Tuesday, 6 Oct 2009

Dollar Weakens on Speculation Gulf States May Stop Using Greenback

Growing speculation over the potential end to Dollar-based trading in the oil market has pushed the USD down against 14 of its 16 major counterparts yesterday. A report on Tuesday in the Independent newspaper revived the idea of ending a huge volume of trade of the world's most liquid commodity - Oil in the U.S. Dollar, a potentially major sign of the greenback's fading status. The Dollar weakened after the U.K.-based Independent reported oil-producing Gulf nations are seeking to move to a basket of currencies to settle transactions. Analysts said ending the use of the Dollar as the currency used to settle oil trades between countries would be an easy task, but a move to replace the currency in which oil is priced would require a massive effort.

Economic News

USD - USD Declines against Major Rivals as Equities Rise

The Dollar declined against most major counterparts Monday after some optimistic economic data pushed investors to move back into stocks and other risky assets. The USD declined against the EUR as stocks rose and a report showed U.S. service industries grew. The Dollar fell to $1.4691 per EUR from $1.4648 in New York yesterday. The Dollar declined to 89.02 Yen from 89.53 Monday.

The Institute for Supply Management's index of non-manufacturing businesses, which make up almost 90% of the US economy, rose to 50.9 from 48.4 in August. 50 is the dividing line between expansion and contraction, meaning the index is showing expansion for the first month since 2007. The positive report helped lessen the bitterness from Friday's Employment reports and, along with several recommendations by Goldman Sachs, has helped boost equity markets which weighed on the Dollar.

Investors will keep a close watch on the U.S. weekly retail sales data, the EIA energy outlook for October and the U.S. API weekly crude stocks report to uncover more clues about the USD movement.

EUR - EUR boosted by Growth in Manufacturing and Services

The EUR received a boost Monday by a report that stated that Europe's manufacturing and services industries grew more than initially estimated. The EUR bought $1.4657, up from $1.4576 on Friday. The common currency traded at 130.79 Yen from 131.15 Yen. The British Pound traded at $1.5942, down about 0.1% from late Friday while the EUR rose 0.7% to 91.96 pence.

Europe's manufacturing and service industries expanded in September for a second month, rising to 51.1, from 50.4 in the previous month. The EUR was also boosted by Ireland's overwhelming approval of an agreement to overhaul the European Union's decision-making process in Friday's referendum.

Today traders will be focusing on the GBP with the release of the Halifax HPI at 8:00 GMT and the Manufacturing Production at 8:30 GMT. Better than expected results might provide a much needed boost for the Pound.

JPY - Yen Drops on Comments by Finance Minister Fujii

The Japanese yen retreated earlier against most of its major counterparts after Japan's Finance Minister Hirohisa Fujii issued a warning that his nation is open to intervening in the currency market. The Yen traded at 131.14 per EUR, following a 0.2% decline. Japan's currency was 89.53 per USD, after appreciating 0.3%.

Fujii's position changed since his initial remarks when he took office in September. He previously opposed intervention in the foreign exchange markets in order to artificially weaken the Yen. However, the currency's appreciation last week to an eight-month high of 88.24 against the Dollar began threatening exporters' profits and thus Japan's economic recovery. Since Japan is highly dependent on exports, a strong currency makes its exports too expensive and erodes any profit from an increase in trade.

With a light news day today with no news releases from Japan, U.S or Euro-Zone, Yen's levels will likely be determined by equity movements as well as investors' risk appetite.

Oil - Oil above $70 a Barrel

Crude Oil futures ended above $70 a barrel Monday, after an optimistic survey of the U.S. services sector reignited hopes for economic recovery. Crude Oil prices were also boosted by a rally in equities. Oil for November delivery climbed 46 cents to settle at $70.41 a barrel Monday. Futures have traded between $65.05 and $75 since Aug. 1.

Also helping Crude was the U.S. Dollar's decline against most major currency counterparts after finance ministers from the Group 7 nations made no specific mention of the currency in a communiqué at their weekend meeting, disregarding its weakening status.

Along with Dollar levels, traders should also pay attention to third-quarter company earnings reports which will begin to be published this week since Oil levels are highly correlated with equity movements.

Technical News

EUR/USD

The bullish trend continues with plenty of steam as the pair now trades around 1.4700. The Slow Stochastic of the hourlies indicates that there is still more room to run. The next target price might be 1.4765. Going long with tight stops seems like the right choice today.

GBP/USD

This pair is in the midst of a narrowing upward channel and is now floating in the middle of it. The hourlies are showing mixed signals with its RSI floating in neutral territory. However, the Slow Stochastic of the daily chart is showing quite a strong bullish momentum, and the RSI confirms that the direction is indeed up. All indications are that there is more room for further upward movement and the preferable strategy today will be to go long on dips.

USD/JPY

There is a very accurate bearish channel forming on the daily chart, as the pair is now floating in the middle of it. A bearish cross on the 4-hour chart's Slow Stochastic is also suggesting that the bearish move has more steam in it. This might be a good opportunity for forex traders to join a very promising trend.

USD/CHF

The pair is in the middle of a very intensive downtrend that still shows great momentum and on a bigger scale appears to have more room to run. The hourly chart is showing a strong bearish cross, and the 4-hour chart is also joining to that notion with the Slow Stochastic pointing to the continuation of the bearish movement. Being on the sell side appears to be the right choice today.

The Wild Card

Oil

This commodity has been on a sharp upward movement over the last day and this bullish correction is likely to stick around in the near future. All charts are still providing a mild bullish signal; however, there may be short-term corrections during this uptrend. Therefore, forex traders can maximize profits by buying on lows and taking advantage of this bullish trend.