ForeX

Year in Review

2008 was undoubtedly a turbulent year in the financials and the volatility in the forex market reflected that. Let’s look at some highlights of major currency movements:

Housing and Inflation, Oil, Credit Crunch, Confidence and Deflation
The year began with an extension of the previous year’s housing turmoil and surging inflation. Inflation was significantly above the target rate central banks had set. This was partially due to speculations that oil prices may reach $200. With oil prices rising, the USD was pressured especially against commodity currencies. The inflation problem was complicated by a global economic slowdown, a condition called staglation, which precluded much needed rate cuts to stem a recession.

The credit issue was lurking and finally became a full blown crisis in the summer as financial institutions collapse. The issues of frozen credit pipelines dampened investment sentiments globally. The outlooks on global economies plumetted, and all of a sudden oil prices started to fall. When investment sentiments started to deteriorate, the legs of financial industries became wobby and banks started failing. Nations dived into recession, and price pressures flipped into deflationary conditions.

Commodity and Carry Trade Currencies Rise and Fall
Admist forewarnings of global recessions . This came to a stop this year, Panic ensued in stock markets as they plummet across the world. In the currency market, the US dollar regained strength due to its safe haven status. Commodity currencies fell sharply creating “waterfalls” across major pairs. Carry trade pairs fell to a similar fate as investors unwound in a panic. Therefore, the Japanese yen was the other big gainer during this financial turmoil.

Central Banks Cut Rates
In an unprecedented move, major developed nations’ central banks got together for a concerted effort in reducing key interest rates (Japan was on the sidelines but eventually cut the benchmark rate to 0.30% from 0.50%). With inflation no longer a concern, central banks went on a rapid rate cutting campaign, despite attempting to appear vigilante on inflation. The market saw very apparent central bank policy divergence between the Bank of England and European Central Bank. As the BoE was seen to cut rates very aggressively while the ECB was seen to remain modest in cuttin grates, the EUR/GBP rallied sharply and is now nearing parity.

Year Ends with Question Mark
It remains to be seen if these rate cuts will be effective. The markets have been less volatile during the holiday season. The US automakers are also in limbo, although the US government seems to be doing whatever it can to save the industry. Oil prices have dropped to $40/bbl, not $200/bbl. 2009 is a year where the market will be looking for bottoms, and rebounds. However, fundamentals globally suggest further contraction.

EUR/USD: New Trend Waiting for Retracement Pattern to Complete

The EUR/USD had started a new trend in December. The main driver was the dollar losing its safe haven status. Instead, the Swiss Franc became the preferred destination for safe haven currency flows. The euro also had a boost from a relatively less aggressive ECB. The central bank is postering that it will not persue the rate cutting campaing as aggressive as the BoE and the Fed has been doing.

The new trend hit resistance at abourt 1.4500, or more accurately was rejected at 1.4700. It has gone into consolidation mode for the past 2-3 weeks with support at 1.3850 - 1.4000. The consolidation does not appear complete in the classical sense - no clear ABC or ABCDE corrective Elliot waves. We can anticipate possible continuation of consolidation to 50% fibo. However the major anticipation is for a continuation of the uptrend.
USD/CHF: Francs Safe Haven Gains Bring pair to Important Support

The Swiss banks have a reputation for being the some of the safest. The dollar had a run at the top spot for safe haven flows but lost that to the Fran in December. This was partially due to the Feds rate cuts which brought the Feds Fund Rate to a target range between 0.00%-0.25%. Barack Obama’s stimulus plan also pressured the dollar because it will require a significant increase in money supply.

The recent sharp decline has brought the USD/CHF to 61.8% retracement. It is also at a major uptrending support that extends back to March. Examing the slow stochastics, it is almost in oversold condition. The Bollinger Band shows an earlier signal that the pair may be oversold (touching bottom band without breaking down). The 3 straight bearish weekly candles suggest there may be bullish bias in the intermediate period. This week’s candle is a hammer and is a trigger for a long signal as it is confirmed by an oscillator and channel indicator.

AUD/USD at Resistance

The AUD, NZD, CAD, and ZAR have been pressured due to correlation to commodities, which have been declining due to the global recession. Global conditions haven’t improved, but at least the bulk of panic has passed and investors are focused on new plans and policies and the new global financial infrastructure.

AUD/USD had found support at 0.6000 and resistance at 0.7000. It is currently testing resistance now after the dollar lost its luster of late. Two forces are at work: Global conditions continue to pressure the Aussie. On the otherhand, the dollar is pressured due to its poor fundamentals. There is a possibility that this resistance will break. The next resistance range would be 0.7800-0.8000, which is between 61.8% - 78.6% retracement.