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The US Cuts Borrowing Cost to Bolster Rescue in Euro Debt Crisis

Currency Market Observations – 05 Dec 2011

Fundamental Outlook

The US federal banks cut borrowing cost for dollar during mid last week and spiked the Dow Jones stocks. The American unemployment rate dropped in November unexpectedly and showed resilience in recovery. Euro debt crisis widens and cautions many central banks to be on guard for next possible meltdown.

The US new home sales for October increased 1.3 percent to 307,000 annual pace, lesser than forecast.  The Conference Board’s index measuring the consumer sentiment gained to 56 in November from revised 40.9 in prior month, showing biggest monthly gain since April 2003.

Another separate report on S&P/Case-Shiller index of property values in 20 cities fell 3.6 percent in September from the same month in 2010 after decreasing 3.8 percent in the year ended August. Fitch rating agency affirmed US long-term credit to be AAA status but cut to negative outlook.

Last week, 6 US Federal central banks cut the borrowing rates for dollar in a global effort to ease Europe’s debt crisis after it was stepped down by Fitch rating agency. Dow Jones and global stock markets jumped for short-term recovery.

The US Institute for Supply Management’s factory index increased to 52.7 last month from 50.8 in October while initial claims for unemployment benefits rose by 6,000 to 402,000 in the week ended 26 November. Non-farm payrolls increased 120,000, after a revised 100,000 increase in October and jobless rate shed to 8.6 percent from in November, both indicating unexpected improvement in job markets.

Japan jobless rate rose for first time in past 3 months by increasing to 4.5 percent in October. Industrial production gained 2.4 percent compared to 3.3 percent decline in September. Central Bank Governor Masaaki Shirakawa said policymakers are ready to bolster stimulus plan should Japan be affected by contagion of Europe sovereign debt crisis.

As the euro leaders promised last month to roll out a rescue plan in December, German Chancellor Angela Merkel reiterated that implementing tighter economic ties in Europe is the only way out. However, market sources said Euro central banks have proposed to channel combined loan funds through the International Monetary Fund (IMF) by an estimated EUR200 billion (USD270 billion) to fight the debt crisis.

UK Central Bank Governor Mervyn King warned banks to step up defense against the deteriorating Euro debt turmoil as the situation seems to become a “systemic crisis.”

Technical Forecast

USD/JPY traded barely for 100 pips last week from 77.28 – 78.28 bands. This week, we reckon the trend may widen from 76.50 – 79.00 regions as some movements might be influenced from Euro debt issues. We advise traders to exercise patience and trade from extreme ends!

EUR/USD has been making technical consolidation though the resistance is very strong above 1.3520 levels. This week, we forecast the market trend will continue to swing sideways from 1.3200 – 1.3550 regions without new direction. Abandon your long-view if the trend breaks beneath 1.3200 levels!

GBP/USD pulled up last week to high 1.5779 for technical consolidation after hitting recent bottom 1.5421. We predict the market will continue to trade within this range but immediate resistance will appear at 1.5650 regions. The trend will most likely be bearish and hover back at 1.5500 regions for a while. Abandon your view if the trend breaks beyond any of the aforementioned extremes.

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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