U.S Dollar at Key Resistance Lines
The strength of the green back could continue for a few more weeks/months, but gains will not come without some pain. In fact, while the short/medium term scenario contemplates higher levels, the longer term picture appears to anticipate more weakness ahead, for the U.S. dollar, if history repeats its course.
U.S. dollar higher short/medium term, lower long term
As the economic slowdown is spreading globally, the U.S dollar remains well supported against major currencies. The strength of the green back could continue for a few more weeks/months, but gains will not come without some pain. Foreign trade revenues, as an example, are expected to decline along with a rising dollar. Last year, the international trade accounted for about 80% of the growth in real Gross Domestic Product (GDP) in the United States. Corporate profits could fell as well, when they rely on both dollar weakens and foreign demand. As a result, while the short/medium term scenario contemplates higher levels for the U.S. dollar, the longer term picture appears to anticipate more weakness ahead. History would sometime repeat itself and numbers favour the dollar bears. Why? Since 1972, the U.S. dollar suffered two major declines against the Euro (D-Mark) that lasted for about 8/10 years from highs to lows. During the same period, it has bottomed every fifteen year. The last one occurring in 1995. In effect, Chairman Bernanke admitted last week that the financial crisis is hitting the economic activity in the United States. Employment is rising, while housing has not found a bottom yet. Inflation is a threat, albeit commodity prices are receding from recent highs. Nonetheless, the Federal Reserve is monitoring events carefully. What would the next move be?
Fed's "wait and see" approach continues
Continuing with the current "wait and see approach" might be the appropriate choice, since the work done by the Fed and the Treasury department is evolving. How? Rates are low and checks from the tax rebates are still getting into the mail. Nevertheless, interest rates might decline further next year, if inflation will regress tangibly and growth will not pick up substantially. In reality, the Producer Price Index (PPI) for finished goods is at 9.8% in the United States, the highest level of the past twenty-seven years. Numbers should soften with commodity prices cooling off from recent heat, before again picking up. Economic growth is at the contrary underperforming. Jobless claims remained elevated at 432,000 units during the week ending August 16th, despite declining slightly from the 445,000 claims registered the previous week. Additionally, housing starts numbers are swinging from month to month. Inventories are at the highest levels and builders are planning new investments very carefully. Consequently, after rising 10.4% in June, following a pick up in activity in New York City, starts declined 11% in July. The weakness was broad based with housing starts in the Northeast sliding more than 30%.
Slowdown expanding in Europe
The effects of the financial crisis, that started last year in the United States, are expanding into key European countries as well. So, after France, Spain and Italy, also a resilient Germany seems to be surrendering to the economic slowdown. In fact, while the August flash Purchasing Manager's Index (PMI) for manufacturing and services was almost unchanged in the Euro zone (fifteen nations sharing the euro), German's PMI manufacturing moved down to 49.9 from 50.9 and the services index declined to 50.6 from 53.1. Actually, the German economic sentiment index, known with the German acronym of ZEW, rebounded 8.4 points in August to -55.5 from the bottom of -63.9 reached in July. However, the trend stays down for the German economy and could accelerate in the coming months. Recent economic news are discouraging and point to a deterioration of the economic conditions. Let see how.
Life more expensive with a cheaper euro
In June, as an example, Euro zone industrial new orders fell 7.4% year on year, the largest decline since 2001, with Germany, France and Spain losing momentum. Then, there is the construction business. It slumped 2.4% year on year in June, after declining 1.6% in May. German and Spain are showing the heaviest losses with Spanish numbers moving down almost 16%. During the same month, the Euro zone trade balance showed a deficit of Euro 1 billion (+Euro 1.2 billion expected) from May's +3.9 billion. Exports rose only 1.4% month on month, after falling 4.7% in May. Imports moved up 2.9% after declining 3.0%. Finally, as the strong Euro is penalizing the international trade, the Euro zone current account deficit (imports minus exports of goods and services) increased to Euro 8.2 billion from Euro 5.5 billion. What will the European Central Bank do? Nothing for now. The rhetoric is well known. Inflation is the target and only a deep contraction will motivate ECB officials to cut rates. In Germany, the Producer Price Index (PPI) rose 8.9% year on year in July, the strongest move of the past seventeen years, versus June's +6.7%. Time is needed to assets the benefits of commodities declining from recent highs, although buying foreign items is also becoming more expensive with a falling euro.
USD: testing key resistance lines
EUR/USD rebounded from the important support line at 1.46 and rose to the lower Bollinger bands at 1.49. The short/medium term trend points to the downside, although test of 1.54060 should not be discharged yet. So, a move below 1.4520 is necessary for 1.44, eventually 1.38.
GBP/USD short term trend is down and price might decline further for the short/medium term. However, the market should stay below 1.8740 for 18220, possibly 1.78. A breakout failure could take the price back to 1.8790, 1.8890.
USD/JPY failed to rise above the important resistance line at 111.00 and tested the support at 108.00. The short/medium term trend is still up. However, a swing above 111.35 is necessary for 112.10, eventually 113.50. A breakout failure could take the price to 108.00, 107.00.
USD/CAD bounced back from the important resistance at 1.07/1.0750 to the trendline of the past six years at 104.00/104.50. The short/medium term trend is still up, but a move above 1.0820 is necessary for 109.50, 1.1050. Declines find support at 1.04, 1.03.
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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