Market Moves: The U.S. Dollar Enters the Game

The Asian markets closed mostly in the positive on Tuesday, October 23, 2007. The small, but noticeable rebound in the U.S. markets is considered part of the cause after a very negative Monday in which the Shanghai index lost 2.59 percent. However, Tuesday was different trading day and the major markets in Asia closed in the positive. But the region saw a different leader this week. The Hang Seng and India’s BSE Sensex were the winners, each gaining 3.5 percent, followed by the Shanghai index with a 1.9 percent gain. The Nikkei closed flat with a 0.07 percent gain, but there was a lot of action in the Japanese market. Toyota Motor Company () was knocked down into the second position against General Motors () who made the most sales in the first nine months of 2007. You might remember that Toyota made the most sales for the first six months of the year, which allowed it to claim the “world’s largest automaker” prize. General Motors has now driven home the award. Yet Toyota remains the most profitable automaker in the world. The company gained 1.0 percent following a report that auto sales in Asia and the Middle East are expected to climb 10 percent.

The European markets traded strongly in the positive on Tuesday, October 23, 2007. The European Big Four group was led by Switzerland’s SMI index, which gained nearly 1.5 percent, followed closely by the FTSE and CAC 40. Even with its “dreadful” third quarter earnings, BP plc () traded up more than 2 percent during the U.S. session. The oil giant lost 1.3 percent during the European trading session. Still, BP shares rose 7 percent in October. Yes, there are economic reports in Europe. Eurozone Current Account figures for August are expected on Wednesday, October 24, 2007. This important report summarizes the flow of goods, services, income, and transfers in and out of the Eurozone nations to other countries. This figure is central to forecasting long-term developments in foreign exchange rates. The strength of the euro could be affected by this figure as well as the strength of the European bourses. The current account figure is expected to increase from $1.7 billion to $2.0 billion for August. Look for a big dollar and stock movement following the release of this figure.

Back in the United States, the Dow () has been hurting. It dropped 367 points on Friday, October 19, 2007. Granted, this was the anniversary of “Black Monday” and traders can be very superstitious, but the index left its hard-won position in the 14K level. The bulls and bears have been fighting hard for control over the Dow. The index had opened to triple-digit losses only to see the bulls charge back and take the index up to a positive, double-digit close. Yes, Monday, October 22^nd was volatile day.  We have major market movers coming this week so let’s go directly to the economic reports.

Economic Reports

Last week, we had the start of the housing data. This week, we have the major market-moving economic reports on housing. On Wednesday, October 24^th, the Existing home sales figures are due. Not surprisingly, the figure is expected to fall from 5.50 million previously-owned homes sold in August to 5.24 million homes in September. That figure could hurt the struggling market in a big way—and it could definitely get the Fed’s attention. Eighty percent of homes sold every month are previously-owned houses so this is a major examination of the housing market. The value of bonds could be positively affected by this news while the value of the stock market and dollar could suffer. The report will be released on Wednesday, October 24^th. The New Home Sales report is the next housing figure that could make us shiver. Although new homes are not as numerous, they cut across a wide range of sectors, including lumber, permits, construction, and building services. The New Home Sales report is expected to show a sharp decline from 795,000 new homes sold in August to 765,000 homes sold in September. Ouch! The bond, stock, and dollar should react in the same manner as for the Existing Home Sales report.  The New Home Sales report will be released on Thursday, October 25^th. Leaving the housing market, we have the Durable Goods Orders report. This major market-moving report is an advanced report on the sale of products having a life of more than 3 years. The notion is that these products require large investment and reflect optimism (or pessimism) by the buyer over the purchased product. The market is very sensitive to the Durable Goods Orders report. It is expected to show an increase from a 4.9 percent loss in August to a 1.1 percent gain in September. This figure could put downward pressure on the value of bonds. However, the dollar and stock market should get a lift from this rising figure. The report will be released on Thursday, October 25^th.

Next week, which is the last week of October and the first week of November, will be busy. Besides the meeting by the Fed on Halloween (October 31^st) in which the central bank will decide whether to lower interest rates again, the ISM Manufacturing Survey will be released on Thursday, November 1^st. And, of course, we have the Nonfarm Payrolls on Friday, November 2^nd. The market should go crazy from so much information! Let’s see what the market is doing around the lunch hour.

Company News

The Dow opened strong on Tuesday, October 23^rd, gaining 70 points in the first hour of the trading day. However, it could not hold on to these gains for very long. By the noon hour, the Dow was up only 14 points and struggling to keep these meager gains. Two tech biggies are moving big on this volatile day. Apple, Inc. () announced a profit increase of 67 percent, primarily from the sale of more than 10 million iPods in the third quarter. At the market’s open, Apple shares jumped 6.6 percent—and it held onto those gains. Just in: Apple has hit a new high! The company gained 7 percent in intraday trading, but as pulled back slightly to a 6.6 percent (or $11.21) gain. The tech sector is carrying the market, right?  Don’t jump to conclusions too quickly. At least, don’t jump before we look at Texas Instruments, Inc. (). At the market’s open, Texas Instrument shares plummeted 8.4 percent. By the noon hour, the company was trading down 8.7 percent. By the final trading hour, Texas Instruments was trading down 9.3 percent.  Dow companies have been struggling during this earnings season. On Friday, October 19^th, Caterpillar, Inc. () and Honeywell International, Inc. () each fell 4 percent while 3M fell 5 percent. Ouch again! But we know that such is the nature of the market during earnings season!  Just so we end on a positive note, DuPont Company () lifted its earnings forecast for an entire year, but is trading down 0.11 percent. Lockheed Martin () made the same announcement and is trading down 0.35 percent. Well, that wasn’t great news. But the market was trading down 7 points as we approach lunch. In the final hour, the Dow is trading up 75 points. The bulls and bears are really fighting it out! How ‘bout that dollar…

Special Focus: U.S. Dollar [USD]

The dollar is under loads of pressure these days. On Friday, October 19^th, the dollar fell to an all-time low against the euro and to a 31-year low against the Canadian dollar [CAD]. The greenback bounced off these low levels, but remains at an unsteady multi-year low level against the world’s major currencies.

What is happening?! The most recent blow to the U.S. dollar came from the G-7 meeting last week. In anticipation of the meeting, the dollar weakened. Following the G-7 meeting, the dollar fell. (No mention was made in the final paper, but China was criticized for its artificially weak currency.)  However, it has regained some of the biggest losses, but remains quite unsteady. Why? The credit crunch is still looming like a storm cloud over the greenback. Rain and lightning are imminent. But the dollar remains at risk for the next several weeks—far beyond storm season. The housing data can make the dollar plunge. With the housing data showing that new and existing home sales are declining, the dollar could decline right along with the housing figures. A strong Durable Goods Orders report could give the dollar a bit more strength, but it would likely be short-lived.

On the other side of the currency pair, the euro is likely to gain more strength from a strong Eurozone current account figure and the Canadian dollar should get a boost from a strong retail sales figure. The British pound is suffering under the same credit crisis as the United States. There is tremendous speculation that the Fed will lower interest again on October 31^st. These all weigh heavily on the dollar—and giving strength to its major rivals like the euro, Canadian dollar, and Swiss franc.

Leaving fundamental analysis aside, technical factors are very important in the Forex market. In fact, technical factors are often more important than economic figures. Technicians and chartists will move where they believe the trend is strengthening and the momentum is building. Let’s take a look below:

Figure 1: USD/EUR Daily Chart. Here is a picture of a bearish trend. The recent downward pressure is located in various places, but the sharp decline is very clearly at the end of the chart. The dollar is hitting very strong resistance from the 20-day moving average () line. But the greenback is also getting strong support from the lower Bollinger Band (). The Bollinger Bands are tightening, which is a strong indication that a breakout is ready to occur—either to the up- or downside. A storm is definitely brewing so grab your umbrella.

Yes, the market is driven by so many factors—each of which can drive the various markets in strong ways. We have only touched on the dollar and we might return to it following the Fed’s next meeting. We might slide back to oil, if that commodity makes another big move. Or we might just be moved by something else! Either way, we know the market will be moving and we just need to keep up! Happy trading.

Market Moves Wisdom of the Week

Keep moving!  We are seeing that many things can move the market. Some are obvious like the price of oil or employment data. Others are not as obvious like the factory orders report or the current account figure. Some market movers are expected like the manufacturing survey or the GDP figure. Other market movers are surprises like a hurricane that affect oil production or political turmoil. These factors appear in many forms, but they have one thing in common: they all move the market! So the Market Moves Wisdom of the Week is to keep moving. Good traders cannot remain stagnant in their research, their trading style, or their trading knowledge. And traders must be open to moving to trading bonds, stocks, currencies, or whatever else is making moves.  Moving with the market can help a trader move to better trades and higher profits!

Robin Lofton
Staff Writer and Trading Strategist
ProfitStrategies.com