Thursday, August 20, 2009

AUD/USD: Aussie appreciates to levels below 0.8315 resistance

Thu, Aug 20 2009, 07:41 GMT (Barcelona) - Australian Dollar declined on Wednesday from 0.8300 to 0.8175 low and got back to levels above 0.8300 during Asian session to put 0.8315 resistance area under pressure on early European session.

According to Liviu Flesar, technical analyst at InnerFX, the Aussie trades now at an area where bears could show up: "The whole .8315-.8355 region is expected to provide a selling point but it seem to be a hazardous scenario as the short term charts show signs of recovery especially due to yesterday’s reversal on the .8175 support. A continuation of current recovery may bring the top side of .8450/75 on focus."

Resistance levels, according to Flesar, lie at 0.8315 and above here, 0.8355 and 0.8400. On the downside, initial support lies at 0.8250,and below here, 0.8200 and 0.8150/75.

AUD/USD (Aug 21 at 05:06 GMT)

0.8221/31 (-1.08%)

H 0.8327 L 0.8214

[?]Trend Index[?]OB/OS Index
Data updated on Aug 21 at 05:05 (15-minute timeframe)

USD/CHF fresh intra week low

Thu, Aug 20 2009, 19:55 GMT (Buenos Aires) – USD/CHF continues pushing lower and the pair printed a fresh week low just under previous one at 1.0617, and continues hovering around that zone. American indexes extend the rise pushing dollar down across the board.

The pair has been ranging between 1.0550/1.1000 since early June, and despite risk appetite return, is not expected to break to the downside. Close to the floor of the range however, downside acceleration could send the pair to the lows 1.0400 before SNB becomes to worry.

Short term supports lie at 1.0610, followed by 1.0580 1.0550 and then 1.0520. To the upside, resistances are at 1.0650 1.0680 and then 1.0720.

USD/CHF (Aug 21 at 05:05 GMT)

1.0649/53 (0.12%)

H 1.0655 L 1.0617

[?]Trend Index[?]OB/OS Index
Slightly BullishNeutral
Data updated on Aug 21 at 05:00 (15-minute timeframe)

Yen trapped between 94.00 and 94.40

Fri, Aug 21 2009, 02:45 GMT (Buenos Aires) – USD/JPY Current Price: 94.23. Trapped between 94.00 and 94.40 zone, hourly indicators hold the bearish bias, while 20 SMA still has a bearish slope despite current candle opening above it. Bigger time frames also support further falls in the pair, with 93.66, weekly low as key support.

“Once this zone gives up downside momentum will likely accelerate and send the pair to the 93.20 zone, ahead of stronger 92.80 level,” said Valeria Bednarik, collaborator at

Support levels: 94.00 93.70 93.20. Resistance levels: 94.25 94.55 94.80.

USD/JPY (Aug 21 at 05:03 GMT)

93.58/58 (-0.67%)

H 94.29 L 93.46

[?]Trend Index[?]OB/OS Index
Data updated on Aug 21 at 05:00 (15-minute timeframe)

GBP/USD Current Price: 1.6507

Fri, Aug 21 2009, 01:01 GMT (Buenos Aires) – GBP/USD Current Price: 1.6507. Holding just under 1.6520 static resistance zone, along with 200 EMA. Hourly indicators have turned slightly bullish, pointing for some gains in the next hours, thus clear opening above 20 SMA will give further support to the bias.

“Above that, next resistances come at 1.6550 and 1.6600, 20 SMA in the daily; pair has reached and retreat strongly that level several times, suggesting that another failure attempt could turn the pair bearish in the midterm,” said Valeria Bednarik, collaborator at

Support levels: 1.6470 1.6440 1.6410. Resistance levels: 1.6520 1.6550 1.6600.

GBP/USD (Aug 21 at 04:45 GMT)

1.6434/37 (-0.40%)

H 1.6518 L 1.64314

[?]Trend Index[?]OB/OS Index
Data updated on Aug 21 at 04:40 (15-minute timeframe)

Euro still consolidating under 1.4275

Fri, Aug 21 2009, 04:12 GMT (Buenos Aires) – EUR/USD Current Price: 1.4257. Still consolidating just under weekly low of 1.4275, indicators remain flat in the hourly, with no clear bias coming from there. 20 SMA under current price slowly turning to the upside could favor some rises in the pair thus seem limited due to lack of volume, and ahead of Friday early Europe macroeconomic data.

“Strong resistance level around 1.4340 should made the pair retreat if reached during next session, thus clear break above, will leave doors open for further gains on the days to come,” said Valeria Bednarik, collaborator at

Support levels: 1.4230 1.4200 1.4150. Resistance levels 1.4275 1.4300 1.4340.

EUR/USD (Aug 21 at 04:41 GMT)

1.4223/26 (-0.15%)

H 1.4269 L 1.4211

[?]Trend Index[?]OB/OS Index
Data updated on Aug 21 at 04:35 (15-minute timeframe)

Dollar Reverses Course

Aug. 10th 2009

A recent WSJ headline reads, Good Economic News Threatens the Dollar, and summarizes the Dollar’s trading pattern as follows: “Demand for the U.S. currency continues to erode amid a tide of more encouraging economic data and corporate earnings that have fed a thirst for riskier assets such as stocks, commodities, and growth-sensitive currencies.”

Less than two weeks after that article was published, the Dollar rose by a healthy 2% against the Euro in only one trading session, as US labor market conditions improved slightly: “The U.S. unemployment rate fell in July for the first time in 15 months as employers cut far fewer jobs than expected, giving the clearest indication yet that the economy was turning around from a deep recession.” While technically another 250,000 jobs were lost and economists forecast that the employment rate will rise past 10% before peaking, investor sentiment is still at a high.

Unsurprisingly, the news triggered a stock market rally. More noteworthy, though, is that the Dollar also rallied. Since the beginning of 2009 and especially since the beginning of March, there has been a clear negative correlation between stocks and the Dollar, as a result of risk appetite. “At one point this year, the correlation between the euro-dollar rate and the S&P 500 index hit 50 percent, according to BNP Paribas calculations. That is, the euro and S&P 500 rose or fell in tandem half the time.”

This latest development suggests that this relationship has broken down, at least temporarily. Argues one analyst, “The dollar’s going to turn. The U.S. economy is more able to withstand shocks than other economies, especially Europe.” Perhaps going forward, the markets will be driven less by risk appetite and more by comparative growth trajectories and economic fundamentals.

Not so fast, though. Much of the Dollar’s recent slide has been a product carry trading patterns, as investors borrow in low-yielding Dollars and invest in higher-yielding alternatives. An improvement in economic conditions could compel the Fed to hike rates, which would seriously dent the attractiveness of the carry trade. “Indeed, long-dated U.S. interest rates have been quietly moving in the dollar’s favor while U.S. interest rate futures on Friday started pricing in a federal funds rate of 1.25 percent by the mid-2010, the highest since June.” Based on this paradigm, then, it’s still risk appetite that’s driving the Dollar, whether up or down.

Fed to Hold Rates for the Near Term

Over the last week, the markets have been abuzz with chatter about how the US recession will soon come to and end, followed by a quick and healthy recovery. According to investor logic, the result would be a rise in inflation and interest rates. This optimism was partially deflated today, as the Federal Reserve bank conducted its annual monetary policy meeting.

Excluding a brief uptick in June (see chart below courtesy of the Cleveland Fed), investors had long come to expect that the Fed would leave its benchmark Federal Funds rate unchanged, at 0-.25%. At the same time, there was a strong belief that the Fed would begin to hike rates at the end of 2009, and comment accordingly in the press release that accompanied its monetary policy decision. Barron’s predicted yesterday: “The statement will acknowledge some improvement in the U.S. economy, though it will imply that this nascent growth reflected in recent gross domestic product reports is fragile and will be monitored closely. This will leave open the specter that interest rates could be increased at some point in the future.”


Sure enough, the Fed left rates unchanged, and its press release conveyed a restrained sense of hope that the worst of the recession is now behind us: “Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks…Although economic activity is likely to remain weak for a time, the Committee continues to anticipate…a gradual resumption of sustainable economic growth in a context of price stability.” The Fed also announced that its Treasury buying activities would soon come to an end, although it may continue to buy mortgage securities as part of its quantitative easing program.

Perhaps the tone of the press release was slightly less positive than investors would have liked, since interest rate futures dived immediately on the news. Especially compared to last week, investors are now assuming that it will be a while before the Fed actually hike rates: “At Wednesday’s settlement price of 99.655, the February fed-funds futures contract priced in about a 38% chance for a 0.5% funds rate after the late-January meeting. That’s down sharply from about a 60% chance at Tuesday’s settlement, about a 76% chance at Monday’s settlement, and about a 96% chance at last Friday’s settlement.” Analysis of options trading activity reveals that the large brokerage houses believe similarly.

As for the Dollar, it now seems possible that last week’s rally was premature. If the Fed isn’t prepared to hike rates anytime soon, then the current interest rate differentials between the US and the rest of the world will remain intact. More importantly, the Dollar will remain a viable funding currency for carry trades, and the shift of funds into higher-yielding alternatives will probably continue for the time being.

Euro retreats from 2009 Highs

In forex, timing is everything. If I had written this post a couple weeks ago, the headline would read “Euro Touches 2009 High.” Perhaps if I had waited another week, it would have read, “Euro Approaching 2009 High.” But alas, I chose today to write about the Euro, and the headline I chose is probably the most appropriate under the circumstances.

On August 5, “The euro hit a high for the year against the dollar as stocks trimmed their losses in afternoon trading Wednesday despite a generally cautious tone in currency markets.” Analysts were careful to point out that the markets remained cautious and the Euro eased past - rather than smashed through - its previous high.Technical analysts would and have argued that this paved the way for the subsequently rapid decline: “The euro is testing the base of an ascending channel with daily momentum charts showing a ‘double top in overbought territory.’ ”

This notion might have some merit, considering that fundamentals arguably favor a continued Euro appreciation. “The economy of the 27-country European Union shrank 0.3 percent in the three months ended June 30, for an annual rate of roughly 1.2 percent. The 16 countries that use the euro registered a 0.1 percent decline for the second quarter, or an annual rate of roughly 0.4 percent.” While output remains well below its 2008 levels, the slight contraction represents a tremendous improvement from the first quarter, when GDP shrank by 2.5%.

“Underlying the strong reading were solid performances in France and Germany, each of which grew 0.3 percent in the second quarter, government data showed.” This is helping to offset further contractions in Italy and Spain, which have turned into economic laggards as a result of the housing bust. In addition, exports in Germany grew by 7% last month, and “Investor sentiment improved more than analysts had expected in August to its best level since April 2006.” On an aggregate basis, “the euro zone’s trade balance with the rest of the world rose to 4.6 billion euros ($6.5 billion) in June, compared to a flat balance in the same month last year,”

Still, explorers looking for bad news and/or cracks beneath the surface will have no difficulty finding them. German exports (and output in general remain down year-over-year. In addition, there are still trouble spots in the EU, notably in western Europe. “Already, the euro area’s unemployment rate stands at 9.4 percent, its highest level in 10 years, and the anemic growth of the coming quarters will not be enough to arrest the slide. That, in turn, could drag down consumer confidence or even generate political backlash in Europe, economists said.” Most worrying is perhaps that, “consumer prices in the euro area dropped 0.6 percent in July…” ‘Deflation is becoming entrenched in the euro area, which would be very bad for the economy.’ ” Good thing the ECB left some room to lower rates further.

SocialTwist Tell-a-Friend

AUGUST 17TH 2009

The Force is With the Yen

Just when it looked like the carry trade was back for good and all signs pointed to a Yen depreciation, out of nowhere came a series of surprise developments, propping the Yen back up. Spanning finance, economics, and politics - a Forex Trifecta - these developments moved swiftly through the markets, creating optimism for the Yen where before there was only pessimism. Of course, it’s possible that this bump will prove temporary, and a reversal could transpire just as quickly.


The biggest news, by a large margin, was a report that the Japanese economy had returned to growth. Similar in scale and in tenor to stories coming out of other countries, the data showed that Japan grew at an annualized rate of 3.6% in the second quarter of 2009, a sharp reversal from the 11.7% contraction in the previous quarter (which was itself revised upward from -14%).

Japan GDP 2008-2009

The sudden sea change was brought about by a combination of government spending and export growth. “New tax breaks and incentives to help sales of energy-efficient cars and household appliances, coupled with lower gas prices and a rebound in share prices, spurred consumer spending. Prime Minister Taro Aso has pledged 25 trillion yen (about $263 billion) in stimulus money, including a cash handout plan and more public spending on programs like quake-proofing the country’s public schools, to revive the economy.” Meanwhile exports grew by a healthy 6.3% from the previous quarter, while imports fell, causing the trade surplus to widen.

The announcement of economic recovery was accompanied by a noteworthy reversal in capital flows, such that Japan’s capital account swung into surprise weekly surplus: “Foreign investors bought 292.9 billion yen ($3.1 billion) more Japanese stocks than they sold during the week ended Aug. 8 and domestic investors were net buyers of 125 billion yen in overseas bonds and notes.” Meanwhile, speculation is mounting that Japanese investors will move to repatriate some of the coupon and redemption payments they receive on their US Treasury investments.

While seemingly unrelated to the economic turnaround (it’s important not to read too much into weekly data), this could be a sign that Japanese investors are growing more optimistic about domestic economic prospects and are moving to invest more at home. It’s worth noting that such a shift could actually be necessary if the recovery is to be sustained, in order to increase the role of (capital) investment, relative to exports and government spending. Ironically, it could instead be a sign of excessive pessimism, if Japanese believe that prospects for US/global growth have been overestimated, in which case risk appetite and the carry trade would be due for a combined correction.

Domestic consumption could also play an increasing role in Japan’s economy going forward, as a result of imminent political changes. “To stimulate consumption at home, the Democrats have pledged to put more money in the hands of consumers by providing child allowances, eliminating highway tolls and making fuel cheaper. That marks a shift away from the long-ruling LDP’s emphasis on steps to help companies.”

Along similar lines, the Democratic Party (which has a wide lead over the incumbent Liberal Democratic Party), has also conveyed its opposition to currency intervention, since such tactics inherently prioritize export growth over domestic consumption. “Japan’s export-led growth is reaching its limits and Tokyo should not intervene in markets to weaken the yen as long as currency moves match fundamentals, the No.2 executive in the main opposition party said on Monday.” Could the carry trade be in trouble?

All Eyes on Central Banks

While Central Banks have always featured heavily in the minds of forex traders, their actions have taken on a whole new significance of late. Financial reporters have also been generous in doling out space to stories about Central Banks, writing stories with headlines like “Central bankers add to equities’ momentum” and “Currency Traders Hold Fire, Await Central Banks.”

Traditionally, forex traders eyed Central Banks for one reason: interest rates. The theory was simple: currencies with higher interest rates tended to outperform in the short term. This trend was especially reliable in the years leading up to the housing bubble, as carry traders ensured that high-yielding currencies rose while low-yielding currencies stagnated or fell.

Even in the context of the credit crisis, traders have continued to monitor the rate setting activities of Central Banks. Interest rates in every industrialized country are currently locked at record low levels, but anticipation is already starting to build that the beginning of a tightening cycle is just around the corner. Current expectations are for the US to lead the way (first to lower, first to rise), followed by Australia, New Zealand, and Canada. The Bank of England and European Central Bank are further away on the curve, while rate hikes are a remote possibility in Japan, a perennial favorite of carry traders.

Interest rates are now only a small part of the equation, however. Most Central Banks have implemented additional strategies, known variously as quantitative easing, asset purchases, liquidity programs, etc. The goal of all of these programs is to stimulate the money supply and stabilize financial markets, by injecting newly-minted money directly into capital markets. Traders initially focused on which Central Banks were involved in quantitative easing. After nearly every bank introduced some version, it quickly became a question of scope. In this respect, the Fed and the Bank of England are in first and second place, respectively. Now, traders are waiting to see not only when these programs will end, but also when they will be unwound. If there is a perception (and even worse, a reality) that some Central Banks are waiting too long to draw funds out of the market, this could foster (concerns of) inflation, and consequently, currency depreciation.

Finally, there is the issue of direct currency intervention. The Swiss National Bank became the first western bank to intervene on behalf of its currency. Its actions are directly responsible for holding the Swiss Franc down. The Bank of England meanwhile has used its quantitative easing program to influence the Pound, while the Banks of Korea and Brazil are buying Dollars on the spot market to depress their respective currencies. Paranoia is clearly running high, and some traders are apparently concerned that the Fed could be next. Just when you thought the surprises were over.