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Some questions will be discussed here, is the EUR headed Back to 1.60? and can the GBP remain in the levels of 1.97-1.98 and higher?
The Vulnerabilities of the US Dollars
The US Dollars weakened significantly this past week as rising oil prices revealed the vulnerabilities of the United States economy. Companies are beginning to struggle and have been forced to come up with more creative ways to deal with the energy crisis. With crude oil prices hitting $135 a barrel and gasoline in many states topping $4 a gallon, US companies are making cuts across the board. Ford Motors Co for example plans on reducing production while American Airlines will be lowering capacity by 15 percent and adding bag charges. According to the futures market, some traders even expect gas prices to hit $7 to $8 a gallon. However the US is not alone in having to deal with the oil crisis which is one of the major reasons why the dollar has weakened. Over the past few weeks, the market had been slowly pricing in a pause from the Federal Reserve. At the same time, there was a growing consensus that other central banks may need to begin or continue to cut interest rates. The surge in oil prices and hawkish comments from the European Central Bank, the Bank of England and the Reserve Bank of Australia dramatically altered the outlook for these central banks. With strict inflation targets, traders came to realize that interest rates for these 3 countries will remain unchanged for the foreseeable future and as a result, currency rates adjusted for these expectations. In the coming week, the vulnerabilities of the US economy may become even more apparent. The US markets are closed for Memorial Day on Monday, but we still have a busy week ahead of us with consumer confidence, new home sales, durable goods, first quarter GDP, personal income, personal spending and Chicago PMI due for release. We expect most of these numbers to be dollar bearish as US consumers continue to struggle under the weight of deteriorating personal finances.
Dollar selling still continue, and this week we’re seeing more and more of it, but the pair had a hard time clearing the 1.5850 resistance level on the way to challenging the 1.5900 all time highs against the euro. Perhaps the bears are starting to run out of steam. Certainly the economic data gave them little to chew on this week. Overall the results were a bit mixed as housing data and personal income showed some mild improvement but Durable goods once again missed to the downside. At best one could say that the US fundamentals have not become dramatically worse and that was enough to keep dollar bears at bay.
The pair remains at standstill as traders look for new themes to develop. Last week we noticed that “With EURUSD having run out of stream at 1.5900 early last week, near term momentum has shifted to dollar bulls. They will however, need further negative surprises out of the Eurozone in order push the pair lower. Otherwise, assuming there are no additional exogenous shocks, the currency market may simply meander aimlessly for the rest of the week in very narrow trading range.”
The range for the time being appears to be contained within 1.5600-1.5850 zone but if it gets out of 1.6000 limits it can go even higher than that. However, next week the veneer of calm may be shattered by the event risk to come. The US calendar carries important releases nearly every day of the week with both ISM Manufacturing and Services possibly foreshadowing the state of the US labor market to be revealed in Friday’s NFPs. If data confirms the doomsayers worst predictions showing continuing contraction in US labor demand, the dollar may not be able to hold its ground and 1.6000 could give way. On the other hand if the numbers do not reveal a huge decline of –100k or more, the greenback may inch away from precipice and commence a much needed relief rally.
Currently, there is a high reward / risk short USDCAD opportunity. The EURUSD remains in a range, but the recent rally is corrective. This corrective advance could very well be part of a larger corrective advance however. Not much has changed regarding the EURUSD this morning. We wrote yesterday that “the drop from 1.5701 is in 5 waves and is most likely wave 3 within a 5 wave drop from 1.6039. A corrective 4th wave advance is expected to unfold over the next several days. 4th wave usually reach at least the 4th wave of one less degree (1.5083 in this case). The 38.2% of 3 is also a common terminal point for 4th waves (1.5153 in this case).” Although a larger correction to the mentioned levels is preferred, the advance from 1.4815 is clearly in 3 waves and therefore corrective; leaving the EURUSD vulnerable to additional weakness as long as price is below 1.4981.
Things are playing out as expected with the USDJPY. “Bigger picture, we maintain that wave Y (the third wave in a 3 wave advance from 95.72) is underway from 103.76 and will end in the 113.25-116.65 zone (Fibo levels from the 124.13-95.72 drop) and give way to a long term reversal. The rally from 103.76 is probably the first zigzag in a double zigzag (as wave Y), so expectations are for a drop to reach the 38.2% of 103.76-110.40 (107.86).” The USDJPY fell to 108.36 this morning but we favor additional weakness with the first objective being 107.86 and the second 107.10. The GBPUSD has plunged and is nearing the longer term support levels that we have mentioned in recent months near 1.85. The short term trend remains bearish as long as price is below 1.9034. It is worth mentioning that 13 day rate of change is at its lowest level since August 1997. When we do get an upward correction, it will probably be sharp.
