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Looking at Important Financial Issues
Table of Contents:
USD/EUR Study
Analysis
Reasons for the shift
Outlook
USD/JPY Study
Analysis
Outlook
S&P 500 Study
Analysis
Outlook
Conclusion
Appendix
USD/EUR, Jan 16 to April 26
USD/JPY, Jan 16 to April 26
Golden Rule affects
S&P 500, Jan 16 to April 26
Works Consulted
USD/EUR:
Analysis:
From the initial time period that this report is supposed to take place the USD/EUR was on a downward spiral. The initial report and analysis is supposed to take place on January 16 of 2007 to the present standing which this is reported. On January 16, 2007 the USD/EUR stood at an open price of 1.2917 and closed that day at 1.2936 which gained momentum of 0.0019. When reviewing the graph created from these dates in shows, (please refer to Figure 1) that the USD/EUR has steadily increased to the current price of 1.3646. Even though the climb has been extremely rocky, when momentum drops of -0.0103 as on March 04, but has seen significant positive momentum shifts such at 0.0082 has on March 11 and just recently on April 09 which the price rose 0.0085. Just by initial view of the Figure 1 it shows a pretty constant trend as there are a few days of positive momentum, follow by a few days where it drops, plus there have only been two days where that has been no momentum shifts, these days include, March 15 and March 22, ( 8 & 11).
Reasons for the shift:
In December of 2006 the Daily FX team gave their outlook for the First Quarter of 2007 and the remained very cloudy even though aspects had improved on the euro side. Experts said that improvements would really rely on further compression of interest rate differentials of both the Federal Reserve and European Central Bank. At the time of this report in latter 2006, experts were hoping that the Fed would not remained sidelined by slow economic growth, while the opposite was at the time experiencing steady growth and expanding labor markets, (4).
Even though our assignment was asked to start at the beginning of January 16, 2007 I thought it would important to include these important first quarter facts. Taking a more extended look at the charts it showed according to DailyFX that the USD/EUR is up 200 points since the beginning of the year, however a closer look at the price action during the first quarter revealed that USD/EUR saw a impressive 500 pip rebound after hitting a low of 1.2944 on the January 12 of 2007. The dollar’s rally at the beginning of this push was triggered so to speak by solid data from manufacturing and service sectors of the market, (4).
Unfortunately, the EUR/USD consolidated the rest of January into the beginning of February, evidence of U.S. economic weakness began to emerge. Another problem regarding the USD/EUR included U.S. sub prime lending sector intensified worries on a possible recession prompt the EUR/USD ascent to a price they have not seen in over two years, (4).
Outlook for the Second Quarter 2007:
As the currency market enters the second quarter of 2007, the main driver of the price action in the EUR/USD will be determined by the depth any housing market downturn in the US. If the problems in the sector are contained only to sub prime mortgages, then the Federal Reserve may keep interest rates unchanged at 5.25 percent, which will spur continued demand for dollars. If, at the same time, the ECB signals an end to their tightening cycle, it could exacerbate any moves lower in the EUR/USD. On the other hand, if US consumer spending contracts significantly as a result of a more major downturn in the housing market, then the Federal Reserve may have no choice but to deliver the rate cut that the market has been anticipating. In that case, we could see the dollar head to fresh lows against the Euro, (5).
USD/JPY:
Analysis:
On the opening day of classes for spring semester the USD/JPY had opened at 120.64, which surprising above the mean of 119.89, (refer to graph 2), however on the first day of class the price of the USD/JPY did rise but only by .01. This was not the case for the rest of the first quarter or semester. To truly define this chart to someone it would classified as a roller coaster, very gradual increasing prices, then the bottom drops out. The seesaw price action in the pair was driven more by the flow in and out of the carry trades rather than actual Japanese economic performance. Nevertheless, the Japanese economy aided by favorable exchange rates, produced strong results as the corporate sector continued to register healthy profits while the long suffering Japanese consumer finally showed a willingness to spend, (6 & 11).
After a gradual upgrade to 120.77, the price had its first initial drop of nearly 1.52 to 119.25 on February 14. Only a week later the USD/JPY on February 20 had one of greater increases of .92, where the price went from 120.00 to 120.92. Only after a couple of days of daily changes the worst was only to come. On February 26 the prices of the USD/JPY plummeted 2.71 from initial open price of 120.63 to 117.92. Unfortunately, the price continued to fall quickly and on March 5 the USD/JPY reached it lowest price during the initial time period of this study of 115.51, only 22 days after the price had reached its peak at 122.08. To continue the roller coaster pattern price rose once again on March 7 over 1.00, exactly 1.02 to 117.16 giving hope as it inches closer to the medium of 119.89. However, the hopes were dashed when the price once again at an alarming rate 1.98, (open price of 118.24, closing price 116.26), (8).
After the drop of March 7 the price of the USD/JPY would begin to rise once again and on April 16 the price came close to the medium of 119.89 when it closed at 119.85, closest the price has been close to the medium since February 26. However, after the initial high the roller began to drop again however, only by