Forex News

Forex Technical Analysis for 03/31—03/04 Week

EUR/USD trend: sell.
GBP/USD trend: sell.
USD/JPY trend: hold.
EUR/JPY trend: sell.

Floor Pivot Points
Pair	3rd Sup	2nd Sup	1st Sup	Pivot	1st Res	2nd Res	3rd Res
EUR/USD	1.4958	1.5149	1.5475	1.5666	1.5992	1.6183	1.6509
GBP/USD	1.9307	1.9533	1.9739	1.9965	2.0171	2.0397	2.0603
USD/JPY	95.62	97.09	98.11	99.58	100.60	102.07	103.09
EUR/JPY	148.49	150.77	153.77	156.05	159.05	161.33	164.33

Woodie’s Pivot Points
Pair	2nd Sup	1st Sup	Pivot	1st Res	2nd Res
EUR/USD	1.5183	1.5542	1.5700	1.6059	1.6217
GBP/USD	1.9533	1.9739	1.9965	2.0171	2.0397
USD/JPY	97.09	98.11	99.58	100.60	102.07
EUR/JPY	150.77	153.77	156.05	159.05	161.33

Camarilla Pivot Points
Pair	4th Sup	3rd Sup	2nd Sup	1st Sup	1st Res	2nd Res	3rd Res	4th Res
EUR/USD	1.5516	1.5658	1.5705	1.5753	1.5847	1.5895	1.5942	1.6084
GBP/USD	1.9707	1.9826	1.9866	1.9905	1.9985	2.0024	2.0064	2.0183
USD/JPY	97.77	98.46	98.68	98.91	99.37	99.60	99.82	100.51
EUR/JPY	153.86	155.31	155.79	156.28	157.24	157.73	158.21	159.66

Fibonacci Retracement Levels
Pairs	EUR/USD	GBP/USD	USD/JPY	EUR/JPY
100.0%	1.5858	2.0191	101.04	158.34
61.8%	1.5661	2.0026	100.09	156.32
50.0%	1.5600	1.9975	99.80	155.70
38.2%	1.5538	1.9924	99.50	155.08
23.6%	1.5463	1.9861	99.14	154.31
0.0%	1.5341	1.9759	98.55	153.06

USD: What is the story?

Recent news reports have painted a downright bleak picture of the US economy. Home prices are now falling. Equity prices are also falling, at an annualized rate of 20%. Meanwhile, energy and food prices are rising, dipping into what little purchasing power consumers can still claim. Somehow, as DailyFX, recently reported, the Dollar has held its own. Their reasoning is that there is a struggle being waged in forex markets between yield and growth. On the one hand are investors who are bearish on the Dollar because of interest rates that are headed downwards, despite already being low. On the other hand are investors who think that yield is comparatively unimportant, since the rate cuts are needed to shore up the economy. While interest rate differentials do not favor the US, the economic growth that they are intended to bring about tell a different story. DailyFX reports:

The only problem with this thesis is that 2 percent interest rates or 100bp is about as low as the market expects the Fed will go. If banks are forced to take more write-offs and the US economy deteriorates further, the Federal Reserve may be forced to go below 1.00 percent.

Loonie in Trouble

In a recent article published in the Toronto Star, a Canadian columnist outlined five reasons why the Canadian economy is in trouble. Only a couple factors are unique to Canada, and several can be subsumed under the credit crunch, but the pessimists are sounding broad alarm bells. First on the list is the looming drop in prices for commodities, the cornerstone of Canada's economy. Oil recently sank below $100/barrel, and gold dropped 5% in one day! In addition, China is threatening to curb demand in order to rein in inflation.

The second and third causes for concern are a decline in bank credit and loss of confidence, respectively. Neither of these factors are endemic to Canada, as banks around the world have suddenly developed an aversion to risk and have tightened lending accordingly. Next, corporate expansion (namely of American companies) is stalling; Home Depot and Proctor & Gamble have already announced a temporary hold on opening new stores in Canada. The final factor(s) are American consumers, which collectively spend $9 Trillion per year. The recent tightening of wallets could spell massive trouble for Canada, since some of its provincial economies are primarily driven by cross-border sales to Americans.

In short, the Canadian economy could actually contract in 2008. But perhaps the resulting decline in Canada's currency, the loonie, would make Canadian exports comparatively more attractive and return the economy to firm footing in 2009.

Euro Could Replace Dollar

Two American economists recently conducted a computer simulation to determine how the role of the US Dollar as the world's reserve currency will evolve over the next decade. Their hypothesis- that the Dollar's preeminence would be maintained- was contradicted by the simulation leading them to conclude that the Euro will overtake the Dollar within the next 10-15 years. This may be hard for many analysts to stomach, since the Dollar's share in global currency reserves is 66%, compared to the Euro's 25%. In addition, the Dollar has held its title for nearly 150 years, and it's difficult to fathom its being replaced.

However, two factors have emerged within the last 10 years, lending support to the argument. First, the US twin deficits have exploded; the current account deficit approximates $800 Billion and the national debt is estimated at $9.4 Trillion. Second, prior to the inception of the Euro, there didn't exist a credible alternative to the Dollar. The Deutsch Mark and Japanese Yen initially seemed like potential candidates, but the German currency was folded into the Euro, and the Japanese economy has soured and taken over by deflation. Then there are peripheral factors, like US monetary policy, which is facilitating inflation and eroding the Dollar. There are also signs that a neo-imperialist foreign policy has overstretched the US, and foreign Central Banks are becoming nervous. The Financial Times reports:

Many developing countries will find it harder to maintain their dollar pegs. They may be reluctant to drop them now but there will come a point when the rise in inflationary pressures becomes unbearable.

Return of the Carry Trade?

After the Fed cut its benchmark lending rate by 75 basis points last week, the Dollar immediately rallied 2.5% against the Japanese Yen, marking its highest daily rise in nine years. Some analysts are at a loss to explain this phenomenon, since a narrower interest rate differential should have produced the opposite effect. Perhaps, the answer can be found in the carry trade, whereby investors sell Yen in favor of higher-yielding currencies. Support for the carry trade typically moves inversely with volatility. For example, when risk aversion rises due to economic uncertainty, investors typically unwind their carry trade positions. With the Fed rate cut last week, however, risk aversion actually fell, and the S&P 500 Index surged. By no coincidence, the Yen fell. Reuters reports:

As U.S. stocks rallied, with investors willing to take on more risk, the dollar recouped some of Monday's sharp losses versus the low-yielding yen.

USD: 0 for 3

In a recent commentary piece, the Market Oracle used the analogy of baseball to outline why this will be an "off year" for the Dollar, listing three reasons to support its claim. Consumer spending was listed first because it represents the largest component of US GDP. Since much consumption is financed through borrowing and since the credit crunch has forced banks to rein in lending, the Oracle reasoned that consumer spending will be especially hard hit. Next, there is the worsening employment picture. As its moniker implies, the "jobless recovery" that has characterized the US economy over the last few years did not add many jobs, and due to the economic downturn, jobs are now being shed. Finally, the Market Oracle has identified the Federal Reserve as a primary contributor to the decline of the Dollar. While the Fed is trying to shore up the economy, it is simultaneously enabling inflation. Thus, even if the battle is won and recession is averted, the Fed may still find that it has lost the war- on prices.

Read More: Three Strikes Against the U.S. Dollar