Dollar's Roll Relentless as Key Levels Fall

Last updated 12/17/2009 5:26 AM ET (GMT -5) 6 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• S&P downgrades covered bonds send euro through 1.4400
• UK Retail Sales huge miss -0.3% vs. 0.5% eyed
• Asia and Europe slightly lower as action is elsewhere
• OIl holds $72/bbl so far
• Gold steady at $1130/oz.

Overnight Eco

• NZD NBNZ Business Confidence 38.5 vs. 43.4
• GBP Retail Sales -0.3% vs. 0.5% expected
• GBP Consumer Inflation Expectations 2.4%
• GBP CBI Realized Sales n/a
• CHF ZEW Economic Expectations 54 vs. 56.4 last

Event Risk on Tap

• CAD CPI expected at 0.4%
• CAD Foreign Securities Purchases expected at 10.11B
• USD Unemployment Claims expected at 470K
• USD Philly Fed Manufacturing Index expected at 16.1
• USD CB Leading Index expected at 0.8%

Price Action

• USD/JPY runs to 90.00 on broad dollar gains but can't hold the level so far
• AUD/USD pro dollar flows push the pair to 89.00 as dovish RBA stance lingers
• GBP/USD plunges through 1.6200 on much weaker than forecast UK Retail Sales
• EUR/USD downgrade of covered bonds trips stops at 1.4500 and 1.4400

Another night of slaughter for dollar shorts in the currency market as the greenback hit a three month high against the euro while GBP/USD tumbled through the 1.6200 figure after UK Retail Sales missed expectations by a very wide margin.  The buck was strong from the start of the Asian session on the back of structural downgrade by the S&P of nearly 1.5 Trillion euros of covered bonds.

Covered bonds which are backed by assets like residential mortgages but remain on the books of the banks, typically carry a shorter maturity than the asset they back, putting the banks at the risk of a maturity mismatch that could create serious re-financing difficulties in times of credit stress in the capital markets. As we wrote earlier,” The combination of lingering credit problems in the Eurozone along with a more upbeat assessment of the US economy by the Fed has created a cascade of stop running as first the psychologically key 1.4500 level gave way and then 1.4400 barrier broke as well.”

Meanwhile in UK the Retail Sales numbers were horrid printing at -0.3% versus 0.5% eyed. The Retail Sales numbers were at their lowest monthly level since May 2008 indicating that high debt burdens and lackluster labor markets continue to weigh heavy on consumer spending behavior. That  dynamic could prove especially toxic  next year as UK government seeks to increase tax collections against its spending outlays.Cable plunged to 1.6100 handle – its worst level in two months and now faces the real prospect of testing the 1.6000 figure if pro-dollar flows accelerate in the North American session.

Looking ahead the markets will get a glimpse of the Philly Fed numbers and the LEI readings with traders anticipating slightly more positive data on both fronts. However the key driver in early trade could be the weekly jobless numbers due at 13:30 GMT. If the jobless report prints below the 450K level it would provide  a massive to the dollar bull case offering further evidence that US labor markets are improving markedly which should in turn lead to better growth in 2010. With the greenback now trading on fundamental data rather than risk flows, any good US economic news could extend the dollar rally even more.

FX Upcoming

Comments (6)

FXDragon

December 17, 2009 at 05:59 AM ET

Why do you think usd is not as merciless on jpy and cad? You can say cad has good data but any justifications on yen? Or is it just gonna catch up like gold.

schultzz.at

December 17, 2009 at 07:37 AM ET

Canadian inflation numbers came in somewhat above expectations, but the pair easily shook off the numbers. The commodity currencies seem to get some support from the stock market with European markets and U.S. index futures only marginally down by 0.5%.
However, I advice against the recommended USD/CAD short trade as the pair may easily run into the stop if volatility comes into the market later in the day with the initial claim numbers and the NYSE open.
As far as the Yen is concerned, a BoJ meeting is scheduled for tomorrow at 04:00 GMT. This may be the reason for the relative quiet trading in the pair.

FXDragon

December 17, 2009 at 08:40 AM ET

Naa, dont think thats the reason if even boris has no idea. Thats weird. Its either gonna shoot after breaking support. I'll stay long on both and wait for surprises.

alexjbrandt

December 17, 2009 at 08:52 AM ET

I guess the rise in continuing claims, and the rise in initial jobless claims for the US economy hasn't fazed dollar bulls, despite both reports failing to meet market expectations.

bschlossberg

December 17, 2009 at 09:14 AM ET

Actually it stopped the dollar rally so far. Let's see how the day plays out

alexjbrandt

December 17, 2009 at 09:37 AM ET

Weekly claims rose last week as well, so that makes two weeks in a row that report has increased.

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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.