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Dollar Sent Tumbling As Rate Increases Doubtful in New Year |
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Written by Jason
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Tuesday, 03 January 2006 |
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Two-thousand and six started off with a bang with a broad sell-off of the dollar following a surprisingly weak ISM index report and reinforcement from the Fed’s minutes today that the Fed may stop raising the target federal funds rate further this year. December’s ISM index dropped to 54.2 from 58.1 last month while economists forecasted a reading of 57.5. Eurozone data countered this negative ISM report with a higher than expected purchasing managers index reading. Further ammunition contributing to the dollars losses are speculation about last week’s yield curve inversion possibly being the precursor to a recession and also an indication that the Fed may have overshot its interest rate target. Our forecast of a euro-dollar reversal has been realized as the technicals show the euro-dollar breaking through the daily downtrend line (see below). The single pair has travelled over 200 pips in the past two days obliterating resistance after resistance thus dealing a heavy blow to dollar bulls. Long-term players seem to be heavy on the bid as the weekly chart is signalling a major shift in sentiment primarily due to the expectation of a narrowing of the interest rate differential between the U.S. and Eurozone this year. The next major offer levels for the euro-dollar are 1.2090 and 1.2150. To the downside, bids are noted at 1.2000 and 1.1950. Any retreat to these lower levels will sustain the current uptrend unless broken. Write Comment (0 Comments) |
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Bond Market Signals Caution As Yield Curve Inverts |
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Written by Jason
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Tuesday, 27 December 2005 |
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For the first time since 2000 the long-term bond yields fell below those of the short-term resulting in an inverted yield curve. Despite several historical references of this event being a leading indicator of a recession, Greenspan and other economists believe this may just be a signal that the economy is slowing. In the past 40 years, two inverted yield curves have not led to recessions; therefore, it is not a statistical absolute that a recession will occur. Tomorrow’s consumer confidence will weigh on the market as investors are seeking a reading of 102.5 in December from economists’ forecast. A solid reading will continue to reinforce the Fed’s slant to continue raising rates. Volume has been considerably thin due to the holidays. As such, the major pairs have been quiet, especially the euro-dollar which has been trading within a range of 1.1800 - 1.1900. Long-term studies (see below) are currently bearish as the single pair struggles to break above the downtrend line. A falling wedge pattern may reverse the pair’s course upward as the euro-dollar trades towards the apex of the converging trendlines. With most triangles, diminishing volume towards the end typically increases its resolve and indeed volume has been thinning as of late. Resistance to the upside is 1.1900, and to the downside bids are noted around 1.1760 and 1.1670. Write Comment (0 Comments) |
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Dollar Thrusts Into Gear; ECB Signalling Contraction in 2006 |
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Written by Jason
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Thursday, 22 December 2005 |
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Euro-dollar faltered today as expectations for future Fed rate increases were rekindled following a speech by the Jeffrey Lacker the Fed Bank of Richmond President. He forecasted that the U.S. economy will grow at a reasonable 3.5% pace next year. Rising inflation and a steadily growing economy are two major ingredients for influencing the Fed to raise interest rates and in turn this will continue to support the dollar. Technicals reveal the euro-dollar in neutral territory, with a slightly upward short-term bias as the pair continues to hold the 1.1800 level (see chart below). This level is critical for upholding the bullish move from the 2005 lows of 1.1638. Beyond the 1.1800 level, the pair finds bids at 1.1760 and 1.1705. To the upside, major supply is noted at 1.2040. Dollar-yen is still slowly recovering from its sharp fall off 121.50. Japan’s trade surplus widened last month from 597.3 billion yen to 600.6 billion yen and this may limit the pair’s recovery as any positive economic data will be yen-supportive due to Fukui’s aim to begin contractionary monetary policy. Resistance is slated at 117.80 and 118.30. Bids are noted at 116.80 - the reversal breakout level. Write Comment (0 Comments) |
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Fed Set to Raise Rates Yet Again; Euro-Dollar Firm |
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Written by Jason
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Sunday, 11 December 2005 |
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The major currency pairs remain relatively stable approaching the next Fed rate announcement tomorrow. It is widely expected that the Fed will again raise the Fed funds rate by 25 basis points to 4.25%, but the market is poised to hear the Fed’s rhetoric following the hike concerning future actions. A less hawkish tone will not necessarily shift the market bias against the buying of dollars, especially since the Fed set to outpace the ECB in rate hikes through Q1 2006. It is of note, however, that with each 25bp increase, the closer the Fed may get to topping out, which would then shift the focus to possible ECB inflation-countering rate hikes in 06. Furthermore, Lorenzo Bini Smaghi and Axel Weber sent conflicting signals regarding rate hikes, stating that the ECB could indeed raise rates at anytime especially if inflation and growth continue in the eurozone. This was clearly a mixed message as Trichet suggested there would be no more rate hikes in the near-future. Technicals for the euro-dollar remain neutral as the pair hovers below daily downtrend resistance at 1.1870. A breakout above this level will only stabilize the upward surge upon the pair holding the 1.1940 level. Major support is slated at 1.1770. Our strategy is to re-establish a bearish position at 1.1915 with a target of 1.1560. Write Comment (0 Comments) |
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ECB Favors Rate Increase Next Month |
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Written by Jason
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Sunday, 20 November 2005 |
Jean-Claude Trichet, the ECB President, surprised investors Friday by stating the ECB is ready “to moderately augment the present level of interest rates in order to take into account the level of risks to price stability.” This verbal ammunition will be a catalyst for the euro to assert itself against other major currencies in the coming weeks. The ECB’s benchmark rate is currently 2.0%, a number that hasn’t budged in more than two years. The next ECB meeting is December 1. Technicals for the euro-dollar are effectively neutral after bottoming at 1.1638. The recent firmness of the single pair brought on by Trichet’s speech leaves the dollar vulnerable to losses in the near-term. We expect a retreat back to the 1.1900 level weekly trendline resistance) in order to re-establish a bearish strategy for 1.1580. Any sustained break above this 1.1900 level would signify a longer-term trend change. The yen remains the weakest currency hampered by Japan’s deflationary recession. The consensus is that zero percent interest rates will remain as the Bank of Japan faces political pressures to provide liquidity to the economy. Our current upward targets are 120.45 and 122.00, foreseeable in the remainder of the year. Critical supports for the pair are slated at 118.40 and 117.50. |
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