• Share this:

Since the beginning of the year, forex traders have grown accustomed to the U.S. dollar trading against U.S. fundamentals.  In other words, the dollar would sell off on positive U.S. data and rally on weak data.  The counterintuitive price action was driven by the dollar's safe haven status and when bad news would spell trouble for the U.S. economy, investors would flock into the safety of the low yielding currency. In contrast, when economic prospects brightened, investors would plow out of dollars into higher yielding and riskier currencies.  However since the beginning of the month, this dynamic appears to have changed.  On the heels of a dramatic improvement in non-farm payrolls, the dollar began to strengthen as the outlook for the U.S. economy brightened.  Last Friday's retail sales report indicated that the moderation in job growth has translated into stronger consumer spending, supporting the fundamentally driven rally in the dollar. 

Is This Just a Phase?

The next obvious question to ask is whether this is just a phase for the dollar.  In the short term, we believe that good data should continue to help and not hurt the dollar as traders readjust their expectations for Fed tightening.  If the U.S. economy continues to improve at its current pace and global economic risks stabilize, even the ever skeptical Federal Reserve may have to recognize the need for tighter monetary policy.  Although there was no U.S. economic data release this morning, news that Citigroup reached a deal to repay $20 billion in government aid, Abu Dhabi's $10 billion support to Dubai World and Exxon Mobil's $31 billion stock deal ($41B including $10B in debt) to acquire XTO Energy Inc.  has helped the dollar hold onto its gains.  However at the same time, we do not see further gains in the dollar until the FOMC rate decision on Wednesday.  Dollar bulls are still relatively insecure and therefore need confirmation that the Fed has been swayed by the recent improvements in U.S. economy.  Based upon last week's comments from Fed Chairman Ben Bernanke, it is not clear whether or not the Fed is convinced that the improvements are here to stay.

Capacity Utilization in Canada Retreats

Meanwhile the only piece of North American data released this morning was capacity utilization from Canada which dropped from 67.7% to 67.5% in the third quarter. Production capacity fell to a record low on declines at mining companies.  For the second trading day in a row, the Canadian dollar weakened against the greenback despite the overall improvements in the Canadian economy. The consolidation in USD/CAD suggests that a breakout is imminent.  The levels to watch are 1.07 on the topside and 1.04 on the downside. TEST

The information, including Commentary and Trade Ideas, provided on FX360.com should not be relied upon as a substitute for extensive independent research which should be performed before making your investment decisions. Global Forex Trading and FX360 .com is merely providing this information for your general information. The information and opinions presented do not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision and should tailor the trade size and leverage of their trading to their personal risk appetite. Any projections or views of the market provided by FX360.com may not prove to be accurate.

The views of the authors and analysts are not necessarily those of Global Forex Trading, its owners, officers, agents or other employees. FX360.com and the currency research team will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained on FX360.com. Global Forex Trading and the currency research team do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.

About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.