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US Dollar Back Under Pressure But Market Conditions Are Choppy

US Dollar Back Under Pressure But Market Conditions Are Choppy

2011-10-19 11:19:00
Joel Kruger, Technical Strategist
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  • Markets well bid Wednesday despite denial of EFSF story
  • Moody’s downgrades Spain more aggressively than others
  • Earnings from tech giant Apple disappoint
  • Reserve diversification could be source of USD selling
  • BOE Minutes shows unanimous decision on rates and QE

Conditions remain quite choppy at the moment, and after looking like we were in for acceleration in USD gains on Tuesday, markets turned around rather quickly on a report of an increase in the EFSF by Eur 2trl. However, this report was later denied, and we are actually somewhat surprised to see risk correlated assets still so well bid. Moody’s came out to downgrade Spain more aggressively than S&P and Fitch, and earnings out from tech giant Apple were disappointing after missing expectations. But, there could be some larger forces at play that have been influencing the resurgence in risk correlated assets.

Relative performance versus the USD on Wednesday (as of 11:05GMT)

  1. AUD +0.80%
  2. EUR +0.68%
  3. GBP +0.57%
  4. NZD +0.55%
  5. CAD +0.49%
  6. CHF +0.11%
  7. JPY +0.04%

Our colleague, a leading strategist at a major US bank resurrects the topic of reserve buying which has taken a backseat in recent month. In his report he makes the point that once risk appetite returns to markets, it could very well be accelerated on an aggressive pick-up in reserve buying away from the Euro and US Dollar. “The point we would emphasize is that if the worst risk-off period in more than a year did not greatly slow China FX buying and did not make a dent in aggregate EM reserves (among medium-sized reserve managers), once risk appetite returns to the investors, the flow back into small G10 and EM currencies is likely to rebound sharply. Further, as a group, reserve managers probably muted their diversification programs in September because of financial market uncertainty. They now find themselves with 85-90% of their portfolios in tainted currencies such as the USD and EUR, and falling further behind their diversification goals.”

Still, one key point made above is that the flows away from the USD and Euro and into some of these other currencies on reserve buying is not likely to come until we actually do see a pickup in risk sentiment. Unfortunately, we do not project that this pickup in sentiment will be forthcoming, and instead continue to anticipate further stress in the global system for some time. It is our strong view that despite any structural problems in the United States, the US Dollar will remain the currency of choice given its safe-haven appeal.

Elsewhere, the Bank of England was out with its latest Minutes which came in on the dovish side and showed a unanimous 9-0 vote to leave rates on hold and expand asset purchases by GBP75B. Looking ahead, US inflation data, housing starts and the Fed Beige Book will be the key releases in North American trade. US equity futures are mixed, while oil trades moderately higher and gold lower by the same degree.

ECONOMIC CALENDAR

slices_body_Picture_5.png, US Dollar Back Under Pressure But Market Conditions Are Choppy

TECHNICAL OUTLOOK

slices_body_eur.png, US Dollar Back Under Pressure But Market Conditions Are Choppy

EUR/USD: Rallies have stalled out just over 1.3900 and ahead of 1.4000, with the market putting in a strong bearish reversal day on Monday. From here we see risks for the formation of a fresh lower top by 1.3915 ahead of the next major downside extension back towards and eventually below 1.3145. Look for a break back below 1.3650 to confirm and accelerate. Back above 1.3915 delays.

slices_body_jpy2.png, US Dollar Back Under Pressure But Market Conditions Are Choppy

USD/JPY:Has been locked in an intense consolidation over the past several weeks, since breaking to fresh record lows by 75.95, and while we would not rule out the possibility for a continuation of the downtrend, any additional declines are seen as limited. Longer-term technical studies are looking stretched and we anticipate the formation of a major base in favor of an intense upside reversal. Look for a break back above 77.90 to confirm outlook and accelerate. In the interim, any dips towards 75.00 are viewed as an excellent and compelling buy opportunity.

slices_body_gbp2.png, US Dollar Back Under Pressure But Market Conditions Are Choppy

GBP/USD: The market has been well bid since breaking the neckline of a double bottom at 1.5715, with rallies extending into the 1.5800’s thus far ahead of the latest minor consolidation. However, with the underlying trend still tilted to the downside, we see the risks for the formation of a lower top somewhere around current levels ahead of the next major downside extension below 1.5270. Look for a break and daily close back below 1.5630 to confirm bias and accelerate declines. A daily close above 1.5900 delays.

slices_body_swiss1.png, US Dollar Back Under Pressure But Market Conditions Are Choppy

USD/CHF: The market is in the process of consolidating its latest sharp recovery out from record lows by 0.7000. Although there are some risks over the short-term for deeper setbacks, any declines should be very well supported on a close basis above 0.8645. Back above 0.9315 will signal an end to the consolidative price action and confirm a fresh higher in place ahead of the next major upside extension back above parity. Ultimately, only a close back below 0.8500 would give reason for concern.

--- Written by Joel Kruger, Technical Currency Strategist

To contact Joel Kruger, email jskruger@dailyfx.com. Follow me on Twitter @JoelKruger

To be added to Joel Kruger’s distribution list, send an email with subject line “Distribution List” to jskruger@dailyfx.com

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