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Does Cost Cutting Equal Real Growth?

Discussion in 'Forex Daily News & Outlook' started by mercaforex, Oct 8, 2009.

  1. mercaforex

    mercaforex New Member

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    By Mercaforex



    The USD lost ground to the EUR and JPY on Wednesday and traded in range versus the GBP. There was little economic data from the U.S yesterday but earning’s season did get underway last night with the release of Alcoa’s quarterly report. The USD has found a tough path in recent trading against the EUR as risk appetite and optimism has climbed. Today the weekly Unemployment Claims figures will be released and they are anticipated to be slightly better than last week’s results. Tomorrow the U.S. Trade Balance figures will be published. For the moment it appears that optimists who are willing to speculate on a recovery are controlling the broad marketplace. However many questions continue to plague investors regarding what type of economic future really waits.

    The USD has seen weakness crawl into its midst and while many say that this is due to risk appetite, it can also be argued that the U.S. government is pursuing a weak dollar policy but this leads to an even greater argument. While the U.S. may in fact need a weak dollar to spur its export market it does the States no favors long term to have its currency come under the dark shadows of faltering confidence, particularly when they fund their deficit through the sale of its bonds. What investors are now trying to grapple with is sentiment versus fundamentals. While the Alcoa report last night showed a surprise profit, this occurred because of cost cutting measures. At some point investors will insist on sales growth from corporations to sustain positive market momentum. Where is global demand really going to come from and when will fundamentals become truly positive? While China has supposedly kept it economic pace at a good rate, can they maintain this if the international economy doesn’t pick up for another twelve months? There appears to be a sizeable camp of bulls who are trying to raise the ‘recovery flag’ but many bears remain who question the status of the real economy. The USD has been hammered by the EUR and JPY in recent trading and as long as bourses continue their good run, the dollar may slump against them as a result.

    EUR
    The EUR battled higher against the USD on Wednesday in the face of less than spectacular numbers from Europe. The German Factory Orders figures turned in a slightly positive outcome of 1.4% compared to the estimate of 1.3%. But the Final GDP numbers from the European Union delivered a negative -0.2% number compared to the forecast of minus -0.1%. Today the ECB will get their chance to address the health of the European economy when they announce their monthly interest rate – which is not expected to be changed – and hold their press conference. It is expected that ECB President Trichet will state that the outlook for the European economy remains cautious, but it is how he expresses this that will move the EUR in a certain direction. While Australia had the ability to raise their interest rate last week it remains highly unlikely that Europe is anywhere close to being able to replicate that feat. One of the ECB’s main jobs is to gauge inflation versus the ‘growth’ of its sphere. The simple fact is that inflation has been absent. The EUR has enjoyed momentum on the heels of investor confidence growing. Depending on what the ECB press conference produces regarding comments today, traders can expect a rather fast market.

    GBP
    The Sterling showed a bit of footing on Wednesday as it achieved equilibrium at least for the day. There was no major economic data from the U.K. yesterday but that all changes today as the Bank of England’s MPC will announce their monthly interest rate decision. The BoE will not change their key lending rate today but what investors are desperate to determine is the size of the quantitative easing that is being used and what the outlook is for this scheme. Many politicians in the U.K. have been trying to ‘talk up’ the ability of their economy to overcome the poor economic news that has gripped the world but the outlook that will be delivered from the Bank of England is expected to be rather cautious – and probably deservingly so. The U.K. will release its Trade Balance and PPI data tomorrow. Thus the GBP which has traded in a rather weak mode as of late, may find the next couple of days rather volatile as it stands at a fragile juncture.

    JPY
    The JPY continued to build in strength against the USD even as international bourses held steady. The value of the JPY is setting off a storm of debate among Japanese officials, who cannot quite seem to come to an agreement regarding what the strong currency means for its country. Japanese export companies are certain to suffer if the JPY continues to build its momentum. And while some economists have said that Japan can make up for this with greater consumer spending from their own citizens, it remains to be seen if those goals can be attained. Japan’s economy like other major economies continues to struggle. The JPY’s recent success is getting the attention of many who do not see eye to eye about the implications.

    Technical Analysis

    SPX/USD:
    The SPX did nothing spectacular yesterday but it did manage to have a green day, while forming an inside candle. Even though the Dollar Index came off nicely, Gold made new highs, and Google Soared, we were not able to have a real move. Today’s trading could be volatile and we may even try and fill the gap that was formed on Tuesday. That would indicate that there is not much except for froth holding up this market and I would expect a breakdown to below 1000 by the end of next week. Support 1047.2, 1040.8, 1038.8, 1020, Resistance 1060.4, 1065.1, 1074.8, 1080.2

    XAU/USD:
    While Gold continues to Sky rocket, its presence in the media is becoming more and more ominous. Even though we are breaking through highs, so it would be expected to hear some buzz about it, when the general public starts hearing about Gold and what a good buy it is, that’s usually when I start getting out of my positions! Now I am not saying that we can’t go higher, the strength in this market is very obvious, but I think that just as quickly as we have climbed, the too far too fast principle comes into effect, and we may pause and even retrace to take a small breath. Take note of the continued consolidation and push upwards that we saw over the course of the day yesterday. Support 1051.32, 1048.35, 1043.5, 1033.8, 1021.33, 1014.55, 1007.5 Resistance 1058.5

    GBP/USD:
    Finally the Sterling is starting to show signs of life. Early yesterday we bounced off of support of 1.5858 with three hits on the support line. Currently we are trading over 1.6050. However, for us to consider this a sustained move, with potential to move higher, we must break over 1.6125. With increased dollar weakness we would have expected the Pound to be much higher, and now it may have to play a little catch up. We remain cautious, yet more optimistic than we were yesterday. Support 1.6022, 1.5941 1.5858, 1.5769, Resistance 1.6125, 1.6243, 1.6316, 1.6386

    EUR/USD:
    While we wait for the FOMC to announce its expected unchanged rate decision, the Euro continues to climb higher. After dropping down to support of 1.4649 which, was the high off of last week’s Non Farm Data, we are now trading a full penny higher. 1.4842 will be strong resistance and might even be a good point of entry on the short side. It is important to note that I am not one to step in front of a moving train and will be watching the market very closely as it nears that level. If it comes barreling down the highway in a Lamborghini, I might just step aside, however, if that Lamborghini is being driven by a 90 year old woman who is stuck in first gear and is sputtering down the road, I might go short. Support 1.4762, 1.4649, 1.4610, 1.4480 Resistance 1.4842, 1.4866, 1.4967, 1.5083, 1.5144
     
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