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Over the past 6 months, being long US dollars has been one of the best trades in the currency market but as the dollar extends its gains, many traders wonder how much further it can rise. In the currency market, trends can last much longer than anyone would normally anticipate especially if it is driven by fear. As humans, we run from uncertainty and not towards it. Risk aversion has been pushing investors into the safety of the US dollar and out of higher yielding currencies. When Main Street reads in the papers tomorrow about the slowest pace of economic growth in 26 years, their shock could turn into more selling. Next week, we also have the US non-farm payrolls report due for release. A sour mood could hang over the markets for most of the week as traders fear that another 500k jobs were lost in the month of January. The only thing that could improve risk appetite and give investors a reason to cheer would be if the Senate passes President Obama’s economic stimulus package.
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The euro rebounded in Asian and early European trade tonight after yesterday’s ECB’s decision to lower rates by 50bp to 2.00%. The pair reached its lowest level in a month yesterday when it hit a low of 1.3024 after Jean Claude Trichet admitted that the economic situation in the Eurozone was deteriorating rapidly and suggested that more cuts would be coming.
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Better than expected US economic data was like a breath of fresh air for the currency markets today. Producer prices fell less than expected last month while manufacturing conditions in the Empire State and Philadelphia regions improved. The dollar rebounded against the Japanese Yen indicating that risk aversion is abating, albeit modestly. The overwhelmingly pessimistic investors will not be easily swayed by a few pieces of secondary economic data, especially since all of the numbers are still in negative territory. Looking ahead, we will have another busy day in the currency market with US consumer prices, the Treasury International Capital flow report, industrial production and consumer confidence due for release.
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The EUR/USD traded on either side of 1.3200 level for most on the night in chopppy Asian and European trade as currency markets awaited the ECB interest rate decision due later today at 12:45 GMT. In a true testament to the confusion of the marketplace the estimates for ECB policy move vary from the low end of 25bp to a high of 75bp.
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Tomorrow’s ECB rate announcement due 12:00GMT is shaping up to be one of the key events in the central bank’s ten year history. With Euro-zone economy facing one of the worst economic slowdowns in decades Mr. Trichet and the governing council are under enormous pressure to abandon his ”Bundesbanke-like” rhetoric and begin to ease aggressively.
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What to expect from a fundamental and technical basis for the US dollar, Euro, British pound, Japanese Yen and other major currencies in the year ahead.
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The euro started off the new week the same way it ended the last one – by sliding against the dollar as focus in the currency shifted towards the ECB. The central banker in Frankfurt are facing escalating pressure to lower rates in light of the severe slowdown in economic activity in the Eurozone. In contrast , Friday’s US Non Farm payrolls, though horrid at -525K, were far better than the whisper number of -700K and as a result support for the greenback stiffened as the data refused to confirm the dollar bears worst expectations.
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The EUR/USD gave up all of it late Asian session gains slipping below the 1.3600 figure in early European trade as news of a much sharper than expected contraction in German Trade surplus weighed on the unit. German trade surplus shrank to 10.7 Billion euros - far worse than the 14.0 Billion euro expected by the market, as exports collapsed by more than 10% in November due to massive pullback in global demand for capital goods.
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The euro hit a three week low against the dollar in active trade today as the unwind of the EURGBP long positions weighed on the currency throughout early European trade. In a session essentially empty of any key economic data trading was dominated by technical factors as cross selling and continued dollar strength took the EURUSD below 1.3500 figure.
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It has been an exceptionally active year in the foreign exchange market as currency volatilities hit record highs. In the first half of the year, everyone was worried about how much further the dollar would fall but in the second half of the year the concern became how much further the dollar would rise. More specifically, after hitting a record low against the Euro in the second quarter, the US dollar surged to a 2 year high against the currency in the beginning of the fourth quarter. From trough to peak, the dollar index rose more than 23 percent in 2008.
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It has been an extremely volatile week in the currency market. On Monday, the EUR/USD was trading at 1.3364 and shortly after the European open on Thursday it hit a high above 1.47. However since then it has reversed violently to end the week back at 1.39. This type of price action is characteristic of an illiquid market that is uncertain about how to react to the drastic measures taken by central banks around the world. There was no US economic data released today, but there are reports that the White House has given $17B in loans to the Big 3 automakers. The US dollar strengthened against all of the major currencies except for the Japanese Yen. Next week is a lightened trading week with the Christmas holiday. US economic data is therefore jammed into Tuesday and Wednesday. We expect the final figures for third quarter GDP, housing market numbers, personal income, personal spending and durable goods next week. The data should continue to reflect the weakness of the US economy.
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After seeing the US dollar sell off for 5 straight days against the Euro and Japanese Yen, we were not entirely surprised to see today’s recovery, especially on the heels of better than expected economic data. The market has become accustomed to disappointments so good news was a welcome change. The European Central Bank has also reduced the interest rate that it offers to banks that deposit with them in order to encourage lending. The 15 percent rally in the Euro has led many to people to believe that the ECB may reconsider their plan to hold interest rates steady in January and the deposit rate cut was seen as a step in that direction. Thin market conditions near the holidays have exacerbated the volatility in the currency market. However even though the greenback is higher today, we had both positive and negative news impacting the dollar.
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Tuesday’s FOMC meeting will be remembered for decades to come as the Federal Reserve brings interest rates down to the lowest level this generation has ever seen. With 2 realistic options on the table and economist and traders divided on how much the Fed will cut interest rates, the only certain outcome is significant volatility for the currency market. The US dollar is selling off aggressively going into the rate decision as traders realize that after tomorrow, the dollar will either be the lowest or second lowest yielding G10 currency. No matter how you look at it, an interest rate of 0.50 percent is just as bad as an interest rate of 0.25 percent.
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With dollar denominated assets yielding next to nothing, we have continued to see money flow out of the US dollar. The greenback fell to the lowest level against the Euro since September and dropped to a new 13 year low against the Japanese Yen. The losses have been even more staggering since the beginning of the month. The dollar has fallen 14 percent against the Euro and 8 percent against the Japanese Yen. This significant sell off begs the question How Much Further Can the Dollar Fall? If you watched the price action in the currency market this past year, you will know that trends dominate. With only 2 weeks until the end of the year, we could be stepping into a longer phase of dollar weakness.
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The anti-dollar rally continued in Asian and early European trade today in the aftermath of yesterdays surprising -75bp cut by the Federal Reserve, but the pace of gains was decidedly more muted as currency traders booked profits in the wake of lackluster equity market performance and downcast economic data from UK.
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The US dollar fell to a 2 month low against the Euro following the Federal Reserve’s decision to cut interest rates by 75bp to 0.25 percent. The greenback is now the lowest yielding G10 currency and for that reason, we should see foreign selling of US dollars exacerbate. At 0.25 percent or more specifically, a target range of zero to 0.25bp, foreigners may not find the yield attractive enough to warrant the risk. Despite the selling that we have already seen in the dollar today, this could just be the beginning of a longer phase of dollar weakness that may last into the first quarter of 2009.
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Tuesday’s FOMC meeting will be remembered for decades to come as the Federal Reserve brings interest rates down to the lowest level this generation has ever seen. With 2 realistic options on the table and economist and traders divided on how much the Fed will cut interest rates, the only certain outcome is significant volatility for the currency market. No matter how you look at it, an interest rate of 0.50 percent is just as unattractive as an interest rate of 0.25 percent.