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Saturday, 06 November 2010 10:14

FOREX: Dollar Rally Less a Fundamental Recovery and More a Speculative Retrenchment

Contributed By: DailyFx

* Dollar Rally Less a Fundamental Recovery and More a Speculative Retrenchment
* Euro Strong Despite Deepening Financial Concerns, 3Q GDP Will Clarify Fundamental Bearing
* British Pound Likely to See More Influence from Quarterly Statement than Last Weeks BoE Decision
* Japanese Yen’s Plunge back to Fundamental Reality Delayed by BoJ’s Uneventful Policy Decision
* Australian Dollar will Clarify Interest Rate Expectations with Employment, Inflation Consensus
* Swiss Franc: What Happens When the SNB Starts to Yield to Inflation?

Dollar Rally Less a Fundamental Recovery and More a Speculative Retrenchment
The dollar put in for its biggest rally in nearly three weeks Friday. Yet, is that necessarily encouraging when it follows a series of three declines to the lowest levels the currency has suffered this year? Putting the currency’s week-end performance into context with comparisons to its relative lows and the fundamentals that have forced it to that level, it is premature to suggest that the greenback has put in for a meaningful reversal. Looking at the technical bearings of the greenback, we see that the most appealing argument for a reversal comes from the trade-weighted dollar index. With the greenback’s correction, this benchmark actually finds itself back above the long-term rising trendline (tracing its history back to the March 2008 swing lows) that was so dramatically broken in the previous session. However, the influence of this move is diminished when we look at the dollar’s showing against its major benchmarks. First of all, against the so-called high-yield Australian, New Zealand and Canadian dollars; the greenback actually lost ground for a seventh consecutive session. From the majors, the performance was more variable. The dollar struggled for gains against the Swiss franc, is conspicuously constrained to congestion against the yen and was overdue for a bounce following six consecutive declines against pound. EURUSD was the primary source of the dollar’s performance in a move back towards 1.40.

Gauging the greenback’s fundamental health is essential to establishing its direction going forward. That said, there are two major drivers working against the benchmark: a dramatic skew in the supply-and-demand for the currency and a remarkable run in risk appetite trends. The concept of a currency depreciating due to an overabundance is an elementary concept of value. For a market that is already incredibly liquid and has deeply-rooted channels of capital flow (like Chinese purchases of Treasuries); it supply and demand is oftentimes ignored. However, over the past few months, this has changed as investors start to react to the divergence in stimulus between major economies. In contrast to the European Central Bank’s, Bank of England’s and Bank of Japan’s decision to maintain policy this past week; the Federal Reserve confirmed traders’ fears/hopes by expanding its stimulus program by an additional $600 billion over a time frame of eight months. More than flooding the market with dollars, this effort has the (intended?) side effect of boosting investor confidence by lowering the cost of funds and encouraging traders to invest this leveraged position abroad. In fact, despite the dollar’s correction, the S&P 500 actually climbed into Friday’s close to a new two-year high. This strong finish was partially encouraged through the October employment figures. For a crowd that is predisposed to bullish trends, the better-than-expected 151,000 net increase in nonfarm payrolls (NFPs) was enough to lift the market. Yet, on closer inspection, the jobless rate is still at 9.6 percent, the underemployment rate is still 17 percent, the number of persons not in the labor force is at a record high and food stamp usage hit a record high. Risk trends played a clear role in interpreting this data.

As we look ahead to the coming week, the dollar has a natural selling point in the Fed’s liberal stimulus stance. Aiming to support growth (and perhaps asset prices), the policy authority puts the greenback at the bottom of the risk spectrum and amplifies the effect by simultaneously encouraging risk appetite. This will be difficult to overcome; but it is a trend that can break. A natural slump in investor confidence is the primary threat. A more interesting catalyst could be the upcoming G20 meeting as they label manipulators and perhaps work towards coordination.

Euro Strong Despite Deepening Financial Concerns, 3Q GDP Will Clarify Fundamental Bearing
With EURUSD clearing 1.40 and scaling multi-month highs, it is easy to overlook the actual fundamental performance of the euro itself. However, against the pound, franc and commodity dollars; this shared currency has pitched into a steep dive. This can perhaps be traced back to the recent surge in the Mediterranean members’ sovereign debt yields recently. Though it was somewhat under the radar, the funding costs for these already pained economies surged to records as German official look to torpedo confidence by threatening shared responsibility in losses for bond holders. Perhaps another sign of divergence in performance intra-EU will come via Friday’s 3Q GDP numbers.

British Pound Likely to See More Influence from Quarterly Statement than Last Weeks BoE Decision

Though the Bank of England was mum on its policy decision last week; a hold was all that was needed to boost the sterling against its troubled US counterpart. However, the reasoning for this decision is very important to gauging when/if stimulus will be expanded down the line. We will be offered evidence one way or the other come next week with the Quarterly Inflation report which is stocked with new growth and CPI forecasts.

Japanese Yen’s Plunge back to Fundamental Reality Delayed by BoJ’s Uneventful Policy Decision
Of all the non-FOMC central bank decisions this past week, the Bank of Japan’s rescheduled meeting was the most tension-filled. Having taken aggressive steps towards boosting markets and fighting deflation, it was highly likely that this meeting would end with a larger stimulus package. And yet, when the decision passed without event the yen was still lower on. Perhaps the market is pricing in further easing later down the line.

Australian Dollar will Clarify Interest Rate Expectations with Employment, Inflation Consensus
It’s hard to find to find fault with the Australian dollar with risk rallying and the RBA following through with its hawkish course. However, as the market works to squeeze every last inch of rally from the Aussie through pricing in forward rates and improved sentiment, the currency grows increasingly susceptible to even a modest correction in prevailing trends. That leverages a lot of importance on jobs and inflation data ahead.

Swiss Franc: What Happens When the SNB Starts to Yield to Inflation?
The Swiss franc is a currency that has appreciated despite its own fundamentals and policy authority’s effort to curb appreciation. And, just when it seems the Swissie is losing momentum, actual support looks like it is just around the corner. This past week, central bankers have stepped up their warnings that rates can’t be held low for much longer. Perhaps risk trends will take a turn by the time rate hikes are really priced in…

Published in Forex News
Friday, 05 November 2010 10:15

US Dollar Forecast Turns Bearish on Fed Actions, S&P 500 Rallies

Contributed By: DailyFx


US Dollar Forecast Turns Bearish on Fed Actions, S&P 500 Rallies

Fundamental Outlook for US Dollar: Bearish

* Federal Open Market Committee announces fresh Quantitative Easing, US Dollar declines
* US Nonfarm Payrolls Jump in October, but US Dollar sees little traction
* View our monthly Euro/US Dollar Exchange Rate Forecast

The highly-anticipated Federal Open Market Committee interest rate announcement sent the US Dollar reeling against the Euro and other key currencies, and the sharp break suggests the Greenback may continue to drop through upcoming trade. For weeks now we have argued that the USD’s fate may depend on the FOMC’s subsequent actions. Fed officials certainly did not disappoint in announcing an aggressive second wave of Quantitative Easing, and the breadth of their actions stifled hopes of a sharp US Dollar recovery. The Greenback is likely to remain on the defensive in the week ahead as traders show little appetite to buy into aggressive dollar declines.

Consensus forecasts called for a fresh $500 billion in Fed asset purchases, and officials trumped expectations in announcing $600 billion in balance sheet expansion. It was perhaps little surprise to see the US Dollar fall on the larger-than-predicted sum of Quantitative Easing, and indeed the decision provides a strong headwind to the US Dollar through upcoming trade. The EURUSD break above previous highs now has our own technical strategist watching for a run towards 1.4500, and current momentum certainly points to fresh dollar declines.

We had previously called for an important US Dollar reversal on seemingly one-sided bearish sentiment and speculative positioning. Yet sentiment can and has remained extreme for extended periods of time, and we were clearly premature in our calls for USD strength. As it stands, bearish momentum and US Dollar fundamentals do not bode well for short-term trends. This is especially true in the face of strong rallies in the S&P 500 and broader financial market risk sentiment. It seems that the US Dollar has few things working in its favor, and it may in fact need to fall further before showing any real chance of important recovery.

A relatively empty week of US economic event risk leaves the currency at the whims of broader financial market volatility in the days ahead. It will clearly be important to watch whether the S&P and other ‘risk’ barometers can continue to fresh highs—especially as stocks hit their highest levels in two years. One wonders whether the Fed’s actions are enough to sustain such one-way rallies in the S&P 500 and declines in the US Dollar. As of this past week, markets show relatively little appetite to go against the trend amidst strong price momentum.

Published in Forex News
Thursday, 04 November 2010 10:33

AUD/USD: Setbacks continue to be very well supported

Contributed By: DailyFx


AUD/USD: Setbacks continue to be very well supported, and the market has since broken once again to fresh post-float record highs above parity. Daily studies are not yet showing overbought and from here, the risks are for additional gains into the 1.0100-1.0200 area before considering the possibility of a bearish reversal. At this point, a break back below 0.9650 would be required to ultimately shift outlook back in favor of the downside.

Published in Forex News

Contributed By: DailyFx


EUR/CHF:The market could finally have found a major base by the recently set record lows at 1.2765, with weekly and monthly studies starting to correct. The cross has finally managed a close back above some major falling trend-line resistance from May to further encourage the prospects for a shift in the trend and additional recovery over the coming weeks. Next key resistance comes in by 1.3925, while setbacks should be very well supported in the 1.3500 area.


Published in Forex News

Contributed By: DailyFx


EUR/JPY: The market has done a very good job of holding above the daily Ichimoku cloud to suggest that we could be on the verge of a material shift in the structure in favor of significant upside over the medium and longer-term. Daily studies are however in the process of consolidating, so the preferred strategy is to look to buy into dips rather than on upside breaks. A good level to look to establish a long position now comes in by previous resistance turned support in the form of the daily Ichimoku cloud top (currently by 112.00).

Published in Forex News
Thursday, 04 November 2010 10:34

EUR/USD:The latest break to fresh multi-day highs

Contributed By: DailyFx


EUR/USD:The latest break to fresh multi-day highs beyond 1.4160 puts a serious dent in bearish prospects and now likely opens a fresh upside extension towards next critical resistance by major falling trend-line resistance of off the record highs from 2008 by 1.4500. Daily studies are closer to overbought, but still show plenty of room to run, and any setbacks are expected to be well supported by the 10/20-Day SMAs in the 1.3900’s. At this point, only back below 1.3695 would ultimately relieve topside pressures and potentially force a shift in the structure.

Published in Forex News

Contributed By: DailyFx


GBP/USD: The market has been holding above 1.6000 barriers over the past few days, and has most recently pushed beyond 1.6100. This opens the door for additional upside over the coming days, with the 1.6500 figure standing out as the next major resistance point. There is some short-term support by 1.5960, and a break back below this level will be required to take the pressure off of the topside.

Published in Forex News

Contributed By: DailyFx


Now that the long awaited FOMC is behind us we will have to wait and see what direction the dollar is going to move in over the medium term, these trends should start to make themselves known over the coming days. The index traded in a narrow band ahead of the FOMC release yesterday which investors around the world holding their breath ahead of what had been said to be the most important Fed decision in decades. The release itself was slightly anti-climactic coming in more or less in line with expectations, massive volatility ensued (the huge spike in the middle of the chart) as vast sums of money changed hands. Things settled down after the US close with the index once again confined to a relatively narrow range as investors digest the details of the Fed’s latest moves and decide which way to send assets.

We feel it important to note that we have mentioned in the past that a close below the support at 76.50 could open the door to further losses in the index, potentially opening up the 2009 lows just above 74.00. It remains to be seen if these technical signals will be enough to dictate price action in coming sessions but a sustained break of this support should indicate that the index is set for further losses.

Looking ahead, we have quite a busy day ahead of us with the Bank of England and ECB set to decide interest rates, weekly jobless claims from the US and CPI data out of Switzerland. None of these releases should really generate much volatility unless the unexpected happens and, as mentioned above, we recommend remaining sidelined until clearer trends appear.

Published in Forex News
Thursday, 04 November 2010 10:34

GBP/JPY Classical 04/11/2010

Contributed By: DailyFx


GBP/JPY: A closer look at Ichimoku studies suggests that we are still very much in downtrend, with the market most recently breaking to fresh 2010 lows by 126.45. However, as mentioned in previous commentary, daily studies were looking quite stretched, and despite the break to fresh yearly lows, the latest sharp bounce suggests that overall, the market is very well supported in the 126.00’s on a medium-term basis. From here, we would not at all be surprised to see additional upside towards 135.00, but we prefer to remain sidelined given what is still an overwhelmingly bearish trend.

Published in Forex News
Thursday, 04 November 2010 10:34

NZD/USD Classical 04/11/2010

Contributed By: DailyFx


NZD/USD: The market continues to accelerate with the latest rallies extending to fresh yearly and multi-month highs and fast approaching critical psychological barriers by 0.8000. However, we recommend that bulls proceed with caution at current levels with daily studies officially overbought and warning of a near-term pullback. As such, any rallies into 0.8000 should be aggressively over the coming sessions in favor of a short-term bearish reversal at a minimum.

Published in Forex News
Page 23 of 35

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