Sunday, October 20

Eurozone sovereign debts resurge in worries

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Fundamental Outlook

The US economy has seen rising inflation finally after much money supply increment but real growth is still limited. Japan is dampened by nuclear crisis that may spread through June. The European regions are re-tainted by sovereign debts in Greece, Portugal and Ireland.

Market analysts speculate new round of financial rout to bludgeon euro currency despite European Central Bank (ECB) Trichet hinted earlier of further rate tightening in July.

The US trade deficit narrowed less than forecast in February, hurt by rapid rising in commodity prices. Trade gap shrank 2.6 per cent to US$45.8 billion. Retail sales increased 0.4 per cent following a 1.1 per cent February. Initial jobless claims rose 27,000 in the week ended April 9 to 412,000, the most in two months. Job markets remain tight though unemployment was down to 8.8 per cent in March.

The rapid inflation has spiked the America’s producer price by a 0.7 per cent gain in March while consumer-price index increased 0.5 per cent for a second month, in line with the median forecast. Core index was up 0.1 per cent and below forecast. The US industrial production rose 0.8 per cent and more than forecast in March, led by a rebound in consumer goods manufacturing.

Japan’s nuclear crisis is increasing worries and fear in spreading into regional basis. Analysts forecast declines in the next quarter from business and household confidence.

However, Japan’s government has declared the nuclear leakage to security Level 7 that is same to Ukraine’s Chernobyl disaster in 1986.

The euro sovereign debt crisis resurges after one year. Ireland’s credit rating was cut two levels by Moody’s Investors Service to the lowest investment grade, from Baa1 down to Baa3, as the Irish government struggled with ballooning debt deficits. Greece plans to cut budget by euros 76 billion (US$110 billion) through austerity measures and sales of state-asset over next four years. Portugal is waiting for a euro 80-billion (US$116 billion) bailout package by the joint efforts of International Monetary Fund (IMF), European Commission and ECB.

German investor confidence fell more than economists forecast in April after the ECB raised interest rates to curb inflation in early April. The ZEW Center for European Economic Research in Mannheim said its investors’ confidence declined to 7.6 from 14.1 in March.

Rapid inflation reflected in German wholesale prices soared 10.9 per cent in March compared to a year earlier, which rose at fastest pace in past 29 years.

Bank of England (BoE) policymaker Andrew Sentance said that financial markets suggest benchmark borrowing costs could reach two per cent next year.  Policymakers comment the weak UK pound might not uphold the fast rising inflation although the central bank refrained from rate hike recently.

Technical Forecast

US dollar/Japanese yen has turned down from recent top 85.52 and target to reach our first target 82.50 regions. We reckon the market trend will consolidate and narrow into 84.00 levels this week if no further fundamental news drive beneath 82.50 supports. Traders are advised to execute swing trading cautiously to capture this sideway movement.

Euro/US dollar topped 1.4520 with strong resistance last week. The market will probably fall if the top can be kept intact. From our technical studies, the downside target is identified at 1.4200 in near future with gradual worries amid euro debt crisis and technical digestion. Abandon your short-view if the trend surges and settles above 1.4520 levels.

UK pound sterling/US dollar consolidated inside the range 1.6200 – 1.6400 regions and very closed to what we forecast last week. Moving forward, we expect the trend to sink further if 1.6400 resistances are not violated this week. This week, the selling pressure will probably test the 1.6200 supports again  before we project the lower targets over next few weeks.

Disclaimer: This article was written for general information only. No liability by the writer or newspapers.

Dar Wong is the founder of PWFOREX.com with 22 years of trading experience in global derivatives and foreign exchange markets. He can be reached at [email protected]