U.S. DOLLAR: FIGHTING FOR SURVIVAL
It has been another volatile session in the foreign exchange market with the U.S. dollar fighting for survival. Although the greenback fell to a new twelve month low against the euro and thirteenth month low against the Australian and New Zealand dollars, it has put up a good fight. A look at the intraday charts reveals that the battle has been tough. The dollar strengthened significantly after the initial set of U.S. economic reports but then gave back its gains when the U.S. equity markets opened. Around lunchtime, dollar bulls tried once again to bid up the currency and the results were good if you traded anything outside of the EUR/USD because the British pound, Japanese Yen and commodity currencies ended well off their highs.
Dollar: Time for a Rally
We continue to believe that the short dollar trade is getting crowded and are convinced that tomorrow’s Commitment of Traders report from the CFTC will reveal that dollar shorts hit extreme levels. This means that the dollar is prone for a relief rally and we already beginning to see this happen in some of the major currency pairs. However the currency market is not the only place where we are seeing momentum fading. U.S. stocks ended the trading day lower, sparking speculation that the rally in the equity market may have run its course. Yesterday we talked about the impact of the dollar on the equity markets, but it is also important to mention how equities impact currencies. When the market is trading off risk appetite, a rally in equities is usually positive for the higher yielding currencies like the euro and in turn negative for lower yielding currencies like the U.S. dollar and Japanese Yen. We believe that a test of 10,000 in the Dow is still likely and we continue to expect the dollar to fall, but not before a further relief rally.
Economic Data: Weakness beneath the Headlines
There was a great deal economic data on the U.S. calendar today but unfortunately mixed reports failed to increase the conviction of traders who may be favoring a sustained recovery or a double dip recession. Housing market numbers continue to reflect a gradual recovery in the U.S. economy with housing starts and building permits increasing. Jobless claims rose by the smallest amount since July but the improvement was offset by a corresponding rise in continuing claims. The Philadelphia Fed index rose to the highest level since June 2006, but the increase was driven almost entirely by higher prices. The employment, future and new orders subcomponents all declined which reflects weakness beneath the headlines. This indicates that even though the U.S. economy is improving, the recovery is uneven and bumpy. There are no U.S. economic reports due for release tomorrow which means that currency traders will be taking their cue from equities.
