crossing would confirm that a short-term low has been posted. (more…)

The greenback struggled against the major currencies on Thursday, with the exception of the Australian and Canadian dollars. The dollar fell by nearly 1.2% to a two-month low against the euro to relinquish the 1.29-level while shedding around 1.1% versus the Japanese yen to slump to a 7-month low at 87.25. The winning streak in the US equity bourses ended at seven consecutive sessions, with the Dow Jones, S&P 500 and the Nasdaq all trading lower by 0.5%. Crude oil also struggled lower, losing almost 0.9% to $76.43-per barrel. (more…)