Newsletter July 21st
Colt FX newsletter Monday July 21st 2008
In this week’s issue:
Forex Review July 14th to 18th
Calendar and Outlook, July 21st to 25th
Notes from the carry trade
Forex Club Platinum Accounts
Forex Review July 14th to 18th
Has the euro run out of steam?
Last week saw the dollar fall to fresh lows against the euro before steadying against a background of falling oil prices, better than expected news out of the US financial sector and speculation that the Fed may raise rates as early as October.
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Chart 1 EUR (hourly)
The week opened with the euro (chart 1) losing some of the gains it had made the previous week after the US government unveiled plans to put a firewall round mortgage giants Fannie Mae and Freddie Mac to protect them from systemic risk from the financial markets. Market jitters were initially steadied by the news and the euro fell close our forecast support of 1.5820. However, as Monday continued fears for the broader US financial sector grew and the euro picked up to cross the key 1.59 level. The euro rise continued into Tuesday and despite weaker than expected ZEW numbers out of both Germany and the Euro-zone, it went on to hit a new all-time of 1.6038. However, it failed to maintain momentum and after Ben Bernanke had outlined the numerous difficulties facing the US economy, the price of oil took a dive and the euro fell after retesting 1.60, a level it did not return to for the rest of the week. The dollar got more support when the biggest bank on the US West coast, Wells Fargo, announced better quarterly results than expected. Wednesday also saw US inflation numbers (CPI) come in higher than expected and the release of the minutes for the FOMC meeting for June 24th-25th, which suggest that a US rate increase could happen sooner than many suspect. This news saw euro-dollar make a serious assault on our forecast support as it fell to 1.58.
The euro struggled to find direction on Thursday as it was buffeted on all sides. It rose when the Financial Times revealed that sovereign wealth funds were cutting their dollar holdings but it halted after a smattering of contentious US data and the news of better than expected earnings from JPMorgan Chase. It wasn’t all good news for the US financial sector however, and Merrill Lynch waited until after the close of the US session to announce bigger than expected losses and an asset sale to raise $8bn. This news makes Merrill one of the biggest casualties of the current financial turmoil with losses of $19bn over the last four quarters. Friday saw Citigroup join Wells Fargo and JP Morgan by announcing better than expected quarterly results and after testing our forecast support once more euro/dollar closed the week at 1.5848.
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Chart 2 GBP (hourly)
Sterling (chart 2) started the week by testing our forecast support before moving on to rise steadily against the greenback. Higher than expected inflation surveys (CPI and RPI) pushed the pound to a four-month high of 2.0153 which tested our forecast resistance. Sterling spent the rest of the week trading in a gentle down channel and closed the week at 1.9981.
Calendar and Outlook July 21st to 25th
Here are the highlights of this week’s economic calendar (chart 3). For an extensive list of the week’s economic releases and events see our economic calendar.
This week sees the release of important US housing data with Existing Home sales on Thursday and New Home Sales on Friday. You should also check the Richmond Manufacturing Index on Tuesday and further insight into the US manufacturing base can be gleaned from Durable Goods Orders on Friday. The widely respected University of Michigan Consumer Sentiment Index will release its revised numbers on Friday and is always worthy of note. US Treasury Secretary, Henry Paulson, will be speaking in New York on Tuesday about the economy and financial markets and what he says could have an influence on trading.
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Chart 3 Important calendar events
Thursday is the big day for the euro-zone, with the release of German Ifo data and the European Purchasing Managers numbers (PMI).
UK economic activity can be gauged with Thursday’s Retail Sales figures and Friday’s preliminary GDP numbers. The governor of the Bank of England, Mervyn King, will be testifying to Parliament about banking reform on Tuesday. Wednesday sees the release of the release of the Monetary Policy Committee meeting’s minutes for July 10th when they decided to hold rates at 5.00%.
Our full economic calendar is available.
Forecast July 21st to 25th
Although last week saw dollar sentiment rise as oil prices fell, EUR still traded in a 1.60 – 1.58 range. We see the EUR/USD finding support at 1.5710 and resistance at 1.6040.
GBP/USD should find support at 1.9805 and resistance at 2.0160.
JPY/USD should find support at 106.00 and test resistance at 108.50.
The latest Forex Focus video
Notes from the carry-trade (Aram Sahakyan)
The carry trader takes advantage of interest rate differentials by buying the currency in a pair which has the higher interest rate. This enables the trader to benefit from swap as well as changes in the price of each pair.
EUR/CHF
Fell to 1.599 on Wednesday, but the widening interest rate spread between the two currencies continues to support the euro and Friday saw the pair reach 1.621. If the currency pair drops to 1.593 our intention is to load a long.
EUR/JPY
EUR/JPY fell to 165.3 as expected after encountering strong resistance at 169 – a fall of some 400 pips. The yen sell-off in the second half of the week saw euro recover and close the week at 169.5 once more. In the light of high uncertainty over further hikes of interest rates in the Euro Zone, we continue to suggest reducing, or at least not increasing any EUR/JPY longs at current prices.
EUR/JPY fell to 165.3 as expected after encountering strong resistance at 169 – a fall of some 400 pips. The yen sell-off in the second half of the week saw euro recover and close the week at 169.5 once more. In the light of high uncertainty over further hikes of interest rates in the Euro Zone, we continue to suggest reducing, or at least not increasing any EUR/JPY longs at current prices.
EUR/GBP
The narrowing spread between the Euro and British pound interest rates, falling prices in UK real estate and the Bank of England’s decision to hold interest rates at 5.00% continues to depress demand for the British pound. Early last week the euro edged up to 0.802 against Sterling, only to close the week at 0792. We see 0.807 as a good level to sell euro with our target standing at 0.763, a significant correction level.
The narrowing spread between the Euro and British pound interest rates, falling prices in UK real estate and the Bank of England’s decision to hold interest rates at 5.00% continues to depress demand for the British pound. Early last week the euro edged up to 0.802 against Sterling, only to close the week at 0792. We see 0.807 as a good level to sell euro with our target standing at 0.763, a significant correction level.
GBP/JPY
Our flagship pair continues to show impressive results. The British pound rose some 3% against the yen in the second half of last week and hit 213.8. Our medium term target stands at 216.7, the mid-point of the recent downtrend. 203.3 would be a good level to load longs.
GBP/CHF
The pair tested the upper level of a descending triangle last week, and if it breaks through this resistance level, we could well witness an uptrend. We forecast an appreciation of GBP/CHF to 2.12 in the second half of the year. Only an ECB refinancing rate hike to 4.50% could cause a further decline in GBP/CHF.
Our flagship pair continues to show impressive results. The British pound rose some 3% against the yen in the second half of last week and hit 213.8. Our medium term target stands at 216.7, the mid-point of the recent downtrend. 203.3 would be a good level to load longs.
GBP/CHF
The pair tested the upper level of a descending triangle last week, and if it breaks through this resistance level, we could well witness an uptrend. We forecast an appreciation of GBP/CHF to 2.12 in the second half of the year. Only an ECB refinancing rate hike to 4.50% could cause a further decline in GBP/CHF.
USD/JPY
The dollar sell-off continued to Tuesday but unfortunately did not take the pair down to our target buying level (of 103.3) and by the close of last week the pair was up to 107. Our medium term target is 109.7.
The dollar sell-off continued to Tuesday but unfortunately did not take the pair down to our target buying level (of 103.3) and by the close of last week the pair was up to 107. Our medium term target is 109.7.
AUD/JPY
The Australian dollar continued to strengthen against the yen, hitting the week’s high of 103.8 on Friday. This rise is due to the interest rate differential. We intend to load a long if the price falls to 97.3.
The Australian dollar continued to strengthen against the yen, hitting the week’s high of 103.8 on Friday. This rise is due to the interest rate differential. We intend to load a long if the price falls to 97.3.
Forex Club Platinum accounts
Forex Club has started offering the Colt FX distance learning course as part of their package of incentives to open a Platinum account. You can learn more about the details of this offer at http://www.fxclub.com/platinum/. You can find out more about Colt FX in our short film What is Colt FX?
That wraps it up for this week. Thank you for reading this far. Have a great week and I hope to see you at www.coltfx.com
Forex Club has started offering the Colt FX distance learning course as part of their package of incentives to open a Platinum account. You can learn more about the details of this offer at http://www.fxclub.com/platinum/. You can find out more about Colt FX in our short film What is Colt FX?
That wraps it up for this week. Thank you for reading this far. Have a great week and I hope to see you at www.coltfx.com
If you have any questions about this newsletter or any of our services, please drop me a line at colt@coltfx.com.
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Disclaimer
www.coltfx.com, and any of its affiliates, will not be held responsible for the reliability or accuracy of the information available in this newsletter. The content provided is put forward in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Colt FX or its affiliates. The reader agrees not to hold Colt FX or any of its affiliates, liable for decisions that are based on information in this newsletter. We highly recommend that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.
www.coltfx.com, and any of its affiliates, will not be held responsible for the reliability or accuracy of the information available in this newsletter. The content provided is put forward in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Colt FX or its affiliates. The reader agrees not to hold Colt FX or any of its affiliates, liable for decisions that are based on information in this newsletter. We highly recommend that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.
21 July | 
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