Dollar's Rally Has Legs

Last updated 12/7/2009 5:12 AM ET (GMT -5) 5 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• UK Independent - Britain to lose G-10 status by 2015
• Nakheel bondholders may get Manhattan sized piece of land
• Asia up by 1.5% but Europe lower by -1% on resource, financial weakness
• OIl drops below $75/bbl at $74.95/bbl last
• Gold at $1141/oz. as $1150 given

Overnight Eco

• AUD AIG Construction Index 47.6 vs. 50.9 eyed
• AUD ANZ Job Advertisements 5.2% vs. -1.7% last
• CHF Retail Sales 3.1% vs. 1.2%
• EUR Sentix Investor Confidence -5.5 worse than -4.3% eyed
• EUR German Factory Orders n/a

Event Risk on Tap

• CAD Building Permits expected at 1.1%
• USD Consumer Credit expected at -9.8B

Price Action

• USD/JPY consolidates at 90.00 after massove raly next week
• AUD/USD drops to .9050 on further dollar strength
• GBP/USD pummeled by UK Independent story breaks 1.6400
• EUR/USD drops through 1.4800 as dollar rally has legs

Dollar’s post NFP rally had legs into the first trading day of the week as majors continued their decline against the greenback with EUR/USD slipping below the 1.4800 handle and pound breaking the 1.6400 barrier in early morning European trade. The eco calendar was very quiet with only a smattering of data from Australia and Switzerland.

In Australia the AIG Construction PMI Index slipped to 47.6 from 50.9 but the ANZ Job Advertisements reading rebounded to 5.2% from -1.7% the month prior suggesting that the employment data due this Wednesday may prove to be positive once again. In Switzerland, Retail Sales printed far stronger than forecast at 3.1% vs. 1.2% - their best reading in 10 months. The news may signal that the broader EZ economy could finally see a pick up retail demand as economic conditions improve across the continent.

The key event risk tonight however was not economic but rather political. UK Independent today ran story that stated that UK economy may be in danger of losing its G-10 status by as early as 2015. It noted that,” Stagnation at home and rapid economic growth in developing economies will push the UK as low as 11th in the global pecking order by 2015, according to analysis by the Centre for Economics and Business Research (CEBR).”

As we wrote earlier, “While (The Independent story) concentrates mainly on the loss of political; and diplomatic power that could occur, the currency markets tonight are far more concerned with the negative economic implications and the concomitant loss to the pound that this scenario would bring. We’ve recently argued that GBP/USD would likely suffer the most in any counter trend dollar rally, as the financially dependent UK economy remains vulnerable to further credit problems in Dubai as well as any serious correction in global capital markets. Today’s story in the Independent only confirms the structural problems facing pound longs.”

The North American session today is also barren of any event risk, but the market may look to Ben Bernanke’s speech at 17:00 GMT for any possible guidance on the interest rate front, although we doubt that the Chairman will be very forthcoming at this time given the nascent state of improvement in the US labor markets. Although many market analyst have speculated that Friday served as a decoupling point in the risk trade with dollar rallying along with equities, we continue to believe that the correlation though perhaps weakened will remain in place for the foreseeable future until capital markets become more confident in the sustainability of the US recovery and the actual possibility of US rate tightening. To that end, we are likely to go back to the same risk on/risk off dynamics in the North American session although the near term bias remains clearly in the buck’s favor.

FX Upcoming

Comments (5)

FXDragon

December 07, 2009 at 05:43 AM ET

Good morning,
Why are you dollar bullish if you dont see a rate hike for the foreseable future?

bschlossberg

December 07, 2009 at 05:54 AM ET

Risk flows

hsbc

December 07, 2009 at 07:46 AM ET

sell eur as it looks like its headed for 1.45

Stephan Smith

December 07, 2009 at 11:00 AM ET

Man, this is a roller coaster. Can I have a solid trend please. That's where my millions are.

FXDragon

December 07, 2009 at 06:16 PM ET

Its too early to sell eurusd. Buy short term then sell around 1.4950 down to 1.47. Forget 1.45. Are you guys obsessed or something:)

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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.