The Market is Bullish on the Dollar throughout January 2009

The USD has gained much support lately as it extends gains against most of its currency counterparts, primarily the EUR and JPY. Barack Obama’s announced stimulus package has done its part in boosting investor confidence that the U.S. economy may in fact exit this recession sooner than forecast, which would no doubt position the Dollar to make significant gains in the near future. This week’s U.S. employment data will be the first earmark of this test.

Economic News

USD – Obama’s Stimulus Package Puts USD in a Position to Make Gains

The U.S. currency has recently advanced versus 14 of its 16 most actively traded counterparts and may extend its near-term gains; even further especially against the EUR which appears to be quite vulnerable. The Dollar rose yesterday to 93.60 Yen from 93.44 Yen, and against the EUR it raised to 1.3504, the highest level since December 15.

The greenback advanced after U.S. President-elect Barack Obama said he favors an economic package of about $775 billion. With this planned U.S. stimulus package investors are betting that this would help the world’s largest economy emerge from its recession more quickly than most countries. According to analysts, investors are leaning toward EUR selling because there appears to be growing signs that the European Central Bank (ECB) will cut Interest Rates during its next meeting.

However, the recent week’s gains in the U.S. currency versus the EUR may be limited by speculation that U.S. services activity shrank to the lowest level since records began in 1997. Economic reports are showing that fewer Americans signed contracts to buy existing homes in November and factory orders are falling for a fourth consecutive month; this is likely to weigh heavy on the Dollar. Moreover, several analysts have said that given the Dollar’s sharp gains over the last few days, the currency may be due for a short-term pullback.

Looking at today’s trading, investors should note that an important indicator is set to be released at the opening of U.S. markets. The ADP Non-Farm Employment Change indicator will give a prediction about this Friday’s upcoming employment data. If it indeed indicates that the employment sector is not shrinking as fast as previously thought, the USD will gain much support. However, the opposite may happen if this indicator points to a further contraction in U.S. employment.

EUR – Poor Euro-Zone Economic Data Warrants further Rate Cuts from ECB

The EUR fell to a three-week low against the Dollar and declined versus the Yen before data that will probably show slowing regional inflation, giving the European Central Bank (ECB) more incentive to lower Interest Rates. The European currency fell to 1.3500 against the Dollar, and declined to 126.13 Yen from the previous 127.31. Inflation in the Euro-Zone has slowed to 1.6% last month. The inflation rate fell to 2.1% in November from 3.2% the prior month, the biggest reduction since at least 1991.

The ECB has cut Interest Rates by 175 basis points since early October, dropping to as low as 2.50% as the region entered this recent recession. The ECB is expected to cut its key lending rate by another 50 basis points or more at its policy meeting on January 15. In the run-up to this gathering, ECB officials have been suggesting that rates could, and likely will come down further in the future.

The EUR plunge against the USD was also pushed by data showing the Euro-Zone private sector services economy shrank sharply in December and firms cut more jobs than expected, pointing to a deep recession lasting for a good part of 2009. The Euro- Zone services sector generates about two-thirds of the single currency area’s gross domestic product and the PMI index fell to a record low.

In Germany, the Euro-Zone’s biggest economy, a separate data has showed last week that inflation is falling more than expected in December, mainly on falling fuel, food and commodity prices. ECB President Jean-Claude Trichet has declined to give any firm indication on whether further Interest Rate cut bets are justified. But the bank’s Vice-President Lucas Papademos said on Sunday that more cuts may be needed to shield the Euro-Zone economy, stressing that deflation was the enemy to be kept at bay.

JPY – Future Outlook for Yen Remains Weak

The Yen depreciated against the U.S. Dollar to as low as 94.05, the weakest level since Dec. 8, from 92.03. Analysts cited speculation that Japanese investors are renewing their foreign investments this year, which should also hurt the Yen further. The Japanese currency declined 1% versus the U.S. Dollar while it has slumped 4% total so far this year. The JPY was the largest beneficiary in 2008, climbing at least 16% against all major currencies.

The Japanese currency declined for a sixth straight day against the USD, the longest run of gains in two years, after General Motors Corp. said it has enough government funding to cover the worst-case scenario and may not need additional loans. The U.S. Treasury has pledged as much as $13.4 billion in aid to help GM pay its bills and $6 billion to prop up lender GMAC LLC, which GM relies on for auto loans and dealer support. Apparently investors have turned more bearish on the prospects for Japan’s recession-hit economy, and deteriorating Japanese consumption, analysts say.

Oil – Crude Oil Prices lack the Support to Push Beyond $50 a Barrel

Crude Oil prices have changed little after falling yesterday. Analysts forecast that gloomy economic data from the United States would make it tough for Crude prices to make a sustained push through $50 a barrel. Data released Tuesday showed that pending sales of U.S. homes dropped in November to their lowest level in at least seven years and that the country’s services sector shrank for the third consecutive month in December.

Israel’s recent incursion into Gaza, however, was seen as supportive to Crude Oil prices. While the conflict does not directly threaten any oil supplies, unrest in the Middle East can bolster prices because countries in the region pump about a third of the world’s oil. Oil prices have risen from $35 a barrel to almost $50 since the start of hostilities. Crude Oil has also gained on news that Kuwait plans to cut oil supplies to U.S. and European buyers by 10% later this month, bringing the producer in line with the Organization of the Petroleum Exporting Countries’ (OPEC) targets. The cartel has cut output three times since September in a bid to halt the recent price decline.

Technical News

After bottoming out at the 1.3300 level, the pair is showing signs of a corrective move. A bullish cross on the daily chart’s Slow Stochastic implies that a local bearish corrective movement might be close to its end. The 4-hour chart and the hourlies do not show any particular signals and are currently floating around 1.3500 level. Traders are advised to wait for a clearer indication on the hourly level before entering trading.
The price made a violent breach of the upper border on the 4-hour chart’s Bollinger Bands, indicating that a downward correction may occur in the near future. The 4-hour chart’s RSI supports this notion as it sits just inside the over-bought territory. Going short might be the right choice today.
It appears that the price is floating in the over-bought territory on the RSI of both the 4-hour and daily chart, indicating a downward movement is imminent. A violent breach of the upper border on the daily chart’s Bollinger Bands supports this notion. Going short appears to be the right strategy today.
The price of this currency pair is currently floating in the over-bought territory on the 4-hour chart’s RSI signaling a downward correction may occur soon. A bearish cross appears to be imminent on the daily chart, supporting this notion. Going short with tight stops might be a good strategy today.

The Wild Card

It appears a violent breach of the upper border of the 4-hour chart’s Bollinger Bands has occurred, signaling a downward correction may occur soon. Supporting this notion is an imminent bearish cross on the daily chart’s Slow Stochastic. The 4-hour chart’s RSI also indicates that the pair is floating in the over-bought territory. Forex traders can benefit by entering sell positions early and riding out this imminent downward price movement.

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