Will Equity Cauldron Spill Over?


Master Trader
Jun 7, 2009
By Mercaforex

The USD lost a little ground to the major currencies on Thursday as mixed results turned up across the board within the marketplace. After making significant gains against the EUR and GBP earlier in the week, the greenback found some resistance in yesterday’s trading. Equities underscored the results on the currency markets by turning in a flat day in which most international bourses moved in a tepid manner. The weekly Unemployment Claims figures were released yesterday and the number was better than expected with a result of minus -565K compared to the estimate of minus -608K. Also Wholesale Inventories data was released and produced a negative -0.8% outcome. Today the U.S. will release its Trade Balance numbers and the University of Michigan will deliver the Prelim Consumer Sentiment reading.

Going into the weekend the USD can expect to trade in correlation with the results from Wall Street still. The unemployment data in the States yesterday was better than the anticipated number but nothing to write home about. There is a palpable nervous sentiment that exist in the stock markets and earnings from the likes of many retail companies the past two days did little to calm fears that the U.S. economy is not exactly rosy. It is clear that in order to spur sales among consumers that retail companies have had to heavily discount their prices in order to create demand. Fears of unemployment continue to cause anxiety for consumers and this directly impacts many aspects of the recession that has a strangle hold on the American economy. The affects of summer trading may be underway with traders starting to look forward to holidays, but with so much pressure on the stock markets investors will have to keep their eyes primed on bears whose negative sentiment seems to be growing. The USD has had a fairly good stretch of trading based on a flight to quality, even though so many question the amount of stress that the U.S. government is putting on the greenback structurally due to the huge amount of stimulus packages it has undertaken. Today’s trading will likely mirror the results from Wall Street and the USD’s safe haven status is likely to be spoken about again by some traders.

The EUR turned in a mixed performance on Thursday as it basically treaded water against the USD. The German Trade Balance numbers were released yesterday and produced a result of 10.3 billion compared to the estimate do 8.9 billion. Today the French and Italian Production data is on the calendar and the German’s will publish their Wholesale Price Index figures. These numbers will be watched by traders but may have little impact on the currency markets. It has been a relatively light week of economic data from Europe which continues to be under a cloud from speculation swirling about the poor health of the Eastern and Central European economies and the exposure that financial institutions have regarding this. It is being reported that the IMF, the International Monetary Fund, has been approached about having to create an aid program for a host of these nations that are requesting loans. The outlook for an economic recovery in Europe has grown weary like its counterparts and investors appear to be looking at the EUR with a more critical eye.

The Sterling stabilized on Thursday and gained against the USD after being put under pressure earlier in the week. The Bank of England’s MPC results surprised no one when the key interest rate was left unchanged. The BoE did cause news on Thursday however when they announced no change to the level of quantitative easing that it has undertaken. Today the U.K. will be releasing its PPI Input and Output data but no major change in the inflationary landscape is likely to occur today. The Sterling may have gotten a boost when investors choose to believe that the Bank of England’s non-action on Thursday was a good conservative business maneuver. The U.K. is suffering its steepest recession since the end of World War II and the British government is facing a critical test of its leadership. The Sterling goes into Friday’s trading with the possibility of being a focal point for opportunistic traders who may choose to tread within its ranges.

The JPY found some tranquility on Thursday after two days of rather volatile trading. The JPY and USD currency pair has traded within a very tight range the past few months and its movement this week was eye opening. The strength the JPY has shown against the USD comes on the heels of investors looking for a safe haven as international equity markets have wobbled. The Bank of Japan went on record yesterday saying that the strength of the JPY is undesirable and not welcome. The Japanese economy showed that it is suffering from the recession severely yesterday when its CPGI inflationary readings showed an enormous decline of -6.6%. The JPY is at the stronger side against the USD and may provide traders with the ability to test its waters for those willing to see if its range can stay true.

Written by: Robert Petrucci, Chief Commodity Expert and Forex Analyst

Technical Analysis

The pair made a bullish correction, after crossing the 1.3990 level and is now floating between the 1.3910 price levels to 1.4020. However, all oscillators on the the daily chart are showing bearish momentum. Going short appears to be the preferable strategy.

The bearish trend made a corrective move breaching the resistance level of 1,6290 and is now floating between the 1,6250 price level to 1,6335. However the negative slope on the 4 hour chart's Slow Stochastic indicates the formation of the bearish movement within the channel. Going short appears to be the preferable strategy.

The sharp bearish channel on the daily chart continues. However the Slow Stochastic on the daily chart is showing the correction of the current bearish trend is possible and is supported by the RSI. Traders should wait for a stronger signal before taking any position.

There is a very accurate bearish channel forming on the 4 chart. The daily chart also supports a bearish notion. We expect the next target price to be around the 0.6170 level. Therefore, the preferred strategy will be a short position.

The Wild Card

Gold is now showing bearish momentum as seen by the hourly oscillators. Both the daily and hourly charts support another bearish move. Therefore, it seems that Forex traders will be able to maximize gains today by entering a short position.