Markets Move Rapidly During Low-Volume Holiday Trading

Forex traders may have noticed this week that currency prices are moving much more rapidly than normal. With the holiday season, most banks are coming and going from the market, and money is being pulled out by investors and large companies to support holiday and year-end bonuses. As a result, the smallest hiccup appears to move currencies by large amounts. These conditions make entering the market now the best possible choice for investors as these price movements can earn the wise trader a large amount of money.

Economic News

USD – The Dollar Slides Broadly Ahead of the Unemployment Claims Report

The U.S currency fell yesterday on concern that the economic recession is deepening in the United States after the U.S. consumer confidence report showed a record decline this month. Yesterday’s decline in the Dollar versus the EUR pared the greenback’s advance this year to 3.4%. It was traded near 1.4160 per EUR after falling 1.3% on Tuesday. The U.S. currency also dropped versus the Yen and was quoted at 90.34.

The USD may extend its decline even further on bets the Federal Reserve’s zero target Interest Rate will weigh on demand for the dollar. The Fed cut its benchmark Interest Rate this month to a range of zero to 0.25% for the first time and shifted its focus to debt purchases in order to revive the economy.

According to economists, what’s most important is how monetary policy reacts to the economic weakness, and at this stage, the easing of monetary conditions is more aggressive in the United States which has led to a weaker dollar versus the EUR. The U.S. Interest Rates are close to zero and policymakers have said they are ready to take more unconventional steps of providing liquidity to bolster the deteriorating economy. In contrast, key Interest Rates in the Euro-Zone stand at 2.50%, and officials have been unclear about how much rates will be cut further in the near future.

Meanwhile, tensions in the Middle East have also damaged the USD. The Dollar fell the most in almost two weeks against the EUR after Israel’s assault on the Hamas-controlled Gaza Strip raised concerns that oil exporters will reduce crude supplies to U.S. consumers. Rising oil prices makes it more expensive for those in the U.S. to buy the commodity, especially when its economy is doing poorly. The U.S. economy is in a very bad shape and analysts say that there are worries among investors that it may get even worse. The Dollar is being sold as the mood in the market now is to buy the EUR and sell the Dollar because it appears to be the safest bet.

EUR – The EUR Gains Ground as Dire U.S. Economic Data Undermines the Dollar

The Euro-Zone currency is extending a broad rally against most major currencies after hitting a fresh record high against the British Pound on Tuesday. Against the Dollar, the EUR was 1% higher at 1.4125, and against the Sterling the EUR traded as high as 98.05 pence. The EUR has been gaining at the Dollar’s expense where sentiment has turned dollar-negative as the U.S. Federal Reserve takes on quantitative easing. The EUR gains were spurred after the Dollar’s inability to hold its gains in previous sessions as yesterday’s attempt to push past 1.4000 against the EUR has failed. Traders want to be less exposed to the wrong type of positioning heading into the year end so they’re clearing out their positions, analysts say.

The European Central Bank (ECB) will begin the new year under pressure to keep cutting Interest Rates after retail sales fell for a seventh consecutive month and loans to households and companies grew at the slowest pace in four years. Investors are predicting that a growth slump and fading inflation will force the ECB to lower Interest Rates by 50 basis points when its governing council convenes on January 15. Today’s reports were the latest to suggest the Euro-Zone’s recession deepened this quarter. Consumer confidence fell to a 15-year low in November, while manufacturing and services industries contracted in December at the fastest pace in at least a decade.

However, against the GBP, the Euro-Zone currency continued to rally on speculation the Bank of England (BoE) will cut Interest Rates faster than the ECB. The BoE reduced its main rate 350 basis points this year to limit the fallout from the global financial crisis. The U.K. currency is 25% lower versus the EUR this year; and it’s declining on the basis of interest-rate differentials, according to economists. Investors bet that the U.K.’s benchmark Interest Rate may be reduced to 0.50%, with a zero percent rate being very possible. It is also very possible that the BoE will engage in some form of quantitative easing in 2009, which might help the British currency to rebound against the EUR in the nearest future.

JPY – Japanese Economy Faces Severe Depression in 2009

The Japanese currency, which has surged across the boards this year even as the economy slid into recession and Interest Rates were cut to near zero, has remained steady at 90.26 per Dollar yesterday, compared to 111.33 at the end of last year.

Despite recent JPY gains against most major currencies, economists predict that Japan’s economy will probably shrink at an annual 12.1% pace this quarter, the sharpest drop since 1974, as its exports collapse. Economists expect negative growth will continue for a fifth straight quarter to the April-June period of 2009. Given the speed and the length of the contraction, this recession could be the most severe in the post-war era. This data has prompted other economists to revise their GDP projections.

The most severe financial crisis since the Great Depression is spreading from industrialized nations to developing markets, including Asia, the destination for about half of Japan’s exports. Consumers at home are unlikely to pick up the slack, with household confidence at a record low and job prospects worsening. In light of these facts, it seems that the Japanese currency may reverse this year’s gains against the USD in 2009. Some analysts predict that the Dollar will rise to 100 Yen by the end of next year.

Oil – Crude Oil Trades near $39 on Grim Economic Outlook

Oil prices fell $1.00 on Tuesday as fear about demand in the global economy outweighed expectations of further Saudi supply cuts in February and tension in the Middle East due to the Israeli-Hamas conflict. The market took in data showing a sharp fall in weekly U.S. retail gasoline demand, and record low consumer confidence in the world’s largest energy user in December. Oil rose more than 6% in each of the two trading days to December 29 on concern that supplies from the Middle East may be disrupted due to the extended conflict between Israel and Hamas in Gaza.

For the next year, the prognosis is that Crude Oil may rebound to average $60 a barrel as the Organization of Petroleum Exporting Countries (OPEC) makes record production cuts to counter the deepest economic slump since World War II. That would be a 53% gain from today’s price of $39 a barrel. The group already has cut output three times in an effort to remove about 5% of world supply. OPEC oil supply is expected to fall by 400,000 barrels per day (bpd) in December as members boost compliance with their deal to reduce output and support Crude Oil prices.

Technical News

The hourlies are showing mixed signals with its RSI fluctuating at the neutral territory. However, the daily chart’s RSI is already floating in the overbought territory indicating that a bearish correction might take place in the nearest future. When the downwards breach occurs, going short with tight stops appears to be preferable strategy.
Narrow range trading continues on the hourly level as the pair did not make any significant move in either direction, and is currently traded around the 1.4450 level. The daily chart’s Slow Stochastic is showing a fresh bullish cross suggesting that an upwards correction might take place in the nearest time frame. Placing long positions with tight stops appears to be preferable strategy.
The pair has been range-trading for a while now, with no specific direction. The Daily chart’s RSI providing us with mixed signals. All oscillators on the 4-hour chart do not provide a clear direction as well. Traders are advised to wait for a clearer sign on the hourlies before placing transactions.
The typical range trading on the 4-hour chart continues. Both the hourly RSI and Slow Stochastic are floating in neutral territory. However, the daily chart RSI is already floating in the oversold territory. It appears that the possible next move might be a bullish one. When the upwards breach occurs, going long with tight stops appears to be preferable strategy.

The Wild Card

Oil prices are once again dropping, and a barrel of Oil is currently traded around $38. However, the daily chart RSI is giving a bullish signal, indicating that oil prices might go up. This might give forex traders a great opportunity to enter a very popular trend.

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