Bouncing Off the Bottom…
Another week has come and gone, and while the news is still dark for many of the world’s economies, there is at least a sense of some stability returning. One great example is with the Dow Jones stock market is finally showing some “normal” gains and losses day to day, as opposed to the wild 600-900 point swings that were causing investors heart attacks all the way around for the last several weeks.
That being said, there is still wide spread weariness. The panic may have run its course for at least the short term, but there’s no question that no one is out of the woods yet, and in most places things are going to continue to get worse before they get better. At least a steady and tempered understanding of this is far easier for the markets to handle than a back and forth manic switch between panic and unfounded optimism.
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There’s no illusion that more hard times are ahead, and even if things seem more stable, the world economies still seem more built on wet sand than on a solid bedrock, and it’s going to take time before anything resembling “normal” consistently becomes the norm again, but at least for the short term things look a little better. Considering the last few months, we’ll take it, and be thankful we’re trading Forex, where there must be a winner in every currency pair, as opposed to stocks.
Starting at home
There were a lot of major reports released this week that had some effect on the USD. Some of them even had a spot of good news (or at least better news) for a change. The week started out well as the USD New Home Sales report showed that there was some positive movement as more individuals bought new homes, after a 17 year low. While a decline of 2.2% was expected, sales actually rose 2.7%, making the report just short of 5% better than expectations. This was a very good boost since any type of boost in the housing market can help to stabilize the U.S. economy and give it a bedrock to start rebuilding again, or at least firmer footing to weather the coming storms.
The consumer confidence report, however, was not nearly so forgiving. While new home sales enjoyed an unexpected bump, the U.S. consumer confidence fell to a record low. The Conference Board’s confidence index fell to 38, the lowest since records began all the way back in 1967. That’s right, this was the most pessimism recorded from consumers in 41 years.
The plunging of the stock markets didn’t help, and the S&P, barring a massive end of the month turnaround, will post their biggest one month loss since the Great Depression. This indicates that the holiday season may suffer as consumer spending tightens, a double blow for retail outlets and the economy in general.
Anthony Ryan, the Treasury’s acting undersecretary for domestic finance, announced at a meeting that the Treasury will be facing historic financing demands as the economy continues to weaken, but demands increase to stabilize the economy, including funding the $700 billion economic banking stimulus package. We might be staring at a $1 trillion budget deficit just for this year, and those are numbers that can’t possibly help the U.S. economy or the USD.
The USD durable goods orders has come out, as well, and this report was better than expected, but not enough to have a huge impact on the market. While a -1.1% movement was expected, there was actually a .8% gain as opposed to a decline, showing at least a little bit of positive movement.
The USD Federal Open Market Committee made their rate decision, as well, reducing their interest rate from 1.50% to 1.00%, just as expected. Meanwhile the USD GDP QoQ Annualized report showed a decline, further supporting indications that the U.S. may very well be in the beginning of an extended recession. Other confidence released reports were equally pessimistic, ending in a bummer for a currency that started off with a good Monday report, but couldn’t build on it.
Just a little bit North
There weren’t many major reports released affecting the Canadian Dollar this week, but the GDP was released on Friday. Although it was a touch better than the expected decline of 0.4%, -0.3% isn’t exactly a reassuring number, and Canada joins the long line of nations who are either on the verge of, or plunged in, recession. The decline in GDP was small, however, giving a little hope that maybe they can pull through the next quarter.
On the Old Continent
This wasn’t the best week for the European economy, either. German business confidence has fallen to a 5 year low, ending up even lower than expectations. A large part of this was due to indications that the economy failed to grow in the second quarter. If there was a small amount of good news, it’s that while the German CPI is up 2.5% from a year ago, the month to month CPI actually showed a drop of 0.2%.
The early release on the October CPI estimate indicates that all numbers point towards the price changes falling within expectations, and the ease on inflation will give the European Union a chance to cut interest rates to try and spur the economy through recession.
In the Alps
The Swiss Franc (CHF) enjoyed a little bit of good news as the UBS consumption indicator for Switzerland actually rose for the first time in over three months. The data gives indication that in Switzerland consumer spending is still holding up fairly well even with the slow down in the overall global economy. The main concern here is whether or not this can hold, as there are expectations that the third quarter numbers will show an actual contraction in the economy, but in the short term the CHF is looking pretty good.
Action in the Land of the Rising Sun
Early economic reports in the week showed that inflation was slowing; giving the Bank of Japan the signals it needed to cut the interest rates. While this action was expected, and in fact the BOJ did not cut rates as heavily as expected, the slow down in inflation was still good news. The Retail Trades reports showed a decline in retail sales, which was expected as Japan is entering a recession that was adding to the squeeze on consumers that inflation was also hitting them hard with.
The Bank of Japan lowered the benchmark interest rates by 20bp to 0.30% from the previous 0.50%. This was a smaller cut than projected, as many thought there would be a 25 bp drop, but this action still shows that inflation fears have eased, allowing Japan to take action to try and blunt the effects of the current recession. This move caused the Yen to rise against both the USD and the EUR.
Japan’s CPI showed only a 2.3% from a full year ago, indicating that inflation fell enough to allow this all to happen. Japan also received more good news, as Japan’s unemployment rate was a pleasant surprise as it fell from a two year high. The job rate is now 4% as opposed to 4.2%, but this might only be a temporary blip as numbers from large corporations indicate that profits are down.
In Summary
It has been a relatively quiet and stable week, which is absolutely fantastic considering the chaos and panic of recent markets. Some might think that it is hard to figure out what currencies to trade when emotions are swinging so wildly in all the markets and the fundamentals look so bad for so many countries, but there are always opportunities when the markets are moving this much. Good trading.
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Market Sentiment
In this section, we will try to gain further insight into the Forex market. We will do this by looking at a poll of market participates and what I call global strength.
Currency Poll
Polls are used to measure the sentiment of market participants. The results are used as a contrarian indicator because they express optimism at market tops and pessimism at market bottoms. Therefore, a high percentage of votes can be used as an indication that the market will do the opposite.
Our poll is only concerned with how the four major pairs will close the next week: up, down, or even. The results are belop.
Poll Results:
EUR/USD
Close Up: 43%
Close Down: 53%
Close Even: 3%
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USD/JPY
Close UP: 51%
Close Down: 42%
Close Even: 8%
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GBP/USD
Close UP: 46%
Close Down: 53%
Close Even: 1%
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USD/CHF
Close UP: 51%
Close Down: 39%
Close Even: 9%
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Global Strength
Global strength looks at the individual currencies to determine how they are doing globally on a year to date basis. My hope is that this will give you a view of the market typically not view, thereby; giving you an edge. We will look at the following currencies: USD, EUR, GBP, CHF, JPY, CAD, AUD, and the NZD. We will compare each currency separately and then we will compare them all together. The currencies are shown in number of pips up or down on a year to date basis across the pairs shown. (Note: Just click on the picture to view.)
USD
EUR
JPY
GBP
CHF
CAD
AUD
NZD
All Currencies
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