Sudden USD Weakness Shakes the Market

Investors fled the USD en masse yesterday after the U.S. Federal Reserve stated that it would begin quantitative easing – basically printing money – in order to revive the U.S. economy hopefully by the beginning of next year. After such a devastating loss in value, traders now have the opportunity to discover a new range for the value of the USD and will begin to do so throughout the rest of this week. Once stabilized, the USD may in fact begin to climb back up as it returns to safe-haven status in the coming weeks.

Economic News

USD – Dollar Plunges on Federal Reserve Plan

The greenback dropped on Wednesday, hitting a 2-month low against the EUR on speculation the Federal Reserve is debasing the U.S currency. The Fed has said that it will buy $300 billion of long-dated U.S. Treasuries over the next six months to boost the U.S. economy, thus contributing to the Dollar sell-off. As a result, the USD may extend further losses as the Fed is preparing to flood the market with Dollars. This move is likely to diminish the appeal of the Dollar as a safe-haven and lead to further weakness of the U.S currency; it might slide to $1.37 per EUR in the upcoming days.

The Dollar was traded at $1.3485 per EUR yesterday, after depreciating as much as 3.6%, the biggest intra-day decline since September 2000! It earlier reached $1.3535, the weakest seen since Jan. 9th. The USD has also weakened 2.4% against the JPY, falling to 95.69 Yen, and against the British Pound Sterling down 1.2% to $1.4224, in yesterday’s trading. The surprisingly strong move by the Fed comes after central banks in Britain, Japan and Switzerland have embraced some form of quantitative easing, the process of flooding the banking system with funds to promote lending when interest rates are already at zero.

The Federal Open Market Committee (FOMC) said in its statement yesterday that the central bank will buy longer-term U.S. government debt and purchase an additional $750 billion of agency mortgage-backed securities, in a policy known as quantitative easing. In its statement at the conclusion of its 2 day policy meeting, the Fed indicated that it is more pessimistic about economic outlook. Officials removed language saying they expected the economy to recover later this year.

However, some analysts have said that the Dollar weakness may not last long given the worsening economic conditions throughout the world. In their view, the Dollar will continue to be seen as the safest store of value at this time of contracting global growth and its role as a funding currency outside of Europe will lend it support during the crisis. The return of investor risk aversion and all the major central banks embracing quantitative easing will cause safe-haven seeking flows to resume and may push the U.S. dollar higher back toward its long-term fair value of $1.20 this year.

EUR – The EUR Rallies as a Result of Dollar Weakness

Yesterday, the EUR rose the most against the U.S. dollar in almost nine years, after the U.S. Federal Reserve said it will buy government debt, while the European Central Bank (ECB) has remained reluctant to match the Fed’s steps. The EUR traded at $1.3493 rising as much as 3.7%, its biggest intra-day advance since 2000.

Analysts say that traders should expect the EUR to keep overshooting for now with the EUR/USD back toward $1.40. The EUR also jumped to its highest in three months against the JPY, climbing above 130.00 Yen. The ECB President Jean-Claude Trichet has said that the central bank is studying at the moment whether to take complementary measures that won’t necessarily be the same as other central banks; the bank’s benchmark rate is at 1.5% compared with 0.1% in Japan and as low as zero in the U.S. Economists expect that the ECB will now have to react rapidly to the Fed’s monetization of government debt by also embracing quantitative easing with an announcement likely as early as the ECB’s next meeting at the start of April.

The EUR also advanced versus the British Pound to its highest level in 7 weeks to 94.16 pence, after a government report showed unemployment increased in February at the fastest pace since at least 1971. The market is still very much concerned about the British economy and that there’ll be more problems in the housing and banking sectors, analysts have said. The U.K economy will probably contract into next year after most of the Group of Seven (G7) economies begin to recover, economists predict.

JPY – Yen Remains Weak as BoJ Holds Rates Unchanged

The Bank of Japan (BoJ) said it would increase its purchases of government bonds from banks by nearly a third, pumping cash into the economy to help ease the worst recession since World War II. The central bank kept interest rates unchanged at 0.1% Wednesday, but also forecasted that the economy would remain under stress in the new fiscal year and said that substantial liquidity is required to ensure stability in financial markets.

The Yen-selling was limited, however, with repatriation by Japanese investors ahead of the fiscal year-end at the end of this month preventing the currency from falling too much. Against the EUR, the Yen steadied but remained weak, with the EUR staying close to an earlier 11-week high of 128.83. Against the Dollar, the JPY was up significantly trading around 95.50, after the USD dropped in value following announcements by the Fed about quantitative easing. The BoJ said overnight it was holding interest rates steady at 0.10% and increasing its outright buying of Japanese government bonds to 1.8 trillion Yen ($18.28 billion) per month from 1.4 trillion Yen. Yet the JPY showed little reaction to this news, as other central banks, notably in the UK and Switzerland, have already announced aggressive monetary easing measures.

Crude Oil – Crude Oil Prices Reverse Losses

Crude Oil prices rose more than 2% to above $50 a barrel on Thursday, after a surprise move by the Federal Reserve to buy government bonds revived hopes the battered U.S. economy could soon begin its recovery. Oil’s rebound was also supported by a sharp drop in the USD, which posted its largest percentage drop since 1985, as the Fed’s move, aimed at resuscitating lending, prompted a sharp fall in market interest rates.

The U.S. Federal Reserve on Wednesday stunned markets by announcing it would pump another $1 trillion into the ailing U.S. economy by buying long-term government debt for the first time since the 1960s, and by expanding its purchases of mortgage bonds. Still, analysts cautioned that a continued weakness in Oil demand could limit Crude’s gains in the near term. Slowing demand and rising inventories have helped drag Crude Oil off record highs over $147 a barrel struck in July as the economic meltdown hit consumption across the globe. But oil prices, which sank to levels below $35 last month, have since stabilized in the $40-$50 range, as the Organization of Petroleum Exporting Countries (OPEC) cut output by 4.2 million barrels per day and vowed on Sunday to achieve stricter enforcement of existing curbs.

Technical News

After an exceedingly volatile price-spike yesterday, the price of this pair has remained floating in the over-bought territory on the RSI of every chart, signaling that a downward correction may occur in the coming hours. With fresh bearish crosses on the 4-hour and daily charts’ Slow Stochastic, this move may indeed be imminent. Going short with tight stops might be the right choice today.
The price of this pair appears to be floating in the over-bought territory on the hourly chart’s RSI, indicating a downward correction may happen in the nearest future. However, a fresh bullish cross on the hourly chart’s Slow Stochastic signals the opposite. Today it may be wise to wait for a more clear direction before entering this pair.
Yesterday’s volatile downward movement has pushed this pair into the over-sold territory on the RSI of both the hourly and 4-hour charts, signaling an upward correction may occur shortly. The violent breach of the lower border on the Bollinger Bands of all charts also signifies upward pressure. Going long might be a wise choice today.
This pair has recently witnessed a sharp downward movement and has since begun to stabilize within a new range. The price of this pair remains floating in the over-sold territory on the RSI of the hourly and 4-hour charts, signaling that there may still be room for an upward correction. The recent bullish cross on the 4-hour chart supports this notion. Going long might be a wise choice today.

The Wild Card

This pair has been giving off relatively clear signals about its upcoming movement. With the price floating in the over-bought territory on the RSI of all charts and a fresh bearish cross on the daily chart’s Slow Stochastic, there appears to be an imminent downward correction in the making. Forex traders have the opportunity to join this impending move at an early entry point for a chance to earn great profits.

Written by: