FOREX TRADING

EUR/USD closed higher on Monday as it consolidates above the 10-day moving average crossing. The high-range close sets the stage for a steady to higher opening on Tuesday. However, stochastics and the RSI have turned bearish hinting that a short-term top might be in or is near. Closes below the 20-day moving average crossing are needed to confirm that a short-term top has been posted. If it renews the rally off June’s low, the 38% retracement level of the 2009-2010-decline crossing s the next upside target.

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EUR/USD closed higher on Friday as it consolidates above the 10-day moving average crossing. The high-range close sets the stage for a steady to higher opening on Monday. However, stochastics and the RSI have turned bearish hinting that a short-term top might be in or is near. Closes below the 20-day moving average crossing are needed to confirm that a short-term top has been posted. If it renews the rally off June’s low, the 38% retracement level of the 2009-2010-decline crossing s the next upside target.

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EURUSD Outlook

The EURUSD was indecisive on Friday. Price attempted to push lower, bottomed at 1.2794 but closed higher at 1.2914. On h4 chart below we can see that price is moving inside a triangle formation after failed to consistently move above 1.3000 and found support around 1.2735 indicating consolidation. Breakout above the triangle could trigger further upside pressure re-testing 1.3000 before targeting 1.3120. On the other hand, breakdown below the triangle could trigger further bearish pressure testing 1.2735 region. Overall we are still in bullish phase.

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Highlights

• Stress test results are in–Yawn
• Sterling bolstered as some of the economic gloom lifts
• German recovery becoming difficult to ignore
• JPY-strength becoming an issue in Tokyo
• Key data and events to watch next week

Stress test results are in–Yawn

The long-awaited results of the Eurozone banking sector stress tests were delivered on Friday and markets greeted them with a collective yawn. Earlier leaks led markets to conclude the adverse scenarios would not be especially stringent, causing most to discount the results. To re-cap, only 7 of the 91 banks tested failed, requiring a total of only EUR 3.5 bio to be raised in new capital. To put that number in perspective, some analysts reckon Spanish banks alone need to raise EUR 40 bio to be adequately capitalized. The stress tests also excluded the potential for a sovereign debt default and focused only on securities held in banks’ short-term trading books, and not the 90% of banks’ government bond holdings that are classified ‘hold to maturity.’ But the basis of the European debt crisis was exactly that–banks holding large amounts of Euro-area government debt were vulnerable in the event of a sovereign default. The lack of credibility of the stress tests raises the risk that market concerns over Euro-area financial sector stability will resurface, leading to another round of speculation that the EUR is a doomed currency. (more…)

This week, the greenback is seen fighting back, although its gains have been slight. It has been most apparent with the EUR/USD. Against the USD/JPY, it is simply holding the Japanese yen from further gains. It also gained insignificantly against the Sterling. Against the AUD and CAD however, the USD actually continued to lose. These mixed results suggest that even though the USD is fighting back, it may still be weak, with the Euro even weaker. Let’s take a look at this week’s action, and see what we can anticipate.

EUR/USD Eyes 1.27, 1.25, 1.2150 (Link)

4H: The EUR/USD has established a top at 1.30 this week after breaking below the double top pattern. Thursday, we saw the EUR/USD surge but this was still a pullback. The targets established in an earlier update are still valid. We know the first near-term target is 1.27, and the market action has set up for a swing towards this level. You can see this projection on the chart above.

I forgot to put the 60 and 40 in the RSI, but you can see the RSI held below 60, a good sign for the bearish outlook.

Daily: The EUR/USD in the daily time-frame has finished 2 bullish swings, and was rejected that 1.30, 61.8% retracement level. I have mentioned the first target is at 1.25. If the market supports the pair here, we may have 5th wave swing towards and possibly above the 1.30 level. However, if 1.25 breaks, this count is invalid. (more…)

U.S. Review

Home Is Where the Economy’s Heart Is

• Housing starts and existing home sales declined in June, reflecting the winding down of homebuyer tax credits.
• Building confidence fell to 14 in July, and June’s numbers were revised down slightly.
• The effect from the unwinding of various economic stimulus programs is evident in other data, with the leading indicators declining 0.2 percent and weekly firsttime unemployment claims bouncing back to 464,000.
• Bernanke’s midyear report to Congress outlined possible future steps the Fed may take to boost economic growth.

We Have Got to Get in Shape

If the state of the nation’s housing market is at the center of the economy’s near-term prospects, then we have got to get in shape. Nearly all of the major housing indicators reported this past week showed more weakness than was widely expected, suggesting that the payback from the homebuyer tax credit program will be a bit deeper and longer lasting than many had hoped. One of the most disconcerting pieces of news was housing starts, which fell 5 percent in June, following a downwardly revised 14.9 percent drop in May. A slight 2.1 percent rise in building permits initially took some of the sting out of the headline number, but all of that gain was in the volatile multi-family unit series. Permits for new single-family homes fell 3.4 percent, following 10.3 percent drops in both May and April

Single-family permits are now running at just a 421,000-unit pace, well below the recent trend in starts. When you couple this with July’s decline in the Wells Fargo/NAHB homebuilders’ index, there is no reason to expect housing starts to increase in July, and we may not see a gain in August either. With demand flat and credit for homebuilders still extremely tight, there is no incentive for builders to get out ahead of demand.

Existing home sales actually fell less that expected, but the trend remains unfavorable. Existing home sales have been harder to read because of the extension of the closing deadline for homebuyer tax credits from June 30 to September 30. The net effect of the deadline extension will be to moderate the slide in existing home sales over the new few months. (more…)

HIGHLIGHTS OF THE WEEK

• Fed Chairman Bernanke delivers semi-annual testimony to Congress, in which he noted uncertainty in the economic outlook but stuck to his guns in continuing to prudently plan the ultimate withdrawal of the extraordinary monetary accommodation.
• Chatter of U.S. double-dip recession remains in the headlines. High frequency and leading indicators do support a slowdown, but the indicators are nowhere near levels required to flash a re-entry into a recession. A mid-cycle slowdown remains the most likely outcome.
• No sign that the housing market is breaking free from the doldrums. Starts slip more than market expectations, and while existing home sales beat market expectations, they still backtrack by 5.1% in June.
• In Canada, markets were unscathed by the widely anticipated 25 basis point rate hike by the Bank of Canada (BoC). Reactions, however, followed the ensuing dovish BoC communiqué.
• BoC affirmed that fiscal austerity measures relating to the European sovereign debt crisis appeased the risk of an adverse outcome and lifted the likelihood for sustainable long-term growth, but the global economy will recover at a more moderate pace than previously anticipated. The BoC observed that the Canadian economy has largely developed as anticipated, except for growth in business investment which seems to be constrained by uncertainties surrounding the global outlook.
• We expect a protracted renormalization of the overnight rate, with gradual hikes of 25 basis points through the latter half of 2010 and 2011, albeit interrupted by occasional pauses. The overnight rate should reach 1.25% and 2.50% by the end of 2010 and 2011, respectively.

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The Fed Chairman, Ben Bernanke dominated currency trading this week adding risk and trader’s aversion back into the mix. When the Federal Reserve worries in public about the lack of job creation in the United States, and says that “properly executed’ tax cuts can benefit an economy, a policy in direct opposition to the government’s plans, markets begin to doubt the security in their own positive economic judgments. The Fed Chair has always been most circumspect in hi economic assessments, if he is willing to pass comment on current government policy, what fears does he hold if no changes are made in Us economic policy?

In the hour after his congressional testimony at 2:00 pm Easter Time the euro dropped almost a figure against the dollar. If the United States economy is then the rest of the world, including China and Asia is as well. Risk renters the currency market and the dollar is the risk slayer of choice.

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