Weekly Review and The Week Ahead: Risk Aversion ...

...Torpedoes Market Rally, Boosts Dollar

on January 22 2010 5:09 PM

Overview

The US Dollar notched significant gains this week versus its major counter-currencies, most notably versus the Euro, the Japanese Yen, the Swiss Franc, and the Canadian dollar. Meanwhile, equity and commodity markets have taken nose-dives this week as the market grapples with news that the White House is pushing a populist agenda that threatens to carve up the U.S. banking giants by outlawing proprietary trading by commercial banks. Moreover, the economic data this week repeatedly missed expectations, with the Philadelphia Index for January serving as the final nail in the coffin with an ugly 15.2 vs a forecast of 18.1. The U.S. Dollar and the Yen have been the main gainers this week as investors flee to cash and bonds.

EUR

The Eurodollar fell to five-month lows this week due to both the continued fear over a Greek debt default and the resounding strength of the dollar this week, to say nothing of the nasty German ZEW investor sentiment, which came in below expectations and below the 50 mark (indicating economic contraction). The euro's skid below the $1.4250 support level led to a sustained drop throughout the week. The pair tested a few support levels on its way down to its current lows and is expected to remain under pressure in the mid-term, as the US economic recovery takes on more shape and the EZ recovery looses steam. As the pair trades around its new six-month low of 1.4030 today, Go Forex traders should remain cautious about a rebound, with a continued decline to the 1.38 level likely next week.

width=540

JPY

After reaching a five-day high of 91.87 on Thursday, the USD/JPY sunk like a rock overnight to just barely breach the psychologically significant 90.00 level. The Yen, just like the Dollar, functions as a safe haven currency the moment risk appetite dries up due. This week, fear ruled as US stocks spiraled lower and China tightened measures on its banks. Now that the Yen has fully breached the 90.00 base, GoForex traders should remain extremely cautious on the pair. The last breach of 90.00 was quickly followed by another bearish move toward the 88.00 level going. The longer the pair stays below that 90.00 level, the stronger the case becomes for further significant weakness going into next week.

width=540

CRUDE OIL

Oil continued to sink this week due to milder global weather patterns and the strengthening greenback. In addition, the historically high crude oil inventories and weakening demand in Europe and North America both point to continued losses in the price per barrel. The fundamentals are decidedly bearish going in to next week, with a stronger dollar acting as kryptonite to Gold's recent Superman run.

The deciding factor in all of this, in the end, will be China. Chinese demand is the single largest determinant of near term oil prices, and some traders are looking for China's crude oil imports to rise 15 percent this year as the country continues with its state petroleum reserve program. The growing demand in China may or may not turn out to be enough to balance the shrinking demand in Europe and North America.

width=540

width=513

width=479

More News from IBT MEDIA