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Today's Featured Article
The last few weeks have seen some major moves in the currency markets. Much of this activity was spurred on by the corrections in the Oil and Gold markets. That is where we have been. Today we are going to take a look at where we are, and where we may be headed on a few currency pairs. Because of the many factors influencing the value of any particular currency, we are going to be reviewing these pairs from both a fundamental as well as technical perspective. Our aim with this exercise is to gain some insight into what we may expect from these pairs in the coming months. As always, the future is uncertain, the market is always right and money management will
continue to prove more valuable than any strategy.
EUR/USD: Fundamentally speaking, this pair looks poised to move back in to a broad channel, similar to what we experienced from March to July of this year. In the Euro zone, flash GDP showed a contraction of .2%, the first decline in real GDP since data has been available (1995). Spain was the only one of the major contributors to show any growth at all with a meager 0.1% rise. Germany, the largest economic contributor to the Euro, was down 0.5% after a 1.3% rise in the first quarter. German ZEW, which is an indicator that measures institutional investor sentiment, showed a great deal of pessimism from that sector at a rating of -55.5. With similar struggles in the US economy, these factors
look to predominately offset in the near future. Moving forward through autumn, I look for negative reports from both economies to continue, interspersed with some positive news. Please read in: positive news simply means bad news, just not as bad as expected.
Technicals EUR/USD: After double-topping around 1.6040 in July the EUR has given back almost 100% of its 2008 gains and just over 50% of its gains over the calendar year (from Aug 16, 2007). Latest support was seen in the 1.4630 range with a bit of a bounce back up to 1.4900; however, another leg down to the 1.4450-1.4500 range would not be all that surprising. This would also put us just about on top of a long-term trend line derived from the weekly chart going back to 2001. In the near/mid-term, and barring any major shifts in sentiment, another broad channel (or very large ascending triangle) starting between the 1.4500-1.4600 to the 1.5200-1.5300 could contain this pair over the
coming months.
If you cannot view the EUR/USD chart,
go here.
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USD/JPY:
The bank of Japan is currently facing several major challenges. The commodities boom this year has definitely strained the USD; however, the effects on the Yen, have been even more profound and look to continue through 2008. In Japan the latest CPI (consumer) and CGPI (corporate) estimates were up 1.9% and 7%, respectively. On the corporate side, this represents the highest rate of increase since 1981. The widening gap between rising prices and diminishing wages is expected to continue to push inflation upward. Export data also indicates further weakening due to an extremely soft global market. The combination of inflationary pressure and economic stagnation, point to one thing:
stagflation. It is important to note, that while this may seem like doom and gloom for the Yen, these factors are not expected to produce a sharp devaluation of the Japanese currency. In a speech earlier today (Aug. 25, 2008), Masaaki Shirakawa, Governor of the BoJ stated: "Japan's economy is unlikely to experience a deep adjustment phase".
Technicals USD/JPY: The technicals on this pair seem to be in agreement with the fundamentals. Since reaching a low on March 17 of this year, the USD/JPY has marched upward. Throughout this climb we have seen several pull backs only to find support at Fibonacci ratios and trend line intersections. Based on the data we have today it looks as this may continue throughout the remainder of 2008. Viewing the chart below we find a nice steady trend upward along the daily trend line (The one exception being the trend line violation in July which ended up forming a very nice Gartley pattern at 78.6% of the previous swing). I expect this pair to continue this pattern through the mid-term and
favor buying pull backs at the trend line support areas which coincide with retracement ratios of 50%, 61.8% and 78.6% from the previous swings.
If you cannot view the USD/JPY chart, go here.
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AUD/USD:
I look for the Aussie to be one of the strongest performing currencies, from both a fundamental and technical standpoint, as we wrap up 2008. On the fundamental side there is talk of a slowdown in the overall economy and a potential interest rate cut of 25 to 50 basis points when the reserve board meets again in September. Even with a basis cut of 50 points, the AUD would still sit at a strong 6.75%. 4.75% over the USD, making it very attractive from an interest rate perspective. While the retail sector has slowed in Australia and consumer sentiment has fallen off in recent months, we have to hold this against the backdrop of rapid growth witnessed in the previous quarters. Similar
to driving a car at 75 MPH on the expressway and then slowing down to 45 MPH in town, It may feel like you are crawling, but in reality you are still moving forward at a decent pace. Australia's terms of trade have risen by a further 20% since the start of 2008 and the income gains from this revenue source will represent a significant stimulus to the economy. Additionally, tax cuts for the consumer that came into effect July 1st, may help to bolster both the retail and housing sectors and offset the strain caused by rising fuel prices.
Technicals AUD/USD: After a massive correction, we have found some support around the .8600 level, thus seeing a slight bounce. While it is possible this support may hold, if it is breached, I look for another small leg down to the .8500-.8550 to retrace 100% of the yearly gains (from Jan. 22). This is very near a carbon copy of 2007, where from mid-July to mid-August we saw the Aussie give back 100% of it's gains from March 5, only to recover and blow out 2007s' high by October of that same year. Additional support comes from a 61.8% Fibonacci retracement (.8506) of the 2007 low intersecting with the long-term trend line derived from the weekly chart (blue line on chart below). From a
risk perspective scaling into a long position, on this pair seems to have a great deal of upside. On a cautious note however, a break below these levels could indicate that the floor is a long way down.
If you cannot view the AUD/USD chart, go here.
Please keep in mind that Forex and Forex Options trades are a leveraged product and can result in losses that exceed your initial deposit. Trading Forex may not be suitable for everyone, so please ensure that you fully understand the risks involved.
The ideas and opinions represented in this article are for informational and educational purposes only and are not intended as a solicitation or recommendation to buy or sell any financial product.
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About the Author
Dan Cook has brought with him to the Senior Market Analyst role at IG Markets, Inc. 10 years of experience in the financial markets.
In 1998 Dan began trading for himself in the equities markets. Trading through the bull market of the 90's and through the bursting of the technology bubble in the early 2000's, has given him a firm understanding of trading during diverse market conditions. It was also during this time that Dan developed his passion for Technical Analysis.
In 2006 Dan moved full-time into the currency markets as a trading coach. Through this experience he has had the opportunity to work with a wide array of trader types and styles, further broadening his understanding of the markets. As an experienced presenter, Dan is able to communicate the intricacies of trading principles and analysis in a clear and concise manner.
In his current role as Senior Market Analyst, Dan continues to focus on currency and options on currency markets. He is responsible for writing daily market commentary for press distribution as well as posting forward-looking analysis based on a combination of technical and fundamental indicators. |
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