US Fed's cautious optimism about the future helps Euro and Pound

The US Dollar fell against the Euro and Sterling yesterday as Forex traders and investors gained confidence which translated into an increased risk appetite as the US government moved to shore up the economy. Yesterday, the US Federal Reserve left interest rates at 0-.25% announcing that they will use all tools at their disposal to continue fighting the economic downturn. The Fed declared yesterday that the economy has indeed worsened since their last meeting in December, however that additional cuts to the key interest rates were unwarranted at this time.

In what was seen by the broker trading community as a signal of strength in action, the Fed said that they will continue to fight the economic woes at the source by supporting the functions of the financial industry by purchasing large quantities of mortgage backed securities, CDO’s and agency debt. This specific announcement pleased those trading and investing in the daily FX markets who fled the perceived safety net of the greenback for some risk and potentially greater reward. The Euro rose to slightly above $1.33 against the dollar while the Pound continued its climb trading above $1.43 – a more than 1% increase.

The Japanese Yen, another perceived safe haven currency also experienced losses today against the Euro and Pound as Forex investors digested the countries influx of cash late Tuesday to shore up businesses and financial companies. The move is widely seen as Japan’s way of curbing the recent strength of the Yen which is believed to hurt exports, the driving force of the Japanese Economy. The US Dollar rose one percent to just over 90 Yen, coming close to a key support level of 90.20. A move above this mark could signal a greater gain for the us currency against its Japanese counterpart. The Euro also made gains on the Yen, rising more than 1% to 119.02 as investors traded the relative safety of the Yen for the promise of greater returns from a Euro rebound.

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Euro rises as the US awaits its economic fate

The US dollar is down in early trading today against the Euro as the US markets wait for the results of the Federal Open Market Committee (FOMC) meeting. The FOMC have been meeting for two days and they conclude later on today while Broker trading firms look for signs of new ways that the Fed will be dealing with the economic crisis. The Fed, which usually is responsible for lowering interest rates has no room to move anymore on the rates as they are at rock bottom right now after last month’s reduction, so the investing and trading communities are not quite sure what to expect. At last trade the Euro was at 1.3251 against the greenback, up .7%.

While the Euro is making gains today against the dollar, the Yen is falling. Forex traders have been speculating that the recent flight from the Yen has to do with risk aversion, where the traders are feeling more comfortable with the situation that they can leave the relative safety of the Yen for things that might reap bigger rewards. This also has to do with the Bank of Japan (BOJ) not wanting the Yen to get too strong as a strong Japanese currency hurts their exports. The Euro is currently at 118.01 Yen in early morning trading, up .83%. Look for this trend to continue throughout the day and depending up what the US fed does. The rest of the week can be see a flight back to the Yen and an unwelcomed rise in the currency if the FOMC meeting results are not favorable with investors.

Part of the Japanese Yen’s issues today arise from the BOJ intervening in companies affected by the economic collapse. The BOJ interjected $16.7 Billion into a fund meant to help hurting companies. This move accomplishes what we have been expecting for a few weeks, that the Japanese government does not want to see the Yen get that strong and is staving off deflation using inflationary measures. Again, this will work for them as long as the US Fed does not do anything so offbeat that traders and investors need to run back to the Yen.

The US economy has more to worry about than what the Federal Reserve will do today. Consumer confidence hit an all time low yesterday and the trading and investing communities got their reality check on housing as well. Last week, home sales surprised everyone when it was disclosed that it was stronger than everyone expected, yesterday they found out why. Home prices fell by 18.2% in November of 2008. Of course more homes were bought with prices being so cheap – there was a report of a man in California that bought 7 homes at a foreclosure auction for less than $1 million, three years ago it would not have been possible to buy one of those properties for that price. Today’s Daily FX advice seems to be: watch out for the Fed and stay away from the dollar until they speak.

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More trouble for Europe means gains for the US

The flight to safety in the dollar was enhanced on Friday when the greenback reached a 22 year high against the British pound and a six week high against the Euro. Considering that the US economic woes are significant, this highlights how bad the Euro and British economic outlook is – at least from the perspective of the Forex traders. The pound sunk 1.4% to 1.361 against the dollar and the Euro fell nearly ½ a percent to 1.292 against the US currency. The tumble started after data released on Friday showed that the British economy tightened at a greater rate than was expected, 1 ½ percent to be exact, which confirmed on paper that the British economy was now officially in a deepening recession.

The Yen also made significant gains against the Euro and Pound on Friday, with the Euro closing down ½ of a percent to 114.66. The status of the US and Japanese currencies as a safe bet amongst Forex Brokers underscores the dire shape of the overall global economy. It is not a matter of who is doing well anymore; rather it is a factor of who is not doing as bad. The trading and investing communities are just looking for something to cling to as the Daily FX charts are becoming more and more confusing to traditional technical and fundamental traders.

The surge, or should it put, strength of the dollar was also helped by the US Treasury Secretary designate, Timothy Geithner, who commented in front of a Senate panel that a strong dollar was in the best interest of the US, prompting broker trading firms to speculate that once confirmed, he will do all he can to prop up the greenback. Considering the mountain of debt that the US economy needs to climb out of which grows each day by billions of dollars, it is difficult to see how any one man can accomplish this feat.

The week was capped off by a peculiar stunt by Canada’s ruling conservative party which pre-announced (it was an intentional leak) that when it reports its budget deficit projections on Tuesday the 27^th, it will show a $52 Billion (US) shortfall the next two years and will not return to positive territory for another five. The move was seen as Canada’s way of minimizing the short-selling and thus overall decline of the Canadian dollar in the Forex trading arena. Aside from this, we can read between the lines into the actual numbers and see a truly disturbing picture. Canada’s economy, and currency for that matter, are intrinsically tied to commodities, oil and metals to be specific.

A projected shortfall of this magnitude means that Canadian economists and actuaries are not too optimistic about a short term global recovery that everyone is hoping for. What this simply means is that Canada is looking at a two year period of global declines followed by a three year recovery period. This essentially puts the crisis in a situation where its affects last five years, a really gloomy scenario that Canada is using to set policy. We hope they are wrong.

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Dollar Shining After Obama Inaugural

The British Pound Sterling is falling today, down to a 7 ½ year low against the dollar and the Euro has fallen to a new six week low against the currency of Obama as well. Banking woes, economic uncertainty, lack of faith in England’s new bailout plan are all contributing to the downslide while the US is tapering some of its inauguration day losses while Forex Brokers are scrambling to find something that is stable in what has been a highly volatile week. At the moment, the Sterling is trading against the dollar at $1.3718, a 1.2% drop bringing it back to 2001 levels.

But it is not only the US Dollar that is benefitting from the British currency’s woes, the Yen, much to the chagrin of the Japanese government which wants to keep the currency from getting too strong, reached a record high against the Sterling today – up over 1% to 123.53. In what Forex Brokers see as a response that is not in line with the wants of the Bank of Japan, the Yen is gaining strength against the majors – also hitting a 13 year high against the dollar. Today, the BOJ will be coming out with a plan to boost lending to businesses (aka commercial paper) in order to thwart ill effects of this credit crisis. Look for the YEN to pare some its recent gains as the BOJ’s hidden agenda is to stem the growth of the YEN in order to protect exports as well.

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Global Economic Crisis And Major Events For Today

What we are seeing these days with smaller economies seems to be a limited affect of the global crisis on their economies. Not to say that they are immune, they most certainly are not, but their slide is less dramatic. How this translates in the daily FX trading patterns as they deal with their crisis remains to be seen – but those investing and trading, along with brokers trading their currencies are sure to keep an eye out as they may offer a glimmer of hope in what is a dark and murky world.

Let’s have a look at the Economic Calendar for major events going to be held today.

Date	Time (GMT)	Source	Description	Forecast	Previous
1/21/2009	04:00	JPN	BoJ Monetary Policy Meeting	n/a	n/a
1/21/2009	05:00	JPN	Leading Index CI	n/a	81.5
1/21/2009	07:00	GE	Producer Prices (YoY)	4.2%	5.3%
1/21/2009	09:30	UK	Bank of England Minutes	n/a	n/a
1/21/2009	09:30	UK	M4 Money Supply (YoY)	16.0%	16.4%
1/21/2009	09:30	EU	Speech by Jean-Claude Trichet	n/a	n/a
1/21/2009	13:30	CA	Wholesale Sales MoM	-1.5%	-1.8%
1/21/2009	18:00	US	NAHB Housing Market Index	9	9
1/21/2009	21:45	NZ	NZ Card Spending (MoM)	n/a	-2.3
1/21/2009	22:30	NZ	Business NZ PMI	n/a	35.4
1/21/2009	23:50	JPN	Merchnds Trade Balance Total	n/a	-Yen225.2B

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My Views on Daily FX Market

UK Bailout Plans Revealed

The United Kingdom’s second bailout plan came to light yesterday as lawmakers discosed the terms and intentions of this new round of economic life-preservers were thrown at the Pound Sterling. Forex Traders were not impressed as the GBP/USD traded lower towards the 1.43 mark during a session that saw the US markets closed. The pound is trading lower today again in expectation of the British CPI figures for December – which are not expected to be great (expectations are that it will come in down 0.9%). The British economy is showing signs of deflation at this point, the question the Forex Brokers and investors are asking themselves at this point is just how bad is it?

As predicted, the markets are starting to taper off a bit – not certain of which direction it wants to travel in. Many are pointing to the loss of the investing and trading community’s appetite for risk as there are too many uncertainties out there right now and core economic data continues to come in worse than the broker trading conglomerates are expecting. Just look at what happened to the Royal Bank of Scotland yesterday. As we spoke about, they announced a huge loss that was more than expected and as a result the entire London market as well as the Pound Sterling was traded down as fears of what is to come haunt investors. The word nationalization comes up when talking about big government bailouts of financial institutions and no matter how they seem to explain it, this is what it looks like. Forex trading companies and private investors are looking to the future and seeing a constricted and restricted free market system and this is the primary issue keeping the markets in a state of flux.

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Deflationary patterns creeping up on India

I have to keep going back to India. Again, this is not a major player in the Daily FX markets, however what happens in India economically affects the rest of the world significantly, whether it is a psychological factor given the sheer size and status of up-and-coming powerhouse or a tangible problem that affects economies around the world is not important at this point. If the deflationary patterns of this downturn art creeping up on India, the world is in for a long and hard road. Governments need to reshape the way they are going about “fixing” these problems as it is apparent that the way they are going about it is either a) not working or b) scaring the investing community.

The problem started in the US with bad mortgage backed securities and it has spiraled. Not only are the banks not lending to individuals, the money they are getting from their governments which is intended to spur lending is not doing so. The reason for this is simple, if you read between the lines. The money that banks receive under bailout plans are going into their reserves as these banks know that they have much more bad debt and exposure to bad debt – they cannot lend money to people because they are over-exposed and need to make sure they remain solvent – if they loan the money away they run the risk of folding at some point down the road when more of their questionable investments that are not doing too well come to light. Look for continued volatility in the markets in the near term.

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Awaiting Bank of Canada Report on Interest Rate Cut

IT will be important to monitor the Bank of Canada today as they are expected to lower interest rates to 1% today – a drop of 50 basis points. Look not for the rate cut itself, but rather what is said about the future outlook. It is widely believed that the Canadian banks are in better shape than the rest of the world’s. The World Economic Forum declared the Canadian economy to be the “soundest” – so any negative talk by Canadian governors above what we already know could send a shock through the entire FX community. The numbers come in at 2pm GMT – keep a watch.

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Daily Chart analysis EUR/USD

Looking at the Daily FX EUR/USD chart, this pair closed the week at an interesting level: almost precisely at the 0.618 retracement level for the move from the 1.2335 low to the 1.4700+ recent high. That 1.4700 recent high, in turn was a 0.618 retracement from the 1.6000+ high to the 1.2335 low, so there seems to be a focus on the Fibo levels here. As well, last week saw the pair finding support ahead of the round 1.3000 level, a break of which will be the key focus if we are to resume the downtrend. The 200-week moving average may also be a focus and comes in around 1.3375 at present.

Forex Broker trading houses comments on FX markets:

· EURUSD: 1.3385 overnight high first resistance. Eventually headed lower. First support 1.3240

· EURJPY: Rally was a short squeeze, looking for weakness in days ahead. Sell for 119.60 target.

· USDJPY: Sell for 90.00 test again with stops above 91.00. Will follow equity direction

· GBPUSD: Technicals muddled. Key resistance at 1.5000, Could rally if breaks. Support 1.4780.

· USDCAD: Looking for renewed rally with tomorrow’s BoC on tap. Buy dips for new 1.3000 attempt.

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Daily FX Updates

According to the Daily FX news, The Dollar rose again against the Euro, which hit a new month low of 1.31 USD, even after the release of a poor US retail sales report which saw sales fall 2.7% in December. Fears over a broadening global recession were realized when Standard and Poor’s downgraded Greece’s credit rating to A- / A-2, something they had warned about doing last week. Forex traders continued their move towards the US Dollar as it is still believed in the investor community that the US currency is a safe bet.

Although the news in the US has not been great as of late, the trading and investing trends has continued to work in favor of the US as Europe continues fielding bad economic news and speculation. Forex brokerages have seen continued selling of the Euro by their customers on news of an imminent rate cut. Adding to the fire in Euro-land was Germany’s declaration that its economy shrank 2.0% in the last quarter of 2008. Coupled with the S&P downgrade of Greece was the now very real prospect that Spain and Portugal were to follow after they too received warnings a short while ago. Look for continued weakness in the Euro as more countries begin reporting their Q4 economic data.

The Euro also fell against the Japanese Yen, albeit slightly to 117.11. The Yen also traded up and down slightly all day against the USD, which was looking at a mild gain towards the end of the day. Japanese officials are monitoring the strength of the Yen in an effort to perhaps keep it from getting much stronger. It is believed that a strong Yen will hurt Japanese exports which, in this environment, are crucial to their economy.

India has said that their inflation will fall to between 3% and 4% by the end of Q1. Normally a drop in inflation is good news however given that many countries are experiencing severe deflation in this economic crisis, this raises flags for India. An economic crisis in India can have a large impact on the overall global economy. This is something to watch in the near future.

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My Forex Recommendations

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My Forex updates

These are some of my daily FX updates I summarized for all my readers.

· After a week which saw traders dumping the Dollar in advance of a dismal employment report, the dollar rallied on Friday after that report showed a better than expected number from the Labor Department. Granted, the number was still miserable at 524,000, however considering the street was expecting a 550,000 number traders found a positive in the Dollar.

· The Euro fell more than 1% on Friday against the dollar on the employment report capping a 2.9%+ loss for the week against the dollar. It will open the next session at 1.3473 where it will try and regain some of its strength in its battle against the greenback. As economic data continues to confirm what everybody already knows – the recession is here to stay for a little bit – the Euro finds itself under more and more pressure. The fact that a dismal US employment report came in less dismal than expected, rallied the dollar against the Euro is more a testament to the poor state of the economies with the EU.

· German industrial production reports showed a higher decline than expected, -3.1% against a forecast of -2.0%. The retail sales report for November showed a more distinct decline of 3% against a forecast of a 0% decline. As one of the largest economies, the German decline is having a serious impact on the Euro as a whole. Traders are now biting their nails over the estimates for the future data reports and revising expectations.

· While the Euro was falling, the British Sterling showed why it is beloved by her countrymen and investors alike. In response to the Bank of England easing up on interest rate reductions, the Pound ended the week with the largest rise against the Dollar in 2 decades and the biggest weekly advance against the Euro. England has their own problems to face, but compared to the struggles going on in the Eurozone and the US, England looks rosy.

· The Canadian Dollar gave back some of its gains early in the week against the US Dollar on reports that the unemployment number was higher than expected and that the housing market had experienced lower than expected sales. Pressure is likely to continue on the CAD this week as investors continue to watch the happenings in the US.

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Market Overview: Ugly US ADP Employment Change made stocks retrace

Yesterdays bad US ADP Employment Change made stocks in the US drop significantly and this will spill over into the European session today as equity markets are pricing in bad Non-farm Payroll Friday.

Market Updates

• Yesterday’s ADP Employment Change of -693K finally had equities reacting on negative news. Today’s Jobless Claims might confirm the job losses.
• S&P500 dropped 3% and could test trendline support at 891 today.
• Obama says that the coming stimulus plan might costs as much as $1.3T and promises regulatory change no later than by April. Thus, financial shares should continue to underperform the broader market.
• The BoE may cut interest rates by 50 bps or more today, but there is a lot of uncertainty around this decision, so GBP volatility is virtually guaranteed.

Forex Recommendations:

• EURUSD: 1.3545-55 held in Asia, risks rebound past 1.3670 to re-test o/n highs
• EURJPY: Risk-aversion making downside vulnerable. Test of recent 125.0 low likely. Res 126.50
• USDJPY: USD negative environment makes test of 92.0, 91.50 likely. Res 92.90-00
• GBPUSD: 1.5000 needs to hold for next leg up to 1.5250. Seen consolidating ahead of BOE mtg.
• AUDUSD: 0.7000-30 key suppt. Rally limited to 0.7125 for now amid weak commodities.

FX Options

• EURUSD: Front end reversals once again dealt at around par but this time skewed towards EUR calls. Vols backed off slightly but should stay at these levels going forward.
• EURCHF: Significant trade observed in the market where interest bought 9m 25delta risk reversals in 350mio/leg sign of lower spot in the long term.
• AUDUSD: Monday 6900 and March 8100 strikes being paid today as spot comes under pressure since the NY session. Spot likely to head under 7000.

Equities

• DAX: Sell at the break of 4906 targeting 4843 initially, 4780 finally. S/L at 5035.
• FTSE: Sell at the break of 4502 targeting 4456 initially, 4414 finally. S/L at 4540.

Futures

• Gold (XAUUSD): Pressured by commodities slide. 835.0 suppt seen holding. 855.0 res
• Silver (XAGUSD): Seen ranging around 11.0 pivot. 10.80-11.20 should be the parameters
• Oil (CLG9): Inventories keeping crude capped for now. Risks slide to 40.40 support.

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My Currency analysis

I saw some interesting patterns and opportunities which I like t share with all my readers of the blog. Here are the price trends of various currency pairs I am eying on and my analysis on the same. I hope you all would like them and will leave your suggestions and comments on the same.

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My Forex Analysis

I am certain you all noticed the vast opportunities in the FX markets so far. Take USD/JPY for example.

As you can see a double top (if you don't know what a double top is please drop a comment here) has formed when the graph tackled a solid resistance. I followed it, opened a short position and left it open for a couple of hours (approx):

I think those who paid attention to the moves noticed an attractive market, enriched with constant opportunities. The market will be extremely interesting tonight (CET) and throughout tomorrow's session due to the heavy releases.

Let's analyze them together and see why is tonight session (CET) and tomorrow are so attractive.

Let us first look at GBP

Nationwide HPI m/m:

It is simply the change in the selling price of homes with mortgages backed up by Nationwide. Rising house prices will appeal investors thus giving us a good picture of the housing market in The UK. So far so good, let's refresh ourselves with last November's Data:

The Graphs are available for all from The Nationwide official web site.

To summarize, the price in November fell to -0.4%, the pressure on the housing market may intensify due to poor economic conditions but big rate cuts may cushion the impact. So, we can see the high rate cut in November was supposed to cushion the impact. British mortgage approvals for house purchases fell to their lowest level in November since records began. Mortgage approvals are an important indicator for the housing market as it reflects housing demand. The Mortgage approvals fell to a shocking 27,000 in November as we discovered last Friday, which forced GBP down against a basket of currencies.

Therefore, the Nationwide HPI for December is very important. We are going to see whether the previous rate cut did the trick despite the grim expectations, which are not positive at all and have the strength to crush GBP.

Time of release: 07:00am GMT

Now lets see what is happening so far with The GBP?