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Will The Dollar Rally Continue?

Last updated 12/15/2009 5:38 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Euro under pressure as fears rise that Austrian banks may face massive writedowns
• UK CPI hotter at 1.9% vs. 1.8% on fuel costs
• Nikkei tad lower, Europe flat at the open
• Oil at $69.50/bbl
• Gold holds steady at $1120/oz.

Overnight Eco

• AUD Monetary Policy Meeting Minutes - statinary for now
• AUD Housing Starts 9.4% vs. 6.4% eyed
• CHF Industrial Production 3.4% vs. 0.4% last
• EUR German ZEW Economic Sentiment 50.4 vs. 50.1 forecast
• EUR ZEW Economic Sentiment 48.0 vs. 50.9
• GBP CPI 1.9% vs. 1.8%
• GBP RPI 0.3% vs. 0.2%
• GBP DCLG HPI -2.2% vs. -2.3% eyed

Event Risk on Tap

• CAD Leading Index expected at 0.6%
• CAD New Motor Vehicle Sales expected at 1.0%
• USD PPI expected at 0.8%
• USD Empire State Manufacturing Index expected at 25.1
• USD TIC Long-Term Purchases expected at 50.3B
• USD Capacity Utilization Rate expected at 71.1%
• USD Industrial Production expected at 0.6%

Price Action

• USD/JPY trades through 89.00 on general dollar strength and hope of hawkish FOMC
• AUD/USD loses .9100 as RBA sounds neutral
• GBP/USD holds 1.6250 as inflation prints slightly hotter
• EUR/USD sold through 1.4550 on worries over Austrian banks

The euro was under pressure all night long after reports on the web suggested that a second bank in Austria may require a government rescue after the nationalization of Carinthian Hypo Alpe Adria Bank AG yesterday. The crisis in the Austrian banking sector is only the latest piece of negative news to affect the  region which saw recent downgrades of Greece’ s sovereign debt and triggered investment concerns regarding  other members of the union such as Spain, Italy and Ireland.

As we noted earlier,” The unit has now come off more than 500 points from its yearly highs as concerns over the fiscal integrity of the European financial sector along with better than expected US economic data have markedly changed the dynamic in the FX market in favor of the dollar…The single currency suddenly became a toxic  asset of its own, with traders loathe to buy it until further clarity in Austrian banking sector can be established.”

On the economic front the ZEW survey printed a tad better than expectations at 50.4 versus 50.1 eyed but nevertheless was lower than last month’s reading of  51.1. This is the third consecutive decline in the index since hitting its yearly peak of  57.7 in September indicating that investor sentiment has clearly cooled into the year end. Tomorrow traders will get a glimpse of the PMI numbers for the region and if that data also falls short of projections the EUR/USD could quickly test support at the 1.4500 level.

In UK the  CPI data printed a touch hotter at 1.9% vs. 1.8% eyed as fuel costs drove it higher but  some of the upside effects were offset by lower food prices. Although inflation is expected to tick up in the months ahead aided by unfavorable base effects, we doubt that pricing pressures will become extreme given the large amount of capacity in the UK economy. Furthermore, the same fuel pressures that drove process higher during the most recent period should act as an offset in the coming months given the recent decline in oil prices.

In Australia, the RBA minutes revealed that the decision to lift the cash rate to 3.75 per cent in December had been "finely balanced" with members weighing the developments in the domestic and international economy and the potential blow to business confidence from a rate rise.  Today’s GDP data due at 00:30 GMT could be the determinant of the RBA policy action next month. If the report prints weaker than forecast market expectations for a rate hike are sure to diminish and the pair could lose the .9000 handle as the result.

In North American trade today the focus will turn to PPI, Empire and Industrial Production. If the news proves supportive  the dollar should continue its new found trend of responding positively to US economic data, especially is traders begin to speculate that it may lead to more hawkish Fed statement tomorrow.   

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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.