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Forex Daily Analysis

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Equities Tumble − Will we see the impact in the Forex Market?

Wed, Feb 28 2007, 08:01 GMT
by Lee More

ForexYard

Economic News
 
USD

Yesterday, the USD fell dramatically against JPY and EUR during a highly volatile and violent session after the Shanghai stock exchange plunged almost 9%, the biggest drop in 10 years, while European equities were down about 2%.

Another factor that hurt the Dollar on Tuesday was a report showing an unexpectedly sharp drop in U.S. durable goods orders in January, adding to speculation that the Federal Reserve may cut interest rates later this year.

Add to this the unsettling talk of more central bank sales of Dollars as they continue to diversify reserves, growing tensions over Iran's nuclear program, surging oil prices - all make it very easy to understand why investors and traders have cut their risk exposure.

The global negative pressure shadowed a few positive indicators released yesterday. Existing home sales rose 3.0 pct in January which was the biggest gain in 25 months and followed the mild 0.3 pct increase in December while the consumer confidence index rose to 112.5 in February from a revised 110.2 in January, beating the economist' forecast of 108.5.

Today, apart from traders awaiting further developments in equity markets, the busy schedule of data releases will also be in focus. US data will provide new home sales for January, the second estimate of gross domestic product for the fourth quarter, as well as the latest Chicago purchasing managers survey for February. 

EUR

German January Import Prices saw a snappy decline of -0.7% M/M bringing the Y/Y rate down to +0.7%. Consensus forecasts were for -0.3% and +1.1% respectively. However, when removing energy prices from the series the Y/Y rate remained unchanged at +2.4%.

Germany's inflation released afterwards and was unexpectedly soft in February. The CPI figure for February came at +0.4% to bring the Y/Y rate to +1.6% both being below forecasts of +0.5% and 1.8% respectively.

The Euro-zone M3 money supply saw further upward pressure in January with a 9.8% M/M rise and keeping upward pressure on the 3 month moving average. The pace of growth has close to doubled over the past 3 years and will be poking a few sensitive nerves in the corridors of the ECB. This number puts one more notch in the pro-rate hike camp in addition to next months.

Today, Euro-Zone consumer inflation and unemployment figures for January are due as well as employment indicators in Germany for February. 

JPY

The JPY rallied over 2 percent against the dollar on Tuesday, its biggest daily jump in 14 months. It surged across the board, rising sharply against currencies such as the EUR, GBP, AUD, and NZD after IMF Managing Director Rodrigo de Rato warned that carry trades may cause exchange-rate misalignments and disorderly global imbalances could be worsened by the increased usage of the JPY carry trade.

In addition, currency markets reacted to the correction in equity markets by dumping carry trades which led to the large rise in the JPY.

However, it's still unclear whether the short-covering in the Japanese currency is over as equity markets might remain unstable for a while and rising volatility would make it difficult to conduct JPY carry trades. Some even say that the JPY could be hurt if foreign investors sell yen to repatriate money out of Japan. 

Technical News
 
EUR/USD

Overnight hourlies are still looking bearish as the RSI plummets beneath the 20 level while the Stochastic is at 20 as well. It is important to note that the market is now (6:30 GMT) sitting on a short term support at 1.3210 which could mean a reversal is in store. 

GBP/USD

Are bears waking up from winter sleep? Well, it seems like the pair is building a powerful down move towards support at 114.50. However, today it seems as though stochasitcs are showing reason for the USD to gain some ground as the RSI starts moving out of oversold areas. 

USD/JPY

Although the 500 pip range (1.93-1.99) is still in effect, its looks as thought eh market is becoming more volatile meaning range trading just got easier. Look for the range between 1.96 - 1.9670 to hold today as all hourly indicators are neutral. 

USD/CHF

The pair looks as though it is heading to a reversal stance after the low of 1.2140 yesterday. Stochastics are heading higher fast on the hourlies while the RSI shifts its gaze north from oversold territory. 

The Wild Card
 
CHF/JPY

Forex traders will be interested in looking to the CHFJPY today as the upward channel reached a low yesterday. Looks as the channel will provide traders buying opportunities on a day like today, so long as the support at 96.70 holds up. Stochastics are heading north as are other hourly indicators. 

Published on  Wed, Feb 28 2007, 08:02 GMT