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Is this the Week For the Dollar to Rally?

Last updated 4/13/2009 5:04 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Japan's wholesale prices dropped at fastest pace in 7 years
• BOJ considering boosting capital
• China plans more stimulus to boost consumption
• Oil at $51/bbl
• Gold up to $888/oz.

Overnight Eco

• JPY CGPI -2.2% versus -1.80% forecast

Event Risk on Tap

• CAD BOC Business Outlook Survey

Price Action

• USD/JPY trades very narrow 100.20-100.50 range in limited holiday trade
• AUD/USD takes out 7300 in very early Asia session stop running but settles below 7250
• GBP/USD trades to 1.4700 on btter bid for high beta currencies
• EUR/USD takes out 1.3200 in early Europe

With many of the markets in Asia Pacific and most of Europe still closed for Easter holiday, trading in the currency markets was characteristically quiet with risk appetite the dominant theme as high beta currencies staged a slow but steady rally throughout the night .  The action started in very early Asia when stop running in the AUD/USD pushed the pair through the 7300 handle in very thin trading conditions. Aussie retreated off the highs settling near the 7250 level but it set the tone for the rest of the day as euro, pound and other high beta currencies all rose in tandem.

The only economic release of the night came out of  Japan where wholesale prices declined  at the fastest pace in seven years.  The CGPI index dropped -2.2% versus -1.8% forecast, stoking fears that the country was returning  to the bleak days of deflation. Given the vicious collapse in Japanese export demand and industrial output, the steep decline in price levels is not at all surprising.

However, USD/JPY has risen more than 1000 points since the start of February and as we noted earlier, “Just as the rise of the yen had a vicious deflationary impact on Japan’s economy by depressing demand for its exports and lowering the cost of its imports, so the fall of the yen now should reverse some of this dynamic assuming currency remains at these levels or trades lower for significant amount of time. Therefore, despite Japanese policymaker’s best efforts to stimulate the economy, the success or failure of their mission will most likely be dictated by the currency markets rather than any policy action on the monetary or fiscal front.”

With US capital markets open for business, the pace of trading should pick up as the North American session progresses.  Whether the rally in the high beta currencies continues will likely depend on the performance of the Dow. It will be interesting to see how US investors react to the announcement late last Thursday that Goldman Sachs is considering a multibillion dollar share sale to help repay a $10 billion TARP loan. If equity investors shake off the dilutive implications of such a move and focus instead on the company’s upcoming earnings, the bull move may have more  life left. On the other hand the rally in equities and the yen crosses is long in the tooth and at the very least suggests a pause and some retracement is due.  Therefore,  we believe that as the week wears on, risk appetite will wane considerably and the buck could catch a bid if the Dow corrects.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.