The US dollar continued its extensive rally on Monday, but it had little to do with fundamentals given the plunge in US non-farm payrolls for the ninth consecutive month on Friday.
Instead, we’ve seen that the risk aversion pervading the market has led traders to sell assets like stocks for US dollars who then use them to buy US Treasuries in a classic bout of “flight-to-safety.” In fact, as of Friday 30-year Treasuries and EUR/USD held an 82 percent inverse correlation, highlighting the importance of demand for government debt. Meanwhile, the CBOE’s VIX Volatility Index hit a record high of 58.24 today, signaling the fears lingering in the markets. The Federal Reserve has been taking extraordinary measures to try to deal with all of these problems, and this morning they announced that they would start paying interest on depository institutions’ requires and excess reserve balances. With more money on deposit at the Fed, the central bank will have better funding for their liquidity injections. Furthermore, the New York Fed said, “Without authority to pay interest on reserves, from time to time the Desk has been unable to prevent the federal funds rate from falling to very low levels.” As a result, this measure should help to stabilize rates. Looking ahead to Tuesday, the minutes from the Federal Open Market Committee’s September meeting will be released and this could draw attention once again to the problems plaguing the US economy. It was somewhat surprising to see the markets completely brush off the disappointing non-farm payrolls numbers, as the risks for recession remain very high. However, bearish commentary by the FOMC members may enough to remind traders just how bad things are. Fed fund futures are fully pricing in a 50bp cut on October 29, and if the minutes suggest that the Committee may actually consider cutting rates, the US dollar could pull back sharply. My fundamental bias for the US dollar on Tuesday: bearish. However, I don’t think this bull trend for the greenback should be ignored. Related Articles: 5 Key Events for the Forex Market This Week 10-06-08, US Non-Farm Payrolls (NFPs) Plunge for 9th Straight Month Check out Daily Fundamentals in its entirety for analysis and outlooks on the US dollar, euro, British pound, Japanese yen, and the commodity dollars.