FOREX WEEKLY REVIEW (Times of Malta) : Summer is over, FX Volatility Expected

[RTFX]

Last week in the United States, stock markets closed lower, with the Dow Jones, S&P and Nasdaq Composite down 0.50%, 0.85% and 1.19%, respectively. This was due to poor American consumer confidence figures reported at 63.2 for the preliminary reading in August (66.0 in July) versus the expected 68.5 for the period. A new record of property seizures set during July in the United States and the bankruptcy of 77 banks in 2009, have also contributed to uncertainty about the health of the US economy. These figures have challenged the expectations for an economic recovery, which was fueled earlier by other more favorable statistics, such as industrial production which increased more than expected in July by 0.50% and retail sales, excluding food/energy (up 0.10% for the month of July). The impact on the foreign exchange market was of risk aversion. Currencies like the British Pound, Euro, Australian Dollar and New Zealand Dollar have suffered significant selling pressure, while the US Dollar and the Japanese Yen experienced gains.

The question on everyone’s mind and in FX Trading Rooms is, “Is the crisis behind us?”

France and Germany are now officially out of recession as from Q2’09, since the two largest Eurozone economies registered GDP growth of 0.30%, as well as Japan, which also registered GDP growth of 0.90%.

However, the Eurozone is still in negative territory with GDP growth still 0.10% negative, as well as the United Kingdom and the United States, registering negative GDP growth of 0.90% and 1.00%, respectively. The last encouraging data suggests that the crisis is indeed over, however, in our opinion, this is not the case.

We believe that the risk of a repeat of the Great Depression of the 1930s seems to have been averted, with the worst of the crisis, which started from the collapse of US Subprime market in 2007, amplified by the bankruptcy of Lehman Brothers in 2008, now well behind us. However, the current figures owe much to the Quantative Easing plans; the economies are far from able to support themselves. The pace of economic growth should slow down once the support measures begin to be withdrawn. Thus, it is too early to speak of the end of the crisis, as a sustained recovery is still distant.

The coming weeks are crucial: the summer season draws to a close and major movements on the Forex market are expected in the coming weeks. The current investor sentiment is bullish on a recovery in the global economy, as shown, for example, by the publication of the quarterly survey of the Federal Reserve of Philadelphia last week which explained that the outlook for growth in the US in the coming quarters is improving, despite sustained increases in unemployment. Also according to survey, economists have raised their US GDP estimates by 0.40% to 2.40% for Q3’09 and 1.70% to 2.20% for Q4’09.

In our opinion, although generally positive, this may however lead to a new surge in commodity prices, an uncontrolled long-term relapse in housing markets or a further loss in consumer confidence with rising unemployment.

Upcoming FX Key Events:
• today’s English retail sales
• tomorrow’s FED President Ben Bernanke speech.

FX Technical Key Points:
• EUR/USD is approaching a very important support around 1.4000, key resistance 1.4447.
• USD/JPY bearish, resistance at 95.90, support at 88.50.
• USD/CHF is neutral, watch 1.0600 or 1.1000.
• AUD/USD is bullish, support at 0.8150, resistance 0.9150.
• NZD/USD is bullish, support at 0.6575.

Chart of the Week:
a bullish channel is visible on the chart GBP/USD Daily as shown below. The bottom of the channel around 1.6250-1.6300 should attract some interest from investors to take fresh new long positions in Sterling. The top on this channel is around 1.7150-1.7200 where we expect some profit taking.

This article has been prepared by Nicolas Longchamp, Head of Trading at RTFX Ltd.

Published in The Times of Malta - 08-20-2009
http://www.timesofmalta.com/