Participants seem to be introducing old themes of structural deficiencies and weaker fundamentals
within the United States to justify the broad based selling of dollars. It will now be interesting to see how the USD
responds in Thursday trade to the healthy rebound in the stock market.
US equities closed much higher on Wednesday, and this could open the door for additional USD declines. However, we contend that the Dollar is more in a state of corrective easing
that will soon come to an end, rather than the initiation of a major exodus from the USD.
The specific drivers of the latest resurgence in risk appetite seem to have stemmed from some stronger earnings in the US banking sector
and the revelation from the EU of what is now being perceived as a less intense stress test methodology
. Two of the more interesting currency pairs to watch over the past few days have been Usd/Jpy and Usd/Chf,
both of which have come under some intense selling pressure. While we have just now started to see some form of a bounce in Usd/Jpy
on the back of the demand for riskier assets, Usd/Chf
has not followed and continues to get slammed, with the market down a dramatic 12 big figures since early June. Usd/Chf
has taken out the latest barriers by 1.0500 and confounds technical traders as it trades at violently oversold levels
. We would recommend watching these two markets closely over the coming hours as both warn of the risk for some major upside reversals in favor of the USD.
On the data front, the key release in Asian trade
has come from Australia, with the Aussie
able to build on its relative strength following the very solid and better than expected employment data
. The single currency has extended its gains against the buck and outperforms all other major currencies in early Thursday trade, as Aussie bears scale back expectations for a more reserved RBA, in light of the hawkish data. However, we would take the data with a grain of salt and believe that price action in the antipodean will continue to be predicated more on broader macro developments
rather than on any local fundamentals, which continues to leave the Australian Dollar exposed to weakness in a highly unstable global economy
. In Japan
, early releases show signs of weakness, with the current account surplus
falling, money supply growth
easing, and bank lending
Looking ahead, Swiss unemployment data is due at 5:45GMT, followed by German trade data at 6:00GMT. UK Halifax house prices (0.3% expected) are then out at 8:00GMT, followed by UK manufacturing (0.3% expected) and industrial production (0.4% expected) at 8:30GMT. German industrial production (0.9% expected) caps things off for the European economic releases at 10:00GMT, with all eyes then turning to the key event risk for the day, in the form of the respective Bank of England (0.50% and 200B asset purchase target expected) and European Central Bank (1.00% expected) rate decisions due at 11:00GMT and 11:45GMT. As always, market participants will be hanging on every word from ECB President Trichet at the post-rate announcement press conference. US equity futures and commodities are tracking with a bid tone in early Thursday trade.
Written by Joel Kruger, Technical Currency Strategist for DailyFX.com
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