Transports lead the way higher, the Dollar Crashed
What started off as a dull week for stocks, quickly flip-sided, as economic data and risk appetite sent the major indices higher, and the Dollar to lower levels. The Transportation index led the US markets higher last week, climbing by 5.62% to close at 3974.5 points. Even though the week was capped on Friday, due to FedEx raising its earnings forecast for its latest quarter, citing international shipments and cost-cutting, the stock had only a minor impact on the indices. The transportation index helped the S&P 500 climb higher throughout the week, rallying 26.3 points or 2.6% to 1042.7 points.
From a technical point of view one can see on the chart below that the transportation index broke its neckline resistance, after forming an inverted head and shoulders pattern.
The bright spots for the week on the economic front came in the form of consumer sentiment. On Friday, the Reuters/University of Michigan preliminary index of consumer sentiment increased to 70.2 this month, from 65.7 in August. The index was expected to increase to 67.5 points, only 1.8 points higher than its last figure.
Furthermore the WSJ helped drive the markets higher releasing an optimistic report. According to a recent poll; economists gave the U.S government high marks in terms of the way they dealt with the financial crisis, preventing a situation that could have been much worse. According to the results, most economists believe that unemployment will peak at 10.2% in 2010, before turning down on the way to recovery. The news was stimulating as it gave investors hope that the U.S unemployment rate could be reaching its highest levels.
How correlated is the dollar and the US equity market?
Recent statistics have shown that the Dollar-equity connection has been calculated above 90%. This means that as the dollars falls, the equity markets in the US climb. The dollar continued to fall this week, making lows for 2009 against many major counterparts. The dollar index, declined to the lowest level for the year, dropping 3% to 76.68 points. The index broke through weekly support and is now thought that it could test a range created in the summer of 2008, between 71-74 points.
The dollar was also on the definsive side this week against the Euro, the Yen and the Swiss Franc. The USD/JPY currency pair broke through recent support of ¥92.00, and is now heading towards its weekly lows at ¥87.00. When taking a glance at the chart below one can see that this coinsides with price action in December 2008 and February 2009. One must note that the move was caused due to Dollar weakness, rather than Yen strength. On the data front, Japan released a few unpleasant figures last week showing that their lending had increased at the slowest pace in eight months as companies continued to cut spending. Furthermore GDP showed a depressing result coming out at only 0.6%, compared to its previous 0.9%. While the massive USD/JPY move might have been profitable for certain traders, the current price of the Yen is yet again causing problems for Japanese exporters, weighing on Japan’s economic recovery.
The EUR/USD broke through a tight 6 big figure range that it had been trading in for the last 4 months. Technically, the chart still looks strong and could test old highs near $1.49. Throughout the week this pair presented classical technical patterns allowing traders to jump on several times for the ride. With a rate of 1%, giving it the upper hand against the Pound, USD, and Yen, many are expecting further price patterns to occur, some of which could present excellent intraday setups. When taking a glance at the following 2 hour chart, one can see the recent price patterns have presented excellent intraday rallies.
Next week there are a number of key economic data points:
On the data front, an additional two banks will take the stage this week releasing their rate decisions. Japan is expected to leave its rate at a low of 0.1%, while Switzerland is expected to hold at 0.25%. Both these banks statements will be scrutinized by traders, as both the countries’ currencies are used in carry trades. Furthermore the U.S will release its retail sales and producer prices on Tuesday. Wednesday will be followed by the closely watched consumer price index. To finish the week the U.S will release a wave of data including housing starts, Building Permits and it’s closely watched Philadelphia Fed Survey.
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