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The EU Summit Bolsters Debt Rescue Plan

Currency Market Observations – 12 Dec 2011

Fundamental Outlook

The US receives highest rating from International Investors Global Poll as sound economy, initiating a recovery in Dow Jones equities. American trade deficits narrowed in October from imports decline. The European Summit (EU) strengthens future debt regulations and adds EUR200 billion to the rescue plan. European Central Bank (ECB) cut the refi-rate by 25 basis point and drives down the euro value.

The US Institute for Supply Management’s service index unexpectedly fell to 52 in November from prior month 52.9. Consumer credit rose to 2-year highest record in October by increasing USD7.65 billion to USD2.46 trillion, fueled by non-revolving loans. Investors are turning confident to US assets after Bloomberg voting showed US as highest rating for investors’ choice.  

The US job claims fell 23,000 to 381,000 in the week ended 3 December with significant decline. Another separate report on trade deficits narrowed in October when gap shrank 1.6 percent to USD43.5 billion and smaller than projection. Drop in imports bolstered the close-up of data.

Japan’s GDP increased at an annualized 5.6 percent in the three months ended September, lesser than initiate estimate. As Japan is still trapped in economic recession and devastated recovery from March Tsunami, corporations are expecting government to offer more aid to expedite exports.

The Japan’s government extended the duration of tax breaks to April 2015 for fuel-efficient vehicles to support automakers. Yen rise and slow down in global demand are getting into the way of Japan’s recovery as the government is aiming to increase in productivity.

Germany industrial production rose in October by 0.8 percent while the previous month slid 2.8 percent. Market investors waited for the outcome of EU Summit to decide the trend of euro. In good faith, Euro leaders added EUR200 billion (USD267 billion) to curb tightened rules for future debts. A total sum of EUR500 billion rescue funds will kick off next year for the bail-out plan.

Last week, ECB reduced its benchmark rate by a quarter percentage point to 1 percent. It pledged for the first time to offer banks unlimited cash for 3 years with loosening credit policy. However, President Draghi warned that governments cannot support such rescue plan permanently unless some tightening rules need to be fastened up.

Technical Forecast

USD/JPY is trapped within 77.00 – 78.50 regions with little movements. We reckon the market will be deadlocked until we see new fundamental changes such as Japan’s intervention or some drastic news arising from US policy makings. It will be wise to observe this market and enter from the extreme end if such opportunity emerges.

EUR/USD has been trading in sideway neutral sentiment. The market is still uncertain amid the outcome of EU Summit but strengthening of dollar has driven the trend lower last week. We expect the trend to be bearish while capped beneath resistance R – 1.3450 levels. The market may re-test 1.3150 – 1.3200 regions if the aforementioned resistance can guard against the bulls!

GBP/USD has bearish technical patterns as of Friday closing at 1.5667. This week, we reckon the resistance will remain strong at 1.5750 regions while downside potential is opened to 1.5450 levels again. Do not sit against loss if the trend breaks the above extreme ends and moves against you!

Dar Wong

This post is contributed by OPF Guest Blogger, DAR Wong.

Wong is founder and principal consultant of PWForex.com and holds a professional qualification in NASD series 3 and 5 approved by National Futures Association (USA). He was previously attached with Bankers Trust Futures Inc, Barclays ZW Futures and Smith Barney Shearson (Citigroup) Inc.

He is also an active trader and author of 8 Ways to Invest In China’s Emerging Markets. Wong is also columnist for The Star, The Borneo Post in East Malaysia, The Busy Weekly, The Trader’s Journal, The Forex Journal, The Pulses, The Analysts and Capital Asia magazine.

He is a regular speaker on trading topics as well as Master Speaker for the annual Asia Traders and Investor99s Convention (ATIC).

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DISCLAIMER: This post is written for general information only. The author, publisher and/or any third party involved in the distribution of this work assume no legal responsibilities and shall have no liability whatsoever for any direct or consequential losses, costs or expenses arising from the use of the information contained herein.

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