Aug 29, 2010

Forex Crunch Unfortunately Pessimistic

Forex Crunch Unfortunately Pessimistic

Unfortunately Pessimistic

Posted: 29 Aug 2010 02:00 AM PDT


One of the main issues on the agenda in Jackson Hole is the double dip recession – what are the odds? Here’s part of the debate, and the No. 1 reason to be pessimistic.

The National Bureau of Economic Research (NBER) is the official body responsible for determining cycles of growth and recession. On one hand, they see a low chance of this happening:

"There's still a significant risk, maybe one chance in three, that there will be a double dip," said Harvard University Professor Martin Feldstein, who sits on the Business Cycle Dating Committee of the National Bureau of Economic Research. Fellow panel member and Princeton University Professor Mark Watson said those odds are "way too high" and puts them instead at "one in 10 or maybe one in 20."

But wait, they never determined that the recession that began at the end of 2007 ever ended.  Mish notes this important point, and explains why he sees contraction in the 3rd and 4th quarters:

Of course, as I have pointed out a number of times, that could make sense if the 2007 recession was still not over. However, that is not what the NBER is suggesting above.

If we want to discuss odds, I believe there is about a 65% chance 3rd quarter GDP is negative! Will the 4th quarter be any better? Why? Stimulus will have run its full course by then. Note that stimulus was supposed to peak in the 2nd or 3rd quarter, yet 2nd quarter GDP came in at a “red hot” 1.6%.

Mish takes into account that stimulus will be over, but in the same symposium in Jackson Hole, Bernanke vowed to do everything he can to keep the recovery going.

To add to optimism, I found optimistic words from Jamie Coleman, that in September 1992, Time Magazine wrote about how the US economy is in a sorry situation, the longest since the Great Depression. Sounds familiar? In his post titled “It’s Always Darkest Before The Dawn” he goes on to remind us that:

Two months later, the NBER would announce the recession had ended 19-months earlier.

So, are the highly regarded economists at NBER just too slow, and all we need is patience? Perhaps. But there’s one huge issue.

Unemployment Never Improved During the Recovery

Unfortunately, being optimistic is a difficult task. It’s not only because “Dr. Doom”, Nouriel Roubini, raised the odds of a double dip recession to 40%. It’s the employment.

The official unemployment rate is still high, 9.5%. Yes, there’s a delay between economic recovery until employment picks up. It’s usually a 6 month gap. With a year into recovery (the US economy returned to growth in Q3 of 2009), the situation isn’t improving.

Weekly unemployment claims and Non-Farm Payrolls are weak, time after time. The official unemployment rate, marked U-3, shows the “Total unemployed, as a percent of the civilian labor force”. But there’s an alternative figure – U-6.

U-6 counts the “Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force” – meaning it also counts discouraged workers who are too desperate to look for a job.

The seasonally adjusted figure,  by the US Bureau of Labor Statistics (BLS), shows that the real unemployment rate rose from 16.4% in July 2009 to 16.5% in July 2010. So, during all the recovery period, the real unemployment rate remained high and refused to improve.

Without an improvement in employment during the “good times”, it’s hard to believe that good times are ahead. Jobs mean consumption – consumption that the US economy is dependent on.

What do you think?

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GBP/USD Outlook – August 30 – September 3

Posted: 28 Aug 2010 10:00 PM PDT


The upcoming week is packed with events, with PMI figures in the limelight. Here’s an outlook for the British events, and an updated technical analysis for GBP/USD.

GBP/USD daily chart with support and resistance lines marked. Click to enlarge:

GBP USD forecast

The Pound dived lower in the past week, but managed to recover, with a boost coming from an upwards revision of GDP for the second quarter. Will it continue higher?

  1. Halifax HPI: Publication time unknown at the moment. This house price index, is one of the most accurate available, as it’s based on internal data from HBOS, one of the biggest banks in the UK. According to the bank, a three month slump in house prices stopped last month with a neat 0.6% rise. A smaller rise is expected this time.
  2. GfK Consumer Confidence: Published on Monday at 23:00 GMT. 2000 consumers are surveyed by GfK for this important survey. After reaching minus 14 points, confidence deteriorated steadily back to minus 22, the worst in 11 months. Another dip is expected now, with the number dropping to minus 23.
  3. Net Lending to Individuals: Published on Tuesday at 8:30 GMT. Borrowing by individuals is necessary to boost the economy. It unexpectedly dropped last month to 600 million, about half of early expectations, disappointing the Pound. A rise to 700 billion is predicted now.
  4. Manufacturing PMI: Published on Wednesday at 8:30 GMT. This survey of 600 purchasing managers always rocks the Pound. In recent months, it has been quite strong, going hand in hand with the UK’s economic strength. It’s now expected to dip from 57.3 to 57.1 points. Any result will rock the Pound.
  5. Nationwide HPI: Published on Thursday at 6:00 GMT. This figure was delayed from last week. The Nationwide House Prices are considered to be an accurate measure of house prices, even though they're not the first to publish them. In the past two months, prices disappointed and even unexpectedly fell by 0.5% last month. As other indicators show the same trend, another fall is expected now – by 0.3%.
  6. Construction PMI: Published on Thursday at 8:30 GMT. The construction sector took more time in recovering from the recession, but when it did, this survey of purchasing managers showed very strong results, rising quickly to 58 points. Last month it unexpectedly dropped to 54.1 points, and is now expected to stay at a similar level.
  7. Paul Tucker talks: Starts speaking on Friday at 00:45 GMT, in a conference in Seoul. The BOE Deputy Governor is an influential member of the MPC, and often joins the BoE governor on testimonies in the parliament. He might contribute to the debate about British inflation and the chances of a double dip recession, that currently seems unlikely in Britain.
  8. Services PMI: Published on Friday at 8:30 GMT. The all-important services sector closes the PMI releases for this week. In the past two months, the score came lower than predicted, but managed to remain above the critical 50 point mark, indicating economic expansion. It’s now expected to remain at similar levels to last month’s number – at 53.1 points.

GBP/USD Technical Analysis

The British Pound began the week with a significant downfall, first losing the 1.5520 line and quite quickly the 1.5470 line. Both were mentioned in last week’s outlook. The 1.5470 line turned into tough resistance. This was eventually broken, and the pair closed just above 1.5520, at 1.5536 – Another week of retreat for the Pound.

GBP/USD ranges between 1.5520, which served as tough resistance in April and as support line in February, to 1.5720, which supported the Pound back in 2009. It’s less strong than in previous weeks.

Looking up, 1.5833, which provided support when the year began and later worked as resistance, is the next line. Higher, the psychological round number of 1.60 proved to be a tough barrier in recent weeks and is a strong resistance line.

Higher, 1.6080 is the next minor resistance line, after working as support in January. It's followed by 1.6270, but that's quite far at the moment.

Looking down below 1.5520, the next line of support is quite close – 1.5470 – it capped the pair just this week. 1.5350 served as pivotal line in March and April and this week’s attempt to break below it makes it strong again.

Below, 1.5230 was a stubborn resistance line in July and is now a major support line. Lower, 1.5120 will provide further support.

I remain bearish on the Pound.

Softer inflation, a new hesitation in job growth,makes the Pound vulnerable in the face of the imminent global slowdown.

Further reading:

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NZD/USD Outlook – August 30 – September 3

Posted: 28 Aug 2010 05:14 PM PDT


4 events await kiwi traders in the upcoming week, with the business confidence being the highlight. Here’s an outlook for the events in New Zealand and an updated technical analysis for NZD/USD.

NZD/USD daily chart with support and resistance lines marked. Click to enlarge:

nzd usd forecast

The kiwi saw tensed range trading in the past week and didn’t make dramatic moves. This week should provide more action, after the summer vacation is over. Let’s start:

  1. Trade Balance: Published on Sunday at 22:45 GMT. New Zealand enjoyed many months of surplus in its trade balance. But after it squeezed sharply to 276 million last month, it’s now expected to turn negative – a deficit of 37 is expected in the month of July.
  2. NBNZ Business Confidence: Published on Monday at 3:00 GMT. This wide survey of 1500 businesses has shown a significant decline last month, dropping from 40.2 to 27.9 points and weakening the kiwi. Another small drop is expected now.
  3. Building Consents: Published on Monday at 22:45 GMT. This figure, known elsewhere as building approvals, recovered last month with a 3.5% rise after a 9.6% fall in the previous month. While this indicator is quite volatile, it’s still important for the New Zealand dollar. A drop is likely this time.
  4. ANZ Commodity Prices: Published on Wednesday at 3:00 GMT. Month over month commodity prices have dropped in the past two months. New Zealand’s economy suffers from lower commodity prices, as it’s a big exporter of commodities. A small rise is expected this time.

NZD/USD Technical Analysis

During most of the week, NZD/USD traded between 0.70 and 0.71. A dip under 0.70 was short-lived, and a rise on Friday lost air towards the 0.7160 resistance line (mentioned in last week’s outlook). The kiwi finally closed at 0.7106.

The pair continues to range between 0.70, the round number that is a strong line of support, and 0.7160 which was a stubborn peak in June.

Looking down, 0.69 is the next line of support. It previously worked as a line of resistance in May, after the pair fell down sharply.

Below, 0.68, that was a swing low in mid-July and also held NZD/USD in February is the next support line. Lower, 0.6685 worked as support back in September and was a pivotal line in July. The final line for now is the year-to-date low of 0.6560.

Above 0.7160, the next resistance line is 0.72 that worked as support quite recently. Higher, 0.7325 that was an area of struggle and also a peak in May is the next line of resistance, followed by the 0.7440 region, which capped the pair when it traded higher.

I remain bearish on NZD/USD.

As the chances of double-dip recession in the US seem strong, risk aversive trading hurts the kiwi. As the last big release from New Zealand was the very disappointing rise in unemployment, the pair isn’t well positioned to weather the storm.

Further reading:

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AUD/USD Outlook – August 30 – September 3

Posted: 28 Aug 2010 12:35 PM PDT


A very busy week expects Aussie traders, with GDP and 12 other events to rock the currency, that still shakes by the election results. Here’s an outlook for the Australian events and an updated technical analysis for AUD/USD.

AUD/USD daily chart with support and resistance lines marked. Click to enlarge:

aud usd forecast

The elections ended in a hung parliament. This political uncertainty, together with weak private capital expenditure, hurt the Australian dollar. The echoes from the elections – whether a government is formed or new elections are called, will continue affecting the Aussie, alongside the many indicators, and also Bernanke’s speech in Jackson Hole. Let’s start:

  1. HIA New Home Sales: Publication time unknown at the moment. The Australian Housing Association releases a rather early report on the prices of homes, but the exact timing is unknown. In the past two months, sales have dropped sharply: 6.4% and 5.1%. A small correction is expected this time in this volatile indicator.
  2. Company Operating Profits: Published on Monday at 1:30 GMT. This quarterly figure has risen in the past two quarters showing that Australian corporations are enjoying the fruits of the economic situation. Following the surprising rise of 3.9% in Q1, Q2 is expected to be even better, with a 5.9% rise.
  3. Guy Debelle talks: Starts speaking on Monday at 23:30 GMT. The RBA Assistant Governor is an influential member of the central bank. In his speech in Sydney, Debelle might hint about future moves regarding the interest rate that has stalled in recent months, after reaching 4.50%.
  4. Retail Sales: Published on Tuesday at 1:30 GMT. This is the most important release that will be simultaneously released with three other indicators (details below). Consumer have been more careful in the past two months – retail sales rose by only 0.2% in these two months. A stronger rise in sales is expected now – 0.4%.
  5. Building Approvals: Published on Tuesday at 1:30 GMT. The housing sector has been a “victim” of rate hikes. The higher costs slowed this sector significantly with three disappointing drops. Last month’s 3.3% fall will probably be followed by a more modest slide this time – 0.6%.
  6. Current Account: Published on Tuesday at 1:30 GMT. On one hand, this is a late figure, released after after the more up-to-date related trade balance figure, but on the other hand it’s a more comprehensive quarterly figure also tends to shake the Aussie. The deficit has stabilized around 17 billion in the past three quarters, and is now expected to drop to only 6.3 billion, helping the Aussie.
  7. Private Sector Credit: Published on Tuesday at 1:30 GMT. Credit is correlated directly with consumer spending, and in this case, complements the retail sales figure released at the same time. Lending growth rose slowly last month – 0.2%, and is now expected to accelerate to 0.3%.
  8. AIG Manufacturing Index: Published on Tuesday at 23:30 GMT. The Australian Industry Group showed good growth in the manufacturing sector last month, with a rise to 54.4 points, significantly above the 50 point score that is the pivotal line between growth and contraction.
  9. Chinese Manufacturing PMI: Published on Wednesday at 1:00 GMT. China is Australia’s main trade partner, and high demand in China is one of the things that helped Australia avoid a recession. Purchasing managers in China showed a slowdown in the manufacturing sector – a drop from 52.1 to 51.2 points. This time, the survey of 700 purchasing managers is expected to rise to 51.5 points. A drop under 50 (meaning contraction) will hurt the Aussie.
  10. GDP: Published on Wednesday at 1:30 GMT. After a strong fourth quarter (+1.1%), Australia’s GDP disappointed in Q1 of 2010 by rising only by 0.5%. Given the strong job market and the overall health of the economy, a growth rate of 0.9% is expected now. Any result will shake the Aussie. This is the main event of the week.
  11. Commodity Prices:  Published on Wednesday at 6:30 GMT. Australia’s economy is highly dependent on exports of commodities, mostly iron and gold. This year-over-year indicator showed a rise of 51% in prices. A similar figure is expected now.
  12. Trade Balance: Published on Thursday at 1:30 GMT. Contrary to the wider current account indicator, this monthly balance of goods has been positive in the past three months. Australia’s surplus rose to 3.54 billion in June, and is now expected to edge down to 3.11 billion.
  13. AIG Services Index: Published on Thursday at 23:30 GMT. According to AIG, the services sector is currently contracting – the score is under 50 points for three straight months. This survey of 200 companies is expected to remain around last month’s figure – 46.6.

AUD/USD Technical Analysis

After the Aussie started lower on a weekend gap, it manged to climb towards 0.90 (mentioned in last week’s outlook), but political uncertainty sent it down again, below the 0.8870 line. A late recovery sent the Aussie to close at 0.8986.

The Aussie now trades between the round psychological number of 0.90 that capped it in the past week, and 0.8870, which is now only a minor support line.

Below, 0.8710, which was a swing low a few months ago is the next line of support. It’s followed by the veteran 0.8567 support line, which began its role back in 2009.

Lower, the double bottom in July, 0.8316, serves as the next support line. Even lower, the year-to-date low of 0.8066 is the ultimate support line.

Looking up above 0.90, the next line is 0.9080 which capped the pair in July and in mid-August. Higher, 0.9135 supported the pair in April and now works as resistance.

Above, 0.9220 was also a support line in April and held the pair a few weeks ago. Even higher, 0.9327 began its role in autumn 2009 and capped the pair many times since then.

I return to being bullish on the Aussie.

The dust from the elections has settled. It seems that a government will be eventually formed. The Australian economy is doing quite well, and the influx of fresh data should support rises.

Further reading:

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USD/CAD Outlook – August 30 – September 3

Posted: 28 Aug 2010 09:00 AM PDT


The Canadian dollar expects another rather calm week, but with one key event to rock it – GDP. Here’s an outlook for the Canadian events and an updated technical analysis for USD/CAD, now on higher ground.

USD/CAD daily chart with support and resistance lines marked. Click to enlarge:

Canadian dollar forecast

Weak retail sales and the growing notion of a double dip recession in Canada’s main trade partner – the US, hurt the Canadian dollar. Will it recover? Let’s start:

  1. Current Account: Published on Monday at 12:30 GMT. This is a late figure in comparison in comparison with the related trade balance figure, but as its scope is wider and it’s released only per quarter, the loonie tends to shake on this release. Canada’s deficit has significantly squeezed in the past two months and reached 7.8 billion. It’s expected to widen once again to 9.8 billion.
  2. RMPI :P ublished on Monday at 12:30 GMT. As Canada is highly dependent on export of commodities, the Raw Materials Price Index is significant and rocks the currency. A disappointing drop of 0.3% hurt the Canadian dollar last month. It’s expected to be corrected with a rise this time.
  3. GDP: Published on Tuesday at 12:30 GMT. Canada’s unique monthly release of the GDP provides action for the USD/CAD more frequently. After a great first quarter, the Canadian economy slowed down in Q2 – stalling in April and only rising by 0.1% in May. The release for June, closing the second quarter and is of high importance. A 0.2% rise is expected. Only a leap back to 0.5% will boost the currency.

USD/CAD Technical Analysis

The Canadian dollar had a bad start to the week – USD/CAD broke above the 1.05 resistance line (mentioned in last week’s outlook) and challenged the 1.0680 twice. Towards the end of the week, USD/CAD dropped and closed just above the 1.05 line.

Looking up, the 1.0680 line became a stronger line of resistance after being tested twice in the past week. It was also a stubborn resistance line at the beginning of July.

Above, the 1.0750 line was the top border of long term resistance line, and also a swing high in May. Another swing high in May, the 1.0850 line, serves as the next line of resistance, after working as such back in 2009 as well.

Above, the next significant line is rather far – 1.1130, which capped the pair back in 2009. It’s quite far now.

Looking down, 1.04 is a veteran line of support and resistance, and currently works as support. Below, the 1.0280 proved to be rather strong in recent months, and is the next line of support.

Lower, the 2009 low 1t 1.02 serves as the next line of support. Lower, 1.01 capped the pair after it reached parity in April, and also was a low point a few weeks ago.

The ultimate line of support is parity – which seems far now.

I turn neutral on USD/CAD.

The Canadian economy cannot keep pushing forward as its main trade partner is still behind. Recent retail sales showed it. While the situation is still OK in Canada, more range trading seems likely at the moment.

Further reading:

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EUR/USD Outlook – August 30 – September 3

Posted: 28 Aug 2010 06:00 AM PDT


The calendar is packed for the Euro in the upcoming week, with the rate decision being the highlight. Here’s an outlook for European events and an updated technical analysis for the ranging EUR/USD.

EUR/USD daily chart with support and resistance lines marked. Click to enlarge:

eur usd forecast

Echoes from the downwards revision of US GDP and also from Bernanke’s speech in Jackson Hole will still move the pair at the beginning of the week. Later, the news will start shaping trading. Let’s start:

  1. German Unemployment Change: Published on Tuesday at 7:55 GMT. The German economy enjoyed outstanding performance in recent months, and this is well reflected in the change in unemployed people. It rose only twice in the past year, and almost always dropped more than expected. Also now, a drop of 19K is predicted, similar to last month’s 20K drop.
  2. Unemployment Rate: Published on Tuesday at 9:00 GMT. In sharp contrast to Germany, most of the other countries in the Euro zone are lagging behind. The European unemployment rate is around 10% for many months, and is expected to remain so now as well, weakening the Euro.
  3. CPI Flash Estimate: Published on Tuesday at 9:00 GMT. Slightly overshadowed by the unemployment rate, this initial release of inflation for August is expected to show that the annual rate of inflation in the Euro zone eased from 1.7% to 1.6%. Only a rise above 2% will spark talks about a possible rate hike somewhere in the future.
  4. German Retail Sales: Published on Wednesday at 6:00 GMT.  After a superb rise of 3% two months ago, this consumer figure corrected with a 0.3% drop last month. A rise of 0.6% is expected now, showing that German consumers are on the move.
  5. Final Manufacturing PMI: Published on Wednesday at 8:00 GMT. According to the initial release, manufacturing slowed from 56.7 to 55 points last month, but still at a healthy pace. This is likely to be confirmed now.
  6. Revised GDP: Published on Thursday at 9:00 GMT. The great growth rate of 1% in the Euro zone will probably be confirmed now. Germany, the locomotive of the zone, already confirmed its stellar 2.2% growth in Q2.
  7. Rate decision: Published on Thursday at 11:45 GMT. Jean-Claude Trichet faces impressing (though uneven) growth in the Euro-zone in Q2, and also steadily rising inflation. On the other hand, the prospects for the near future aren’t too good, especially with remainders of the debt crisis still curbing growth. He is likely to leave the Minimum Bid Rate on 1% for another month. The focus will be on the tone of his words in the press conference that he is due to hold 45 minutes later. He’ll probably express concern over the situation in the US, and commit himself to maintaining the recovery – meaning willingness to more easing steps, though no immediate actions.
  8. Final Services PMI: Published on Friday at 8:00 GMT. Europe’s services sector remained almost unchanged according to the initial release  - an insignificant drop from 55.8 to 55.6 points. This will probably be confirmed now. Only a drop under 50 will be meaningful.
  9. Retail Sales: Published on Friday at 9:00 GMT. Though published after the German figure was already released, this publication still tends to rock the Euro. The volume of sales stalled last month, and is now expected to resume the rises. A 0.3% rise is expected.

EUR/USD Technical Analysis

The Euro started the week in a weak tone, dropping to the 1.2610 support line mentioned in last week’s outlook. It later gradually recovered, managed to cross the 1.2722 line peaked just under 1.2780 before closing at 1.2760. All in all, the Euro rose 60 pips after a tight week of range trading.

The current range is between the important 1.2722 support line and the minor 1.2780 line that capped the pair in the past week. Higher, the 1.2930 that was a stubborn resistance line in recent weeks provides further resistance.

Above, the round number of 1.30 is the next line of resistance, mostly due to its psychological role. Higher, the 1.3110 line served as a line of resistance and later as support during July, and is now a strong barrier. Even higher, 1.3267 is the next resistance line, working as a support line many times in the past.

It’s also important to note the long term uptrend line which switched from support to resistance two weeks ago. It will stand between 1.2950 and 1.30 during the week. A break above this diagonal line will be a bullish sign.

Looking down below 1.2722, the next line of resistance is the 1.2610 line which capped the pair in July and worked just now as a strong line of support.

Lower, 1.2460 held the pair when it was trading lower, in May and in June. Below, the “Lehman levels” – lows of 2008, continue to provide minor support.

A strong line of support appears at 1.2150, which worked as a very strong line of support, and briefly as resistance. Lower, the round number of 1.20 is the next line of support, before the year-to-date low of 1.1876.

I remain bearish on EUR/USD.

The gloomy mood in the markets is still strong, and a double dip recession in the US can hurt the Euro. Also the Euro zone is vulnerable to the austerity measures taken by the member countries. After range trading in these summer days, the new month’s figures, with the Non-Farm Payrolls, can provide significant price action.

This pair receives excellent reviews on the web. Here are my favorites:

  • James Chen sees EUR/USD lean towards bearish ternd resumption.
  • Tim Camerron, on Casey’s site, provides an interesting count of Euro waves.
  • Adam Kritzer discusses the “risk-on, risk-off” performance that currently characterizes the markets, and the correlation between S&P and EUR/USD.
  • Andriy posts technical levels for the Euro and other pairs on a weekly basis
  • TheGeekKnows provides a review of the past week and a look forward.

Further reading:

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