Friday October 30, 2009 - 14:47:16 GMT
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Has USD Sentiment Changed?
The past few days have seen significant moves in currency markets, as they test support and resistance levels on the charts. These moves coincide with better than expected data coming out of the US and the related move higher in US yields. There is a school of thought that dictates that the USD strengthens on both weak news through the flight to quality, and on strong news as US yields rally. The question is: Are we at the tipping point in terms of USD weakness?
The past week's violent nature in the FX market tells us this is a very real possibility. Increased rhetoric and jaw-boning from finance ministers globally; notably in Norway, Canada, Australia, New Zealand and the Euro-zone helps support the idea that either there is concerted global opinion that the USD has fallen far enough, or else governments are seeking to slow the USD's fall to allow local corporates the opportunity to adjust and hedge their forex exposures.
We are of the view that US yields need to rise further for the USD to gain from these levels. The USD will not strengthen on rhetoric, but rather on action. This can come from the Fed adjusting its wording in its next communiquÃ© to open up the door for rate rises in the future. It could also come from a positive print in the non-farm payrolls number - at least a few months off. The biggest factor holding back USD strength is that the recovery so far has been jobless in nature, and most of the growth seen comes as a result of US Government stimulus; stimulus that either has come to an end - AKA Cash For Clunkers, or else is winding down - AKA the First-Time Howe-Owner's Tax Credit.
More future data is needed before we see if the USD is at a tipping point or whether this is a breather before further USD losses. It's all about jobs.
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