FX Strategic Outlook

Written by JS T Alexander | 28 April 2010

Strategic Outlook

Fundamental:

Americans confidence in the economy rose in April to its highest level since September 2008 to a 57.9 as reported by a private research group. A positive report, combined with bullish earnings from corporate reports recently from companies ranging from inmdustry levels do offer more of an economic rebound is gathering a stronger pace which every analyst have not expected.

April's reading is still far from what's considered healthy. A reading above 90 indicates the economy is on solid footing; above 100 signals strong growth. Still, the monthly survey of consumers showed that consumers' current and short-term concerns about jobs and the overall economy are easing. One component of the overall index, which assesses how consumers feel now about the economy, rose to 28.6 in April from 25.2 in March. The other component, which measures shoppers' outlook over the next six months, climbed to 77.4 from 70.4.

The Bernanke's comments on his statement in pushing a more reposnsible cut in the trade deficits would signify a stronger support for the USD, as the US dollar index soared higher to 82.73 basis point compared to its basket of foreign currency majors. As volume and risk appetite for the greenbuck was slowly been increasing from the previous weeks as more significant reports shows up for the economic recovery.

Meanwhile, a key home price index reported its first annual increase in more than three years, though it's too early to say the housing market is recovering. As most of the other reports on the housing foreclosures are also keeping pace as banks wold benefit more from distressed properties holding when the recovery is in the making. The agressive pace of foreclosure on key area cities of the US where the potential of a faster recovery may be expected as banks would also anticipate a quicker return for their forclosed properties.

Standard & Poor’s was downgrading the sovereign credit rating of both Greece and Portugal. The situation from a global perspective, lowering Greece’s credit rating to junk as a reported status would indeed put the nation at a difficult position to find assistance from the European Union and IMF. This dimmer outlook for their economy, would also make it closer that to a default probability.

With the upcoming U.K. election it may produce a coalition government that lacks the political strength to cut Britain's budget deficit which prompted the GBPUSD to move back lower to its 1.5225 in line with the USD reaching it higher price levels. Although, the mid-term outlook may hold steadier after the market absorbs this negative outlook for the European community.

In the Asian market; the Reserve Bank of Australian governor Glenn Stevens commented that the nation’s overnight lending rate was closer to normal stance. The average levels was in reference to a firm number; however the comment was a sign that further rate hikes would come at a slower pace than every analyst have expected.

Meanwhile, the Japanese yen is an immediate benefactor of a risk aversion move. This is not due to hold the currency through financial stress as an arbitrary hedge with the carry trade more towards the Australian Dollar that has a higher interest rate differential compared with the USD as well. The currency has been used to build up carry trade positions and has been the favorite for most investors who happen to utilize this strategy for quite somtime and has been very lucrative. However, when the carry trades are settled it does give way to demand for true security holdings even on an exchange to physicals as the yen’s appeal will start to fade and deteriorate when interest rates starts to move higher for the US dollar.

Technical:

As we mentioned on our market view report, wider trading ranges and increase volatility would be expected specifically for the currency majors like the AUDUSD corrective mode back to the 0.9130 from a 0.9310 high for the week. The weekly cluster on the higher side of the chart has signified a true price bargain hunting where selling near the reisistance prices of 0.9330-80 could well be tolerated with a smaller risk factor to sell rather than to buy the AUDUSD. However, the fundamentals have made it more bearish on the short term while the market absorbs the negative news. On the overall picture the trend is still positive for the Aussie dollar. Utilizing the Fibonacci retracement levels to play the market on a scalping -day trading strategy may prove to be well in place due to the increase in trading range and volatility towards the closing of the month.

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This also holds true for the Japanese Yen from the past four (4) weeks making the true wider range from a high of 94.68 and a low of 91.58. This is a 150 up and down movement for scalping opportunities with an average profit potential between 50-70 average range on both sides of the trade. The market bias USDJPY trend to move higher may still be intact as the debt trade ratio against the Japanese economy may well be at a higher rate leading the currency to loose its value in the long term. On a day to day basis this will maintain wider price fluctuations between the USDCHF on a session to session basis will show contrary price swings that may disrupt the trend analysis for both majors.

The USDCHF has reached its initial price resistance levels at 1.0888-98 which was last March registered high from a low price of 1.0500 week ending April 11. Although, this resistance high may well be broken in the near term as the fundamental reports have been more favoable for the USD and the economic recovery. The build up in trading volumes and increased risk appetite also contribute to this market probability. As the Swiss National Bank interventions has been silent from the past as the prices moves higher. This is an established trend with only a reinforcing volume to ignite a significant movement in prices wil prove our point as we have indicated from our previous video forex presentation dated March 22 : Trend following the CHFJPY.

eur0427 gbp0427

The continued Sentiments from the Greece and Portugal issues have held true our original objective for the EURUSD reaching is 1.3180 with price extensions at 1.3144 low and currently working at 1.3206 corrective price swing. There are no signs of any price reversals as of now as the market has been trending lower making some traders reluctant to create shorts at the lower prices. As this also provides a continued weakness for the cross rate of the EURGBP making is second round approach lower than the pyschological support of 0.8605-50. The only contrary tecnical outlook is the symmetrical triangle on the monthly chart. The closing price for the EURGBP at the end of the month will be the defining factor whether the formation would be intact. Only then we would have a clearer view and technical analysis of the directional trend for the Euro and the Pound. The GBPUSD working at the 1.5220 steadier levels have followed the move lower and attempting the 1.5030-80 range low . No clear signals for a price reersal no matter the technically oversold Pound have some room for a bounce back slight higher simply for a correction.