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Recipe for US Dollar Recovery Being Concocted in Tuesday Trade
Written by article default Tuesday, 12 October 2010 08:24
Asian equities have come under pressure on Tuesday, while the Yen has rallied a bit on similar correlations, with market participants seemingly less concerned over intervention threats. Meanwhile, the Australian Dollar is the weakest currency on the day, as a combination of elevated risk aversion, softer data in the form of business confidence, bearish comments from the PM, and the possibility that China may take more steps towards easy monetary policy, have all weighed on the overbought antipodean.The Euro has put in a dramatic 24 consecutive closes higher than the previous daily low, and the risk for some form of a pullback is increasing substantially, with the market weighed down on Monday and needing to only close below 1.3865 on Tuesday to officially break this sequence and confirm that some form of a top is in place. It certainly feels like Tuesday could be an active day of trade and we would be on the lookout for more catalysts to spur on heightened volatility.
One such catalyst will undoubtedly come later in the day, when the Fed releases its Minutes from the previous meeting. With much of the latest slide in the buck so heavily tied to the expectation that the Fed will indeed implement another round of quantitative easing, any insights from the Minutes that suggest less certainty on the matter, could very well spark a major round of profit taking and broad based USD buying. In our opinion, to this point, the Fed has done an excellent job of letting the markets know that they are fully prepared to act if necessary. Without even doing anything, they have effectively achieved their goals, with equity prices remaining elevated and investor confidence intact. This has enabled the central bank to buy some time, to see if economic data can show some form of stabilization that will allow the Fed to ultimately come back and say that another round of QE is in fact not necessary.
While we acknowledge the need for ultra accommodation in the current market environment, we find ourselves more in the dissenting camp of the Federal Reserve who is reluctant to endorse another round of easing in fear that the US economy will move beyond the point of no-return where it propels itself into a hyperinflationary environment similar to Japan several years back. Fed Hoenig speaks just ahead of the Minutes at 15:45GMT, and could very well set up a USD rally into the end of the day, with the official’s bias being firmly on the anti-QE2 side. With technical studies already so overextended against the buck, it feels like all of the necessary triggers are in place for a major USD rally on Tuesday. Stay tuned.
Looking ahead, German CPI (-0.1% expected) and wholesale prices (0.4% expected) are due at 6:00GMT, followed by a slew of UK data at 8:30GMT including; CPI (0.0% expected), DCLG house prices (8.1% expected), the retail price index (0.1% expected), and the trade balance (-GBP4388 expected). US equity futures and oil prices have been hit ahead of the European open, while gold prices remain mildly bid.
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