Dollar Rises As Week Begins - Start of a Counter Trend Rally?

Last updated 10/12/2009 4:57 AM ET (GMT -5) 1 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Japan on holiday markets closed, US fixed income closed as well
• Bloomberg: Dollar attracting only 33% of new CB reserves
• Asia mixed on quiet day, Europe
• OIl up above $72.00/bbl
• Gold steady at $1050/oz.

Overnight Eco

• EUR German WPI -0.2%

Event Risk on Tap

Price Action

• USD/JPY pops above 90.00 on hawkish comments from Bullard
• AUD/USD holds .9000 and remains reltiavely bid
• GBP/USD hurt by CEBR story dipping below 1.5750
• EUR/USD below 1.4700 but rebounds in morning euro trade

The dollar started the week on bullish note rising against all the majors on the back of hawkish comments from St Louis Reserve President James Bullard and some downbeat news from Europe and UK. In remarks made in front of the National Association of Business Economics, Mr. Bullard suggested that inflation may be a greater concern than the market believes despite the wide output gap.

However, as we noted earlier, with price pressures in G-3 essentially non-existent “inflation appears to be a convenient excuse for Fed officials to jawbone the dollar in the absence of any policy actions. With few tools left at their disposal, US monetary authorities have resorted to rhetoric as their prime method of slowing down the buck’s descent.”

Meanwhile cable continued to tumble in early European trade today after Centre for Economics and Business Research report suggested that UK rates will remain at 0.5% wll through 2011 and will rise only to 2% by 2014. The report predicted that pound will weaken further to possibly 1.40 against the dollar and could tumble towards parity against the euro. The reaction to the report which saw pound drop to 1.5740 before rebounding slightly only underscores the persistent problems of Anglo-Saxon West economies (UK and US) which are so heavily dependent on finance versus the much more promising prospects of Anglo Saxon East economies (Australia and New Zealand) which are driven by Asian demand for commodities.

In Europe the German WPI data printed at -0.2% versus 0.2% eyed indicating that deflationary forces persist in the region making it highly unlikely that ECB will consider any tightening moves in the foreseeable future. The high euro has been able to offset any rise in commodity costs has effectively acted as price stability agent for the central bank. The pair tumbled below 1.4700 as a result of the news and Bulard’s comments and appears to be consolidating its recent highs.

With Japan’s capital markets closed for a holiday and US fixed income markets also closed for Columbus day, the price action in FX is likely to be subdued for the rest of the day. After receiving some support from Fed officials and US economic data showing some signs of improvement the greenback could see some gains this week even if equities rise as well, as the focus in the FX market shifts from the pure risk on/risk off trade and more towards relative growth assessment of the G-10 economies. If the US economy can demonstrate some clear evidence of recovery the uber bearish sentiment towards the buck could ease. Furthermore, with COT data still showing significant long euro positions and Drudge report leading with anti-dollar story today sentiment has clearly become skewed and some dollar rebound is due.

FX Upcoming

Comments (1)

JG

October 13, 2009 at 02:02 AM ET

You really are the best in the business, Boris. Succinct, factual, across the detail, excellent grasp on the macro environment and directional drivers.

There are only 2 fx analysts I read regularly, you are one of them. Your off-sider Kathy, is the other.

GFT must be very clever.

Jade

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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.