USD: Breakout or Failure?

USD: Breakout or Failure?

by Angelo Airaghi [Guest Analyst]

7/27/2009

The U.S. dollar is at key support lines against major currencies and the short/medium/long term trend remains bearish. However, a breakout failure from current levels could signal a short (medium term) rebound for the green back.

U.S: Recession is over or not?

During his testimony in front of the house panel name="ProgId" last week, president Bernanke confirmed a tentative stabilization for the U.S. economy at these levels, although rates should remain low for the next months as well. In reality, the huge consumer and business debit will require years to be repaid. Private sector spending has fallen to record lows and savings have increased. The average duration of the unemployment rate in the United States is at a record high, while tax incomes have declined sharply for the government agencies. The decrease of spending by the private sector has been only marginally substituted by the farious government interventions and the trend should continue in the years to come. Unemployment remains the weakest spot, as jobless claims rose to 554,000 in the week of July 18th from 524,000 the previous week. The housing market is at the contrary designing an interesting bottom, albeit prices are still declining. For the third consecutive month, home sales rose 3.6% in June (+1.3% expected) to 4.84 million. The increase was broad-based with condos rising 14% and single-family homes moving up 2.4%. Unsold home inventories declined instead to 9.4 months from the all-time high of 11.3 months registered in March of 2008. In effect, the worst might be over for the real estate market, if history repeats itself. Since1963 important bottoms occurred every 8/9 years: 1967, 1975, 1983, 1991, 2000, 2008/9 (?).

Europe: Investors still skeptics

The European economy remains weak overall with some sings of improvements. However, the European Central Bank (ECB) is keeping rates steady, despite inflation staying near the lows. In June, the German PPI fell 4.6% year-on-year after having slid 3.6% in May and 2.7% in April. It has been the third straight month of decline and the sharpest down move since 1968. Numbers are improving, albeit the Euro zone is not out of trouble yet. The composite Purchasing Manager’ Index (PMI) for the service sector rose to 44.6 in June from 44.00 in May. In Germany, the PMI printed 45.2 from 44.3. In France, it declined to 47.2 from 48.3. In Italy, if moved to 42.3 from 43.1. The IFO business climate index for Germany rose to 87.3 from 85.9. Current conditions improved to 84.3 from 82.4, while expectations rose to 90.4 from 89.5. Nevertheless, foreign investors are apparently moving away from the Euro zone bond and stock market to target those economies that are running ahead of schedule in the calendar of the economic recovery. In particular, the holding of Italian bonds has been declining steadily since last Autumn, as the Italian public sector deficit is at record high and is expected to hit 5.0% of the GDP by year end. Italy is the second largest European debt market and the economic growth is forecasted to remain only flat in 2010.

US DOLLAR: on focus

EUR/USD: The market is still trapped between 1.44 and 1.38. The resistance is at the conjunction of various long term lines and must be overcome with decision for higher prices. A move 1.4470 would target 1.46. A breakout failure would take the price back again to 1.40, 1.38.

GBP/USD: A move above 1.6660 would target 1.6750. A breakout failure would take the price back to 1.6210, 1.6020.

USD/JPY: The dollar is meeting a strong resistance at these levels that corresponds to the 50 days MA. A move above 96.40 is necessary for 96.80/97.10. A breakout failure could take the price back again to 93.00.

USD/CAD: The Canadian $ reached the lower Bollinger band. A move below 1.0730 is necessary for 1.06. A breakout failure would take the price back to 1.10, 1.13.

Angelo Airaghi is a Commodity Trading Advisor, registered with the National Futures Association and the Commodity Futures Trading Commission. He has been an active professional since 1990 working for major international financial companies. In the past 10 years, Angelo Airaghi has been an analyst and commentator for national and international media.