Dollar Bid As Week Begins

Last updated 6/29/2009 5:35 AM ET (GMT -5) 0 Comments - Add your comment

Forex Trading involves high risks, with the potential for substantial losses and is not suitable for all persons. Past performance is not necessarily indicative of future results.

Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• PBOC reaffirms dollar reserve status
• UK Net Lending at record low
• Nikkei lower, Shaghai at 2009 highs, Europe mildly bid at start of week
• OIl below $70/bbl at 69.21 last
• Gols at 939/oz.

Overnight Eco

• NZD Building Consents 3.5% vs. 11.20%
• NZD Trade Balance better at 858M vs.250M eyed
• JPY Prelim Industrial Production 5.9% vs. 7.0% expected
• JPY Retail Sales 0.0%
• GBP Net Lending to Individuals 0.6B vs. 1.3B record low
• GBP Mortgage Approvals lower 43K vs. 46K eyed
• EUR Consumer Confidence

Event Risk on Tap

Price Action

• USD/JPY runs to 95.55 as dollar remains bid on first night of trade
• AUD/USD pressured to 8000 as dollar reserve status affirmed
• GBP/USD drops below 1.6500 after Net lending drops to record low
• EUR/USD below 1.4000 after PBOC comments

The dollar gained broadly across the board at the start of trading this week after Chinese officials reaffirmed the reserve status of the greenback at the BIS conference at Basel over the weekend. PBOC governor Zhou Xiaochuan told reporters that China’s “foreign exchange reserve policy is always quite stable”, making a tacit acknowledgment  that for the time being the Chinese do not intend to diversify out of their dollar denominated assets.  

As we noted earlier, “it is very much in China’s interest to maintain the value of the dollar, both from the balance sheet perceptive (because its holds nearly 2 trillion dollars of US debt), but also because the country runs a massive trade surplus with the US and any additional weakening of the dollar would dampen American demand for Chinese goods.” The EUR/USD dropped through the 1.4000 handle in the aftermath of the news but managed to regain the barrier after better than expected economic data.

On the economic front, EZ Retail PMI climbed to 47.5 from 47.1 the month prior inching its way to the 50 boom/bust mark. The data from Germany and France showed improvement with the later rising to 49.4 while Italian numbers showed a small decline. The news suggests that consumption demand in the region is beginning to pick up, but the pace remains painstakingly slow. Additionally consumer confidence in the EZ rose as well hitting -25 vs. -30 eyed its best reading in 9 months. The positive news helped EUR/USD regain some ground lost in Asian trade and the pair appears to hold strong support at 1.4000 level  but whether it can rally further as the day progresses remains to be seen.

The eco news out of the UK on the other hand was considerably less positive with as net lending to individuals hit a record low while mortgage approvals remained flat. Net lending declined to 0.6 Billion pounds while mortgage approvals remained at 43K - the same level as the month prior. The news indicates that despite a pick in economic activity, a marked decline in interest rates and an aggressive quantitative easing program by the BoE, the transmission mechanism in UK banking sector is failing  as credit  continues to  contract.  The news knocked the pound below the 1.6500 level, but the pair remains tantalizingly close to its 2009 highs despite less than stellar economic data as of late.

We continue to view the pound rally with skepticism, especially in light of the fact that the rate of improvement in various micro economic releases has declined, while fiscal deficit problems threaten to increase UK government debt to 200% of GDP.  Nevertheless sterling is unlikely to see serious weakness until equity indices begin to correct.  For now, the currency market appears happy to tread water for the rest of the day, especially as US calendar is barren today before becoming increasingly crowded on this holiday shortened week.

FX Upcoming

Loading...

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.