Dollar Dominates Trade As the Week Begins

Last updated 4/20/2009 5:49 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• US Treasury and regulators clash over stress tests
• China to use $80 bln social security fund to embark on international buying spree
• BRC - UK economy teh worst is over
• Equities higher in Asia lower in Europe
• Oil still below $50/bbl - 49.69 last as OEA say no chance of recovery til next year
• Gold remains moribund at $869/oz.

Overnight Eco

• GBP Rightmove HPI decline in prices stops -7.30% vs. -9.0% last
• AUD PPI much weaker -.4% vs. 0.6% forecast

Event Risk on Tap

• CAD Foreign Securities Purchases expected at 1.36B
• USD CB Leading Index expected at -0.2%

Price Action

• USD/JPY drops to 98.00 on EUR/JPY flows but bounces to 99.00 by Europe
• AUD/USD pressure from euro takes it 7100 as risk aversion returns
• GBP/USD very weak to 1.4600 as EUR/GBP buys weigh on the unit
• EUR/USD pushed below 1.3000 as stops triggered in Asia

The euro sliced through the 1.3000 level while the pound dropped below 1.4600 in early European trade as concern over ECB policy actions and some risk aversion flows in European equities weighed on high beta currencies at the start of the week. Comments over the week-end by ECB chief Jean Claude Trichet suggested that the central bank may lower rates by another 25bp to 1.00 percent while ECB Executive Board member Lorenzo Bini Smaghi said the bank’s benchmark 1.25 percent interest rate is “very close” to its floor.

As we noted earlier, “The ECB council continues to be divided over the proper monetary policy path given the economic weakness in the region and this disagreement amongst policymakers has created tremendous uncertainty for the currency as traders deciding to sell first and ask questions later. Having broken the 1.3000 barrier, the EUR/USD& nbsp; has found short term support in early European trade, but its direction this week will likely be driven by the economic calendar. With ZEW, PMI surveys and IFO all on the docket, if currency traders do not see any stabilization or upticks in the data, the unit could see further downside price action to 1.2850 before the week’s end.”

Meanwhile cable also saw some very persistent selling hitting a low of 1.4560 in early London trade, despite relatively positive data from the Rightmove housing survey that showed house price declines finally decelerating to a -7.3% annual rate versus -.9.0% the period prior. The price action however was dictated primarily by profit taking in EUR/GBP which hit a low of 8770 last week and skyrocketed to 8900 today. Having risen to 1.50 last week cable has clearly hit a cement ceiling and as profit taking accelerated in tonight’s trade, stops were tripped continuously.

The next level of support for the unit will be 1.4500 and given the spate of UK economic data this week including, labor statistics and budget numbers it will be interesting to see if sterling can hold position or give back most its gains garnered over the past several weeks. The long bet on cable rests on the assumption that the worst is over for the UK economy and as long as the data does not contradict that thesis, the unit should find support as the week progresses.

UK Starting to Stabilize

In North America this week, the economic calendar is relatively quiet with only LEI data on the docket today. Earnings will be the key focus this week as more than 40% of the S&P will report their numbers.. The dollar is now starting to trade more as instrument of growth rather than just a safe harbor currency. Therefore, if the news on the US economic front continues to improve while EZ data remains grim, the greenback could continue to gain ground with high beta currencies getting no support from any risk assumption flows.

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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.