Euro/Usd Is At Key Support Lines
After the United States, also the European Community is addressing the financial crisis in more systematic and proactive way. During the week-end, the fifteen European members sharing the Euro currency approved three important measures to calm investor fears and to give some confidence the shaky markets. Only time will tell if it was the right approach, although the Euro currency is meeting various support lines at current levels.
Is there a light at the end of the tunnel?
In a last effort to restore some confidence to the falling markets, the Group of Seven (G7) addressed the financial turmoil with a five points plan at the end the meeting in Washington D.C. No specific step-by-step procedure was provided, albeit members will take decisive actions and will use all possible instruments to restore confidence. In effect, the G7 meeting has only been one of a series of moves aimed to face what has probably been an underestimated issue that is now exploding with unexpected force. Chairman Ben Bernanke somehow admitted that the Federal Reserve has been caught off-guard by latest events and expects the economy to contract further in the coming months. However, the Fed has to size each move very carefully, since interested rates are only at 1.50% in the United States.
Last week, the central banks of the major world economies (ECB, FOMC, SNB, BOE and BOC) cut interest rates by 50 basis points. An unprecedented and synchronized move to try to stop the global recession, only few days after the U.S. government approved the rescue plan of USD 700 billion. Central bankers acknowledged that the downside risk to growth is very high, while commodity prices are at comfortable level for lower interest rates. As a result, rates might be cut again, if all the measures taken thus far will not stimulate growth in the coming future. In reality, the financial reshuffle takes time to be completed, as weak hands are taken over by strong hands. Lenders are seeking fresh capital to refill reserves, while families have to repay debts before beginning to consume again. We are only in the mid of a stand-by phase and a decisive fall of the world¡¦s credit instruments (TED spreads, LIBOR and credit default swaps) is required for the business activities to start creating new jobs again. This takes patience and probably more government intervention.
E.U.: an important agreement reached
The financial turmoil, which began in the United States, has decisively jumped the fence and is running into the European territory. The British government anticipated a partial nationalization of the banking sectors and the European Union (E.U.) finally found a series of guidelines to rescue the instable financial system. The leaders of the fifteen European countries sharing the Euro agreed this week-end to guarantee new bank debt issuance from now until the end of 2009; to buy preferred banking shares; to support with government money lenders in difficulty. Actually, the economic contraction is widespread in most activities such as investments, households and trade. In the second quarter, the final Euro zone Gross Domestic Product (GDP) slid 0.2% quarter-on-quarter and increased only 1.4% on an annual basis, after rising 2.1% in the first quarter. In August, German factory orders jumped 3.6% month on month (+0.7% expected) versus July¡¦s decline of 1.3%. Nonetheless, German growth is almost 8.0% below the level of last year and should fall more in the coming months. In fact, industrial production moved up 3.4% month-on-month, but it declined almost 5.0% on a yearly basis. France and Italy, the other two leading European economic powers, are showing strong losses as well. The French industrial production fell 0.4% on a monthly basis versus July¡¦s up move of 1.4%, while the Italian production slid 5.3% compared to July¡¦s decline of 2.7%. As demand is decreasing both domestically and abroad, the European Central Bank (ECB) could again cut rates this year or at the beginning of 2009. In fact, the German trade surplus fell to Euro 10.6 billion (12.4 billion expected) from July¡¦s 13.8 billion. Both exports and imports receded. The first by 0.5% (+0.5% expected) month on month and the second by 2.5% (-2.0% expected).
EURO/USD is at the 7 and 5 year support lines
EUR/USD is meeting good support lines at 1.33/1.31. They correspond to both the long term trendlines of the past seven and five years. These levels should hold over the short term and might represent a strong barrier for the medium term as well. Considering that in the past thirty-six years, the bearish corrections of the EURO/USD within a long term bull trend lasted for about 20%-15% from the highs. However, a move above 1.3890 is necessary to end the decline that started in July. A move below 1.3050 would instead target 1.28.
GBP/USD declined to the important support line at 1.69/1.70. The short/medium term trend stays on the downside. Nevertheless, the market appears to have exhibited a selling climax last Friday. A swing above 1.7790 is necessary for 1.82. The next downside target could instead be 1.65.
USD/JPY has found an important support at 98/100. Nevertheless, the long term trend stays on the downside, but a move above 102.40 could target 103.00/104.
USD/CAD accelerated further and reached the important resistance line at 1.20. It is at the intersection of the five year and the two year trendlines. This level should hold over the short time and might trigger some profit taking. Nevertheless, a swing above 1.2270 would target 1.25, 1.27.
Angelo Airaghi
MG Financial Group
http://www.mgforex.com
Angelo Airaghi is a Commodity Trading Advisor, registered with the National Futures Association and the Commodity Futures Trading Commission. He has been an active professional since 1990 working for major international financial companies. In the past 10 years, Angelo Airaghi has been an analyst and commentator for national and international media.
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