FOREX TREND MONITOR: US Dollar Strikes Back
FOREX TREND MONITOR: US Dollar Strikes Back
Major Currencies vs. US Dollar (% change)
08 Nov 2010 12 Nov 2010
General Comment: US Dollar Strikes Back
The bruised and beaten US Dollar has launched a vigorous counter-attack against the major currencies as the four-month surge in risk appetite suddenly found itself without fuel to continue. That advance had largely owed to expectations of renewed quantitative easing (QE) from the Federal Reserve, a possibility initially floated at the Jackson Hole central bankers' summit in August. When Ben Bernanke and company made good on the rumors in early November, they delivered just about what the markets had priced in over the preceding months, leaving asset prices wanting of a reason to continue higher and opening the door for a much-needed retracement. Indeed, in the first week following the QE announcement, the greenback rose while the MSCI World Stock Index tumbled, both by the largest margin since the five days ending August 13. With the end of the year drawing closer, more of the same is likely ahead as traders take profits off the table and settle in for the holiday season.
EURUSD: Euro Under Fire on Risk Aversion, Sovereign Turmoil
The Euro continues to track broad trends in risk appetite, with prices still showing a strong correlation with the MSCI World Stock Index on 20-day percent change studies. Needless to say, amounts to a direct threat to the single currency as risky assets correct lower. The sudden return of sovereign turmoil on Euroland's periphery doesn't help matters, with 5-year Spanish, Irish, and Portuguese credit-default swap (CDS) spreads hitting record highslast week. Although Ireland has cancelled its bond auctions for November, Greece and Portugal will tap the markets this week, offering 300 million and 1.25 billion euro respectively in short-term debt. These will be closely watched for signs of contagion, with poor uptake likely to weigh heavily on the European unit. On the economic data front, the release of the ZEW Survey of investor confidence and the final revision of Euro Zone CPI figures headline the docket. We have entered short EURUSD.
Source: Bloomberg
GBPUSD: Fading QE Bets Supportive as Risk Appetite Falters
Sentiment remains an important driver for the British Pound and should keep the currency under pressure amid a broad return to risk aversion, but monetary policy considerations remain important with the Bank of England set to release minutes from November's policy meeting. The Quarterly Inflation Report published last week proved more hawkish than expected, which ought to prove supportive particularly as October's Consumer Price Index figures put the annualized inflation rate above 3 percent once again, dimming the likelihood that the BOE will follow the Fed down the path of renewed QE. Jobless Claims figures are also on tap, with expectations suggesting the 3-month Unemployment Rate held steady at 7.7 percent in September.
Source: Bloomberg
USDJPY: Dollar to Gain as Yield Spreads Mirror Post-QE Reversal
Curiously, USDJPY has carved out a significant inverse correlation with the MSCI World Stock Index, hinting the pair is likely to rise in the event of continued risk aversion. This seems related to the pair's well-established link with the spread between US and Japanese bond yields. Indeed, the pair sank to 15-year lows over recent months as the premium to owning US debt over its Japanese counterpart shriveled on expectations of renewed Fed stimulus. Once those bets materialized, the selloff was due for a corrective rebound in the same fashion as risky assets were set up for a pullback. Indeed, the US-Japan 2-year yield spread put in a low on the very same day as the FOMC made its November policy announcement and has moved by close to 17bps in favor of the greenback since. On balance, assuming the unwinding of QE-linked bets continued, USDJPY upside is likely ahead. We have entered long USDJPY.
Source: Bloomberg
USDCAD, AUDUSD, NZDUSD:Deeper Losses Ahead as Profit-Taking Continues
Risk trends remain firmly in control of the commodity bloc, putting the spotlight on the post-QE correction underway across financial markets. The domestic calendar offers a light helping of second-tier releases which are unlikely to prove market-moving. The developing vine disease breakout in New Zealand threateningthe kiwifruit industry merits attention however after the government said the situation is becoming "increasingly difficult", with the containment and eradication effort likely to come at a "significant cost".
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
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