Friday, April 22, 2011

FOREXYARD: Forex News Blog

FOREXYARD: Forex News Blog

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EUR/USD has Fundamentals, Technnicals, and Market Tone in its Favor

Posted: 21 Apr 2011 09:13 AM PDT

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The price moment of the EUR/USD shows three characteristics that indicate the potential for a continued move higher; fundamentals, technicals, and market tone.

Looking first at the fundamentals, despite Monday's flair up of the European debt crisis when Greek sovereign debt yields spiked and the value of the EUR/USD tumbled to its lowest level since April 1st, the pair continues to rise on interest rate differentials and rebounded the very next day. Following this month's 25 bp interest rate hike by the ECB which brings the euro zone interest rate up to 1.25%, further rate increases are expected from the ECB with most economists forecasting an increase in June.

Rising inflationary pressures in the euro zone are the cause for the rate increases. March euro zone flash CPI rose 2.6% from the previous year's increase of 2.4%. The ECB aims to keep inflation below 2%. Despite the fact that inflationary pressures are primarily attributed to rising energy and food costs, the ECB is determined to keep euro zone price stability at any cost.

With the rise in prices the ECB is forced to raise interest rates, and this is directly affecting the value of the euro. Traders focusing on yield differentials between Europe and the US have been driven to sell the low yielding dollar for the higher yielding euro. This type of trade should continue given that the market may be pricing in two more interest rate increases this year.

Risks in the euro are ever present. Expectations are for a Greek debt restructuring, also known as a default. Recent market chatter is speculating of a possible announcement over the weekend. However, traders seem to have put a fence around the nations of Greece, Ireland and Portugal, factoring in the risks of a default by one of these nations. Therefore, the euro may be sold on the knee-jerk reaction, creating better price levels for buyers.

Another point supporting the EUR/USD is the technicals. Technically the euro looks to move higher with rising stochastics on both the weekly and daily charts. A close on the weekly chart above the 1.4580 level would set the next target for the pair at the November 2009 high of 1.5140.

The third factor going for the euro is the price action, also known as market tone. The euro has been resilient, surging on euro positive news and barely budging on euro negative news, creating a positive market tone.

Take for example the rebound in the value of the EUR/USD on Tuesday following the previous day's sell-off due to the S&P warning on the US credit rating. Traders began buying the pair early in the European trading session and the bids increased significantly after the release of stronger than expected German manufacturing and services PMI numbers. This type of price action is expected.

However, Wednesday's euro rally is of a different story and most important. Buying of the euro began early in the Asian session. After the release of less than expected German monthly PPI data, the buying actually accelerated and the EUR/USD traded closed the day at a new yearly high. The significance of the rally on the lower than forecasted data shows how strong the demand is for euros, or perhaps how little warmth traders feel towards the dollar. Nevertheless the euro's ability to shrug off negative news is characteristic of a strong trending environment.

With these three factors aligned, a combination of strong fundamentals, bullish technical signals, and positive market tone makes a good case for further gains in the value of the EUR/USD.  

Pressure Mounts on RBA to Tighten Monetary Policy

Posted: 21 Apr 2011 06:27 AM PDT

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The Reserve Bank of Australia (RBA) is receiving additional pressure with each passing week to tighten its monetary policy in the near future. Data has shown inflation rising in Australia at levels beyond expectations and analysts are now expecting the RBA to take steps to control such growth.

As an example of recent pressures mounting the RBA's next rate decision is Wednesday's report on surging import prices which rose an unexpected 1.4% on the quarter, above the expected 0.8%. This morning's higher-than-forecast Producer Price Index (PPI) out of Australia also supports this notion with a reading of 1.2% growth.

The Aussie dollar has been rising for some time, only recently experiencing uncertainty on Chinese rate statements following last week's G20/IMF meetings. Business sentiment in Australia is also rising with today's confidence survey by the National Australia Bank (NAB) signaling sufficient optimism emerging in the Aussie economy.

The combination of positive inflationary growth with speculation that the RBA will undertake monetary tightening in its next round will likely affect AUD values to the upside. Traders may want to take advantage and begin pricing in such expectations. Look to continue going long on the Aussie dollar in the near future.

EUR/USD Checks Rise after German Ifo Data

Posted: 21 Apr 2011 06:17 AM PDT

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Germany's publication of its Ifo Business Climate report was roughly as expected on Thursday. Analysts were expecting a reading of 110.6 making today's 110.4 figure anti-climactic. Interestingly, the EUR/USD met solid resistance shortly after this report even though such a reading would typically boost the euro.

Today's thin market conditions ahead of this weekend's Easter holiday may be interfering with normal currency values. A number of investors have been anticipating a reevaluation at the start of next week as normal volume levels are reintroduced to the market.

Comments from the president of the European Central Bank (ECB), Jean-Claude Trichet, recently hinted at a softening of the central bank's position in regards to monetary policy. The dovish sentiment has pulled down on the EUR in short-term trading with many traders beginning to shift away from the 17-nation single currency in anticipation of a fall.

The EUR/USD checked its recent rise towards 1.4650 and is now trading downward with a current price near 1.4570. The data out of Germany may have less to do with this movement than the ECB's softened stance in regards to monetary policy adjustments. Traders may want to anticipate a downturn in this pair at the beginning of next week should the current environment remain unchanged.

Pound Soars on Strong Retail Sales Data, Canadian Data Eyed

Posted: 21 Apr 2011 05:19 AM PDT

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The risk-on trade continues to perform well contributing to overall dollar weakness versus the majors. The British pound and the Canadian dollar were the strongest performers this morning heading into the New York trading session with Canadian retail sales on tap.

The release of stronger than expected British retail sales added momentum to the bullish move behind the pound. March retail sales rose 0.2%. February retail sales were adjusted slightly lower to -0.9% from -0.8%. Economists expected a decrease of -0.5%. The unexpected rise in retail sales numbers sent the GBP/USD soaring to a 17-month high at 1.6572. Since the pair rebounded on Monday from a low at 1.6165, the pound has gained 4 cents on the dollar. Traders should now be eyeing a target of 1.6880 followed by 1.7040. Support comes in at 1.6430.

Overall dollar weakness continues with the greenback declining versus the majors. Prior to the New York open, the EUR/USD traded at a 16-month high at 1.4648 before falling back to 1.4595. The USD/CHF is down sharply at 0.8815 from 0.8875.

This afternoon traders will be following data releases from both Canada and the US. Core Canadian retail sales m/m are due out and are expected to show a 0.5% increase after staying flat in the month of February. This morning the USD/CAD traded as low as 0.9453 and is currently trading at 0.9472. The Loonie has been a strong performer versus the dollar and Tuesday's stronger than expected inflationary data hints at potential monetary policy tightening to control price pressures. Traders should be long on the Canadian dollar with a target at the all-time low for the USD/CAD at 0.9050.

US unemployment claims are expected as well as the Philly Fed Manufacturing Index. Strong economic data from the US should help to continue the risk-on trade and prolonged dollar weakness. EUR/USD targets may be moved up to the January 2009 high at 1.5140 with initial resistance at 1.4580. The support is also raised to last week's high of 1.4520.

Spot Gold Hits $1,500, Silver at $45, Crude at $111

Posted: 20 Apr 2011 12:55 PM PDT

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In the US trading session commodity prices continued to surge on US dollar weakness.

In light trading conditions both gold and silver rallied to new highs on the back of a surge in the value of the EUR/USD. Weakness in the greenback has fueled much of the recent commodity gains and in turn the EUR/USD climbed to a high of 1.4546, helping to push up commodities in step.

Spot gold rose to a new high at $1,505.65 to settle at $1,500. Spot silver climbed above the psychological $45 resistance level to $45.37 before closing at $45.06.

Crude oil prices surged following a larger than expected drawdown in US crude oil inventories. The weekly report showed a decline of -2.3M barrels on expectations of an increase of 0.7M.

Boosting risk sentiment was better than forecasted US existing home sales of 5.1M on expectations of 5.02M. As with European bourses, US equities put in a strong showing with the Dow Jones Industrials Average up 1.50%.

Tomorrow large data dump will take place throughout the day in both the European and US sessions. Highlights are the German Ifo survey, British retail sales numbers, and the US Philly Fed Manufacturing Index.

The risk on trade looks to continue into the holiday weekend as thinly staffed trading desks may allow for low liquidity and increased volatility as the holiday weekend approaches.

Growth in US Housing Market Aids Risk Appetite; Lowers USD

Posted: 20 Apr 2011 12:47 PM PDT

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Today's better-than-forecast results from the US Existing Home Sales report has helped fuel a return to riskier assets by global traders. The shift in sentiment has helped spur a rebound in higher yielding currencies like the euro, British pound, Swiss franc and Canadian and Australian dollars as traders pulled out of safe havens and into currencies with slightly higher yields.

One of the more difficult concepts new traders grapple with in the forex market is how a positive economic report can diminish a currency's value against its rivals. This is further highlighted when positive reports from most other countries strengthen their national currency. The US dollar is an exception to this rule.

Many times a year, the dollar will increase with positive data and decrease with negative data. But many times a year the dollar will also rise and fall with global risk appetite; which is important for new traders to understand.

Under normal market conditions, the US dollar will act as most other currencies act; rising and falling on its own fundamental data. But in times of economic stress and uncertainty, risk appetite becomes one of the most important factors in determining investments into and out of the USD.

Given the recent wave of debt concerns in Europe and the United States, coupled with Japan's nuclear crisis, Libya's ongoing revolution, soaring oil prices, and persistent fear of a muted economic recovery and high unemployment, risk sentiment is without a doubt one of the most relevant aspects of today's trading environment.

With that in mind, traders will want to remember that a positive report, such as today's US housing figure, will more likely push investors away from the US dollar despite its direct connection to these positive fundamentals. It has less to do with the strength or weakness of the US economy and more to do with where investors stashed their money in order to avoid the added risk to their equity that the above mentioned factors carried.

Thin Trading Helps Euro, Canadian Dollar

Posted: 20 Apr 2011 12:44 PM PDT

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Wednesday's relatively thin market conditions have apparently granted support to the euro and other commodity-linked currencies. Tensions appear to be easing in regards to recent debt concern flare-ups, which has helped temper risk aversion in the market.

A sudden jump in US corporate earnings has helped move many investors into riskier assets today, as analysts begin to speculate on growth outlook. Spring and Easter break has this week's market also trading very thin, which has caused a number of irregular price swings since last week.

Overall, traders are eyeing tomorrow's retail sales figures out of Britain and Canada for a fuller picture of what is to come after the Easter holiday this weekend. Canada's economy has been experiencing positive fundamental increases for several weeks now, with only minor blips here and there. The Canadian dollar, linked with the value of Crude Oil, is surging from this fundamental growth and from the climbing value of physical assets.

Should tomorrow's retail sales figures get published as high as Canada is expecting, the CAD should undergo another heavy buying session. But traders should be cautioned against a whiplash at market opening next week since this week's thin conditions are likely to push currency jumps higher than they would normally go in a normal market environment.
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