Tuesday August 12, 2008 - 00:58:45 GMT
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US Dollar: Technical Support Levels May Finally Force The Rally To Pause
‚ÄĘ Australian Dollar Hits 6+ Month Low As Gold Plummets Over $35/oz
‚ÄĘ Euro Struggles To Hold Above the 2007 Highs
US Dollar: Technical Support Levels May Finally Force The Rally To Pause
dollar rally showed few signs of exhaustion on Monday, as the currency
rocketed higher across the majors despite there being absolutely no
economic data on hand. However, there are technical indications that the greenback could be due for a pause.
Indeed, the US Dollar Index ran into falling trendline resistance
today, which connects the late 2005 ‚Äď 2007 highs, while daily RSI is
well into overbought territory. Furthermore, both EUR/USD and GBP/USD
have hit critical support levels, with the former testing the late
2007/early 2008 highs near 1.4880/1.4900 while the latter probes a
rising trendline dating back to early 2002. These points all mark the
proverbial ‚Äėline in the sand‚Äô for the greenback, and where the currency
goes from here will be largely indicative of the longer-term trend.
there is little in the way of event risk for the US dollar until
Wednesday, when US import prices and retail sales will hit the wires.
Advance retail sales could prove to be a bit more important for forex
market price action, as the headline index is anticipated to rise
slightly by 0.1 percent. However, as I mentioned in the 5 Key Events for the Forex Market This Week, there‚Äôs some potential for this reading to be disappointing as average gasoline prices fell back from above $4/gallon. Wait, you may be thinking, isn‚Äôt this positive for consumers?
Yes, but since this index is not adjusted for inflation, the gasoline
station component has been by far the biggest gainer in recent months,
pushing the overall index higher. Thus, the recent drop in prices
should, theoretically, weigh on Advance Retail Sales this time around. My fundamental bias for the US dollar on Wednesday: bearish. For more on US dollar event risk this week, checkout our Forex Trading Weekly Forecast.
Australian Dollar Hits 6+ Month Low As Gold Plummets More Than $35/oz
Currencies like the Australian dollar, New Zealand dollar, and Canadian dollar
all remained weak on Monday thanks to softer commodity prices, but the
most notable move by far was in gold, as the metal plummeted more than
$35/oz. There has been speculation that these moves are the result of
deleveraging, as gold-mining companies have reportedly reduced hedging
by cutting back on their forward sales in the second quarter to the
lowest since 1987. As Quantitative Analyst David Rodriguez said in his
special report on forex correlations, ‚Äúthe outlook for the Australian dollar may very well depend on gold prices as well as the usual host of factors,‚ÄĚ and as long as gold continues to decline, the risks for the Aussie will remain to the downside.
Meanwhile, Canadian housing data was broadly disappointing, as housing
starts slowed to 186.5K ‚Äď the lowest since December 2007 ‚Äď while
new-home prices slowed to a 3.5 percent annual pace in June, marking
the smallest gain since March 2002. The news adds to the pile of
indicators pointing toward a further slowdown in the Canadian economy,
as last week‚Äôs releases of Ivey PMI and employment levels all reflected
deteriorating conditions. Likewise, in New Zealand, Quotable Value
reported a 2.2 percent drop in house prices in July from a year
earlier, which is the first negative reading since record-keeping began
in early 2005. Later this week, New Zealand retail sales excluding
inflation are anticipated to have dropped by a whopping 1.8 percent in
Q2, the worst drop since records began in 1995. Clearly, restrictive
monetary policy by the Reserve Bank of New Zealand has taken its toll
on the economy, and the collapse in domestic demand is likely to lead
the central bank to cut rates further from their current level of 8.00
Euro Struggles To Hold Above the 2007 Highs
Monday‚Äôs NY close, the Euro was still testing former resistance at the
2007 highs near 1.4880/1.4900 as dollar bulls weigh the currency down.
The drop is in line with the shift in interest rate expectations that
we saw take place last week following the European Central Bank‚Äôs rate decision,
as overnight index swaps are now pricing in almost 30bps worth of rate
cuts within the next 12 months. Less than a month ago on July 21,
overnight index swaps were pricing in 40bps worth of hikes. However, the release of Euro-zone GDP
on Thursday will go a long way to confirm or dispel fears of an all-out
economic contraction in Q2, as these interest rate expectations are
based primarily on the fact that ECB President Trichet put the
spotlight on the downside risks for growth in the region. Until then,
though, traders should keep an eye on immediate support levels, as a EUR/USD break below the 2007 highs will likely target 1.4680/1.4700.
British Pound Hinges On UK Interest Rate Outlook
British pound fell throughout the US trading session as UK producer
prices rose less than expected in July. Nevertheless, the PPI-output
index still rose at the fastest pace since record-keeping began in
1986, suggesting that inflation pressures have yet to abate. Like the
Euro at the NY close, the British pound was testing key support at a
rising trendline starting from the 2002 lows near 1.9050/65. A break
below this point would certainly be a bearish signal, but the 200 SMA on the weekly GBP/USD charts at 1.9022 may be a better point to watch.
In fact, since breaking above the 200 SMA in June 2002, the level has
served as solid support following multiple tests in August 2002,
November/December 2005, January 2006, and March 2006. If GBP/USD breaks
below this point, though, it will essentially signal that the pair
topped out back in November 2007. From a fundamental perspective,
releases on Tuesday and Wednesday will be crucial for GBP/USD, as UK
CPI will hit the wires on Tuesday and on Wednesday, the BOE‚Äôs Quarterly
Inflation Report will be released, though the latter is likely to be
more important since forecasts for inflation and growth may be revised.
Japanese Yen Second Only To The Greenback
the Japanese yen did not beat out the US dollar today, the low-yielder
did gain across the rest of the majors on Monday as deleveraging
remains a key theme in the markets. However, according to the latest forex correlations report, the once-famous correlation between the USD/JPY, G10 carry trade, ad the DJIA has since faded. That said, there is potential for the Japanese yen crosses to plummet, with the exception of USD/JPY. Indeed, USD/JPY is trading on the whims of the greenback and will likely continue to do so within the next week of trading.
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