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USD Graphic Rewind; Dollar Index Forming a Bottom?
Written by article default Monday, 11 October 2010 08:23
The index had another weak day on Friday as soft US jobs numbers supported the case by the Fed to enact further quantative easing measures, leading to dollar losses. We may however, be approaching the inflection point that we have been calling for as the euro starts to look a little toppish. While it is certainly too early to call a top in the euro, or a bottom in the dollar signs do point to that eventuality.
The index has encountered some support which sits just below the 77.00 level and weekly studies rest just above over-sold levels suggesting that losses will slow ahead of entering over-sold territory before correcting. Turning to the euro, after several days of attempts to establish itself above the psychological 1.40 level the euro still hasn’t closed above the level and has only managed a few brief pops above the key level. Officials are beginning to get involved too with ECB Jancker and Nowotny both saying that the euro looks too strong at current levels and Dr. Roubini adding that the euro above 1.40 is painful for the euro-region. We must obviously take official comments from the ECB with a grain of salt since a weaker currency bolsters exports which will ultimately lead the euro-area to recover. It is worthy of note that the stellar German and European (export driven) growth seen in Q2 came on the back of the euro trading at 1.20. Nonetheless, we do feel that it is possible the market has finally completed its pricing in of QE2 and dollar losses can begin to slow before making a meaningful and much needed correction higher.
Looking ahead, we have a light calendar in Europe and an empty docket in the US session due to Columbus Day so traders will be left trading macro trends. Many players will be keenly watching if the Dow can extend its gains after closing above 11,000 for the firs time since the ‘flash crash’ in early May.
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