22 February 2010 at 14:59 GMT
FX Update: Whither the USD this week?
Market Comments
Friday saw a rather emphatic reversal on the EURUSD chart, after new lows below 1.3500 failed to hold. The reversal in the greenback's strength came about once again on the back of strong risk appetite across the board and as our barometer of risk appetite - the US S&P500, wash pushing at its 55-day moving average, closing right on that level on Friday and keeping the level in focus for this week. It seems that equity markets have also quickly brushed aside any belief that this represents a suddenly more aggressively hawkish stance from the Fed. USDJPY almost managed to graze its 200-day moving average Friday, but has slipped a bit lower as bonds have so far failed to fall out of bed this week.
In the commodity space, oil has pushed all the way back above 80 dollars a barrel despite extremely bearish demand and supply figures. Is this a response to the weak dollar or driven by the latest round of geopolitical tensions after Iran has moved even more aggressively on its nuclear program? There is certainly nothing on the supply side to cause concern, and implied gasoline demand in the US economy is at the lowest level for this time of the year in six years. In any case, CAD doesn't care and has dropped all the way back below 1.0400, while AUDUSD is still contending with that major 0.9040 structural resistance we have discussed a few times recently. Both currencies are extraordinarily dependent on further moves higher in risk appetite for any further strength in the short term. If risk turns tail here, AUDUSD shorts and USDCAD longs are the way to go (with a NZDJPY short thrown in for extra spice....)
Chart: EURUSD
We still have divergence on the daily stochastics as the last dip and rally was quickly wiped out. Will this rally have a better chance of gaining traction this week? If so, basic targets to the upside include the 1.3850-75 area and the symbolic 1.4000 level. Note that the steeply falling 55-day moving average (red line) could quickly come into play in the coming days as well if EURUSD stays above recent lows. If we dip below 1.3560 immediately, however, the rally prospects are suddenly thrown into doubt.
Bernanke testimony
The focus for the week is Fed Chairman Bernanke's semi-annual testimony before Congress on Wednesday and Thursday. We incorrectly stated on Friday that this Wednesday's appearance before Congress was a repeat of the Chairman's recent testimony that was published in absentia (due to inclement weather) describing the Fed's many liquidity programs and how they can be unwound, but this week's testimony is actually the semi-annual Humphrey Hawkins testimony that gives the Fed chairman a chance to express their beliefs on the state of the economy and the trajectory it believes monetary policy will take. The timing of the recent move on the discount rate makes perfect sense in this light, as the Fed may have fretted that it would send too aggressive a signal to the market and now Mr. Bernanke can step forward at an already planned appearance ("already planned" looking important to avoid the embarrassment of a special appearance or press conference, etc...). The appearance gives the Fed a chance to further downplay the implications of the move on the discount rate as simply a further move toward normalization of policy.
Looking ahead
Between now and the Fed, the most interesting figure we have on tap is tomorrow morning's Germany IFO reading. We have discussed that the market has become remarkably short EUR recently, and wonder if this, in addition to worry about the Wed. Fed testimony, could be a trigger for further Euro consolidation in the near term. Looking for a target for the consolidation (and we assume that this is simply a rally of consolidation within an overall bear market), the initial focus may be the 1.3850-75 area, and then the symbolic 1.4000 level. Today's pivot comes in at 1.3560. As things stand at present, any such rally would be built on a position squeeze more than any sharp recent change in the fundamental picture.
Tomorrow we also have testimony from the BoE's King an company before parliament on the most recent inflation report. This testimony comes . UK rate expectations are in the cellar - will the MPC testimony do anything to change that. The setup is rather interesting here with EURGBP trading up close to the very pivotal 200-day moving average as we pointed out on Friday.
Finally, watch out for the BoJ minutes tonight for signs of any new QE policies entering the discussion. The BoJ has been surprisingly quiet while deflation rages.
Economic Data Highlights
- Australia Jan. New Motor Vehicle Sales fell -3.4% MoM
- Japan Jan. Supermarket Sales fell -4.9% YoY vs. -5.0% in Dec.
- US Jan. Chicago Fed National Activity Index out at +0.02 vs. -0.19 expected and -58 in Dec.
Upcoming Economic Calendar Highlights
- US Fed. Dallas Fed Manufacturing Activity (1530)
- US Fed's Yellen to Speak (1600)
- Japan BoJ Monetary Policy Meeting Minutes (2350)
- Australia RBA's Battellino to Speak (0700)