Monday, November 2, 2009

The U.S. Dollar Meeting Support Lines

The economic recovery is underway in the United States, but growth should remain volatile and fragmented for some time. Unemployment is the big challenge, while the housing market should give some relief the household pockets. The U.S. dollar is expected to decline further over the medium/long term, albeit it finds good supports at current levels.

U.S.: A weaker dollar positive?

In the United States, the Conference Board leading economic indicator index increased for the six straight month in September. Eight out of ten components improved, confirming that the economic recovery is underway. The expansion of global economies, as well as the decline of the U.S. dollar, should help exports over the medium term. However, growth might remain fragile for some time, as domestic demand is still weak. In reality, a weaker dollar could be the cure for the huge U.S. current account deficit, which has declined steady since its peak in 2005. The housing market is at the contrary expanding, although swinging data is common during this stage of growth. After few good months of gains during which housing starts rebounded 23% from April’s low, housing starts rose only 0.5% in September to 590,000 units annualized from Augusts’ 587,00. Starts are up 23% from April, but they are still 28% below the level of one year ago.

Declines were broad-based with the exception of the South where starts rose 7.1%. Losses were registered in the volatile multi-family units, which declined more than 15.0%, while single-family compounds rose almost 4.0%. This more reliable indicator is only down 9.0% from one year ago. However, building permits have been falling in two out of the three past months, as builders are probably concerned about the end (November 30th) of the first time tax credit benefits. The democratic administration might propose to extent the benefits throughout the first months of 2010, but a decision has to be made yet. In September, building permits rose 9.4% to 5.57 million units annualized. The Federal Reserve is expected to keep rates steady for the first part of 2010 as well. Inflation is mild for now, the U.S. Producer Price Index (PPI) fell 0.6% in September, but should increase in the coming months along with commodity prices.

Europe: Business activity improving.

Business and industrial activity is improving in the Euro zone, while consumer confidence is steady increasing. New orders climbed for the third consecutive month, as demand for machinery and equipment improve. In October, the PMI manufacturing reached the 18 month high at 50.7 from 49.3. The service PMI rose instead to 52.3 from 50.9 in September. Germany is slowing moving out of recession. The German IFO business climate index moved up to 91.9 from 91.3 in September, while the expectations index jumped to 96.8 from 95.7.

Nevertheless, unemployment remains high in the 16 nations sharing the Euro and it will be a drag to the economic recovery. In effect, growth remains fragmented and uneven. The economy in the United Kingdom registered a decline of 0.4% quarter-on-quarter from July to September. It has been the sixth consecutive quarterly decline, as household debt remains extremely high and employment very challenging. Retail sales were weak in September confirming that consumers are still on the sideline. The European Central Bank (ECB) will keep rates steady for the first part of 2010. Nonetheless, the count-down for a policy change has begun and rates should increase again, once growth becomes sustainable.

US dollar: Meeting support lines.

EUR/USD: The medium/long term trend remains bullish for the Euro. However, a move above 1.5070 is necessary for 1.52, 1.5370. The current resistance corresponds to various long term trend-lines and could set the Euro to a short term correction to 1.49, 1.48, 1.47.

GBP/USD: The pound has quickly rebounded from the support at 1.57 and is meeting some resistance at 1.64. Correction should find support at 1.64, 1.6320 and only a decline below 1.6190 would take the price to 1.61, 1.60. A move above 1.6880 would target 1.70.

USD/JPY: The dollar could target 92.50, if it could remain above 91.30. A move above 92.95 is then necessary for 93.30. A breakout failure would take the price back to 91.30, 90.70.

USD/CAD: The market has found a good support at 1.02. It corresponds to the line of the past 2 years. A move above 1.0650 would target 1.070, eventually 1.0800. A breakout failure would take the price back again to 1.02.

Angelo Airaghi MG Financial Group

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.

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