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Forex Daily Analysis

Forex Trading − Dollar Rises on Reserve Currency Debate

Mon, Jun 29 2009, 10:54 GMT
by Greg Holden

ForexYard

After falling broadly late last week, the U.S dollar regained some ground on Monday as the market is watching cautiously to see if China will keep making comments on the reserve currency. China's central bank did not mention the Dollar by name on Friday but said it was a serious defect in the international monetary system that one currency should dominate.

Debate about an alternative international currency has heated up in recent months and central bankers gathering in Basel this weekend also discussed the dollar's role. Still, the dollar will keep its role as reserve currency, as China is unlikely to change the composition of its foreign currency reserves any time soon. That's dollar positive analysts said.

Economic News

USD - USD Up despite Recent Downward Pressures from Abroad

The US Dollar, after dropping last week due to renewed calls from China and Russia to switch to an alternate reserve currency, began to steadily strengthen in today's early morning hours. From a peak high above 1.4100 against the EUR, the USD has pared some of these losses and is currently trading just above 1.4000. Versus the British Pound, the greenback has gone from 1.6550 back towards 1.6450, remaining within the range this pair has experienced over the previous 2 weeks.

While China's recent call for a new international reserve currency, and Russia's support of such an action, has put downward pressure on the USD lately; the impact has been somewhat muted. It has been forecast a number of times that the greenback will begin to depreciate against most currency pairs as the global economy recovers. As one of the world's leading safe-haven investments, the Dollar will no doubt take a hit from an increase to risk appetite which naturally stems from economic recovery.

China and Russia added to this weight with a call for portfolio diversification, which in fact carries roughly the same impact as calling for the purchase of riskier assets. For economic giants, such as these two countries, to call for a diversion away from the largest economic rival is a basic economic weapon aimed at gaining a larger market share. The problem is that they lay out a general economic plan which is already understood to be in motion. This is why the impact was muted, and why the USD will still experience multiple up-ticks in the near future.

Looking forward to today's trading, however, will see traders with little economic news to wager on for the US Dollar. Britain and Japan appear to be releasing the bulk of today's news, which means we may see a day of trading with low liquidity and increased volatility. Day-traders can take advantage of these intense trading days by swinging within the larger-than-normal price fluctuations.

EUR - EUR's Mixed Results due to High Optimism, Bleak Data

The EUR has been uncertain in its direction lately, despite clear calls for a buy-up of this higher-yielding currency during times of mild economic optimism. Positive news from the Euro-Zone typically leads to an increase to risk appetite, which is definitely something which traders saw last week. The EUR started Friday just under 1.40 against the USD, but steadily rose above 1.41 before the end of last week's trading. The EUR even peaked around 0.8550 against the Pound, despite the moderate drop towards 0.8520 at the end of Friday's trading session.

Many of the economic indicators being released these past 2 weeks have shown that the Euro-Zone is experiencing a boost in consumer optimism. This has come about despite a growth in budget deficits and continuously shrinking manufacturing output and GDP. The people have started looking forward to better days, but the numbers still tell a bleak story. One of the primary impacts of such data is that the EUR has showed heavy signs of a comeback, but fraught with nasty downturns as its rivals make headway from periods of instability.

As for this week, the 16-nation currency has leveled-off in today's early trading sessions, but it appears to be poised for a rather sharp movement today or tomorrow. The EUR looks to be consolidating towards significant price barriers against most of its currency rivals and will either go through a massive drop or, more likely, strengthen as economic indicators continue to show a growth in optimism, and possibly a chance to poke holes in the USD's most recent gains. Traders should pay attention to the few economic indicators released today as the story is being told solely by Europe and Great Britain. With a silenced US economy, we could see much more predictable price movements from the European currencies.

JPY - Yen Declining as Consumer Spending Expected to Fall

Despite the grueling downward trend the JPY experienced last week against its currency counterparts, the Yen now appears to be flattening out. The only currency which seems to have bested the Yen in today's early morning hours is the USD which has climbed from 95.15 to the 95.50 level, with the possibility of reaching 95.80 in the coming hours. Against the EUR and GBP, the Yen has done very little in terms of price movement, consolidating towards the price of 138.90 and 157.30, respectively.

As industrial production in Japan rises for 3 consecutive months, there are some analysts who forecast a faster-than-anticipated recovery for the island economy. On the other hand, consumer spending in Japan has typically played a large part in economic growth, but these figures are expected to continue plummeting this week. Also putting mild pressure on the JPY is the fact that unemployment in Japan has finally reached over 5% and is still climbing. With such negative economic news it is hard to expect a strong recovery in the Yen anytime soon.

OIL - Oil Prices Still Failing to Stay above $70

No matter how much downward pressure there appears to be on the value of the US Dollar, the price of Crude Oil still seems to have difficulty finding support above $70 a barrel. Dropping from over $71 to as low as $69 last Friday, the price of the black gold has continued its plunge in today's early trading hours and currently sits near $68.50 a barrel.

As expectations for fuel and energy demand have been decreased these past weeks, many speculators are now beginning to price in the reality that oil prices may not find the support necessary to climb successfully above $70 in the nearest future. Without a sudden short-fall in supply, the price will no doubt reflect this reality. Traders may anticipate a series of fluctuations above and below the $70 price range as the market searches for a true range of the value of Crude Oil.

Technical News

EUR/USD

The pair has been range-trading for the past few days, and is now traded around the 1.4030 level. Currently, the Bollinger Bands on the 1 hour chart are tightening, suggesting that a sharp movement is impending, and as all oscillators on the hourly chart are pointing down it appears that the move will be bearish. Traders should wait for the breach and swing.

GBP/USD

The daily chart shows fresh signs of a bearish move, suggesting that the uptrend has vanished. The 4 chart's RSI also supports this notion indicating that the downwards momentum has more steam in it. Going short with tight stops might be the right strategy today.

USD/JPY

On the 4 hour chart the pair is showing consistent bullish momentum for a while now and the RSI is also supported by a bullish trend line. Although the signal is not strong the pair might have a local target at 96.00,.which might make it feasible for forex traders to go long with tight stops.

USD/CHF

The pair has been range-trading for a while now, with no specific direction. The daily chart's Slow Stochastic is providing us with mixed signals. All oscillators on the 4-hour chart do not provide a clear direction either. Waiting for a clearer sign on the hourlies might be a good strategy today.

The Wild Card

Silver

The current bullish trend continues as all technical indicators on the daily and the 1 hour charts are showing that the direction is up and the momentum is high. This provides forex traders with a great chance of enjoying the additional momentum still left for the commodity.

Published on  Mon, Jun 29 2009, 10:56 GMT