Dollar Rally Struggles to Maintain Traction as the Fed Keeps Talking up Stimulus, Earnings Feed Appetites

Dollar Rally Struggles to Maintain Traction as the Fed Keeps Talking up Stimulus, Earnings Feed Appetites

With Monday’s close, the dollar put in for its first back-to-back gain since the currency was pitched into its aggressive bear over a month ago. This is both a remarkable development and a cautionary one at the same time. On the one hand, with the follow up to Friday’s bullish reversal from 10-month lows; the trade-weighted Dollar Index has technically broken the consistent descending trend channel that has defined the greenback’s bearing and pace for five weeks. This is a critical first step towards posting a true reversal; and we can see this same development through a few liquid majors – namely EURSD, AUDUSD and USDCAD. On the other hand, we have to refer to the stubborn consistency of the anti-dollar trend in GBPUSD, USDJPY and USDCHF. Considering this is a deeply engrained selling trend, a meaningful recovery will have to be supported across the board. And, therein lies the true burden for a bullish turn for the US dollar: fundamental reinforcement.


Through the first 24 hours of active speculating this week, we would see developments that would seem to support the mature selling effort. Breaking it down, there are two fundamental fonts that have a high potential influence over the dollar: risk appetite trends and the extent of speculation over the Fed’s stimulus efforts. Starting with the most prominent driver in recent months, the probability that the central bank will vote to expand its bond purchasing program was leveraged moderately through macroeconomic data and a few well-placed comments by policymakers over the weekend. From the calendar, the September industrial production and October NAHB housing market activity index were notable readings of economic activity. The top release on the day was without doubt the factory activity report; which subsequently dropped 0.2 percent – the first decline since June 2009. The reason this is a meaningful development is that the manufacturing sector (a component of industrial production) has been one of the most consistent performers for the world’s largest economy where domestic consumption, private investment and trade have fallen short. In the absence of this bulwark, a cooling in the economy looks far more likely and therefore stimulus seems more necessary. Another reading that gives a different angle on the Fed effort going forward was the August TIC capital inflows. At the very beginning of the speculative wave that would eventually consume traders’ attention with stimulus expectations, there was a notable pickup in foreign treasury purchases ($117 billion versus $30 billion previously). Is everyone joining or frontrunning the central bank?


Perhaps more direct in today’s market for speculative influence were the clearly dovish comments from the Fed’s Lockhart and Evans. The former suggested he was leaning towards more stimulus; but the latter said he was concerned that the US was falling into a liquidity trap which required “much more” accommodation that was needed “today.” And, yet, with these blatant comments, dollar selling was limited. If the market has not fully priced in an expansion of bond purchases, it is likely that we are close. We will likely confirm whether that is the case tomorrow the Fed expected to produce comments from: Evans, Dudley, Lockhart, Fisher, Kocherlakota, Duke and Bernanke. Watch both the dollar’s and S&P 500’s reaction to this wave. Another aspect to keep our eye on: 3Q earnings. Will US banks show the same performance as Citi did Monday?


Related:Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: Dollar One Step Closer to a True Reversal


Euro Redeemed in Greenback’s Weakness but ECB’s Trichet Cubs Talk of an Early Stimulus Withdrawal

It is important not to underestimate the influence that the dollar’s strength or weakness has on the euro. The two currencies are the most heavily traded in the market, so it is easy to see that EURUSD liquidity is heavy; and where one currency heads, the other often takes the opposite side of the trade. Through this line of reasoning, we can reflect on the euro’s stability through an otherwise fundamentally discouraging session. For positives, we saw the Bundesbank suggest that they may upgrade their German 2010 GDP assessment and Spain said they were soon to tap the capital market with a15-year debt issue. Far more important though was ECB President Trichet’s rebuttal to fellow policy member Weber’s suggestion that the bond program should be retracted now. This curtails a very appealing hawkish support. Also worth noting, Irish EU Parliament member Kelly plans on asking the EC why Allied Irish passed the stress test only to receive a massive bailout just a short time later.


Canadian Dollar Tops the List for News-Based Trading Opportunities with the BoC Rate Decision

There is little doubt that the round of commentary from the Fed Board holds considerable influence over the dollar; but the impact that the Bank of Canada’s rate decision has over the Canadian currency is far more tangible. Economists don’t expect a change; but the market is still pricing in a 16 percent probability of a 25 bps hike. A hold is likely; but it is the lean of the subsequent commentary that will really sway the loonie.


British Pound Traders Can Garner More from Former BoE Members than Current Policymakers

Sterling traders would have a confusing Rightmove House Prices Index to absorb. Conflicting with the Halifax’s recent 27-year low reading, the Rightmove report accelerated to a 3.1 percent expansionary pace. With a refreshing dose of clarity, we turn to the comments of former BoE members Goodhart and Blanchflower. Both lamented government spending cuts in a way that standing members simply can’t express.


New Zealand Dollar Moves Advances as Demand for Yield Fills in for CPI’s Suggestion of Few Hikes Ahead

In the coming 12-months the market is pricing in 55 basis points worth of hikes by the Reserve Bank of New Zealand (RBNZ). This is rather anemic for a historically hawkish policy body; but it certainly fits Governor Bollard’s dovish turn at his last meeting and the 3Q CPI data we read very early Monday. Slowing to a 1.5 percent annual clip, headline inflation is far from the 3 percent tolerance band that would force a hike.


Australian Dollar Puts in for a Short-Lived Rally after RBA Minutes Call Last Decision ‘Finely Balanced’

Just how close was the RBA’s decision to hold the benchmark lending rate unchanged on October 5th? Considering the Aussie’s reaction, it seemed quite the surprise (initially at least). Well, in the minutes for that meeting, the group said its decision was “finely balanced” and members saw the need for rates to rise “at some point” down the line. If we needed justification for AUDUSD’s proximity to parity, this certainly helps.

By John Kicklighter, Currency Strategist    http://www.dailyfx.com/real_time_news/