In news we had been anticipating for weeks, a European Union report showed that February Retail Sales were down 0.5 percent and Bayerische Landesbank reported a 4.3 billion euros ($6.7 billion) write down. These are signs that the European Union is starting to feel the effects of the U.S. economic slowdown and credit crisis.
These events should not be good news for the Euro. Despite the presence of inflation in the Euro Zone region, this report is a clear indication that an interest rate cut has to be considered by the European Central Bank.
There is no doubt the ECB's policy has been to control inflation, but the overnight news has to be a concern. The initial reaction from traders was to sell the EURUSD. Selling subsided, however, on the release of the U.S. initial claims report, which rose more than expected. The market traded in a range throughout the day with traders focused on the Bernanke testimony and Friday's Non-Farm Payroll report. Expectations are for an increase in the unemployment rate to 5.0% and a drop of 50,000 non-farm payroll jobs. Last month the unemployment rate was 4.8% and the non-farm payroll number was down 63,000.
Trichet and the ECB have been hawkish on interest rates recently, citing a strong inflationary presence. Although the retail number was only one report, it could be the first sign that the Euro Zone economy is starting to weaken. The biggest sign will be a decrease in German exports. Continue to monitor the news for additional announcements of an economic slowdown in the Euro Zone.
Other negative factors toward the Euro include rumors that the Russian Central Bank has been a big buyer of U.S. Dollars this week. Central banks do not usually make a big commitment to one side unless the trend is real.
The chart pattern is indicating a developing double-top formation. Due to the size of the number of longs in the EURUSD, it seems to be taking a long time to distribute out this top. The true sign of the double top will be a break through the last main bottom at 1.5341. This action will turn the main trend to down on the Euro chart with a possible retracement to 1.517.
The trade may be difficult until the Euro commits to one side. Although the fundamentals are building for weakness in the Euro Zone and stability in the U.S., there still has to be solid confirmation that the USD is gaining strength. Fridays unemployment report is going to have to show the economy stabilizing. Ranges could be wide and volatility unprecedented, but short the Euro is the aggressive way to trade unless it trades through 1.5904.
The Canadian Dollar remained strong against the U.S. Dollar for the fourth straight day as a firm Canadian stock market and stronger commodity prices supported the Loonie. This has been a tough market to trade this year, as it has been range-bound most of the time. Par has been acting like a pivot number with trades on both sides.
A trader has to commit to the long side of USDCAD if he believes that the U.S. recession woes are going to spread to the Canadian economy and trigger a BOC rate cut. Long Canadian traders have been playing the commodity game with a focus on crude oil, gold and wheat. With the trends down in gold and wheat, it seems the only market holding the CAD up is the crude oil. As long as the trend remains up in crude oil, stay long the CAD. If the crude breaks with the other commodities, then look for the USDCAD to rally.
The Bayerische Landesbank news from Germany is not good news for the GBPUSD. For weeks, traders have been taking about UK bank write-downs. This has been putting downside pressure on the Pound. Talk surfaced again today of a developing credit crisis. Additionally, bearish comments regarding the credit crisis slowing down the UK economy is also fueling the market for a weaker Pound.
The main top in the GBPUSD is 2.1093. The market has to take this price out to turn the trend back to up. Until this takes place, continue to sell rallies. The first upside zone to sell is 1.9961 to 2.0015. The next downside target is 1.9660.
In the USDCHF, the charts indicate this pair is still in the base building stage with a bigger rally to follow on a breakout through 1.025. At this price, the main trend turns up on the daily chart and sets up a further rally to 1.036. Look for support at .9991.
The USDJPY main trend is up on the daily chart. The first upside objective of this rally was met at 102.17; the next upside target is 103.69. If this price goes, then it likely to rally quickly to 104.24. Downside support is at 101.24. A new main bottom has been formed at .9854. With the trend up, look to buy dips if given the opportunity. Rumors are circulating that Japan may be next in line for the sub-prime mess. Nothing has been confirmed yet, but it may weigh on traders minds Thursday night.
The NZD rallied a third day due to short covering and Bernanke comments regarding a U.S. recovery. This does not seem to be a strong enough reason to hold NZDUSD for the long-term. The main trend is down and the fundamentals are negative. There is also a threat of a cut in interest rates due to a weakening economy. Look to sell a retracement to .7942 - .7980. Be out of all shorts if the market trades through .8103.
Bernanke's comments also provided support for the Aussie Dollar. Traders seeking higher yields bought the AUDUSD. This may only be a short-term move higher as the main trend is down and the fundamentals are weak. Bearish comments from the Royal Bank of Australia are likely to have a negative effect on the AUDUSD over the long run.
A new main top has formed at .9254. Stay short as long as this price holds. The charts indicate a break through .9031 could trigger a sharp break on the downside. With the main trend down, look to sell a rally, back to .9220. Make sure you are out of your shorts if .9254 is penetrated.
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