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US Dollar Just Said Something – We Should Listen

By Saxo BankForexMay 10, 2013 07:38AM ET
www.investing.com/analysis/us-dollar-just-said-something-%E2%80%93-we-should-listen-166448
US Dollar Just Said Something – We Should Listen
By Saxo Bank   |  May 10, 2013 07:38AM ET
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The greenback made a sweeping statement yesterday that could prove a signal for strong further gains – as USDJPY broke 100 late yesterday. Now it’s up to EURUSD and the 1.3000 level to build the case for a lasting USD revival.

Unless this was merely the rumor mill gone amok in a rangebound market, this US dollar move is to be taken seriously, I feel. The rumours included word circulating that Hilsenrath was about to publish a story on possible FOMC tapering of asset purchases and that China was looking to increase its US dollar reserves. I’m tempted to believe good old fundamentals – in this case the very strong weekly US jobless claims number - played a part as well. As I posted yesterday, jobless claims tend to lead the unemployment rate, so this underlines the risk that the FOMC will have to start mulling that purchase tapering.

Also helping the US dollar in the light of what was going on already were comments from the Philadelphia Fed’s Plosser that he sees the unemployment rate possibly falling to 7% already by the end of this year and his favouring of reducing bond purchases (he is not currently a voting member of the FOMC. Even hard cord dove Evans of the Chicago Fed says the jobs market is improving – he is a voter this year, but would be one of the last ones to vote for tapering purchases.

JPY on the move, as are JGB’s

Overnight, the Japanese bond market got a bit disorderly and trading was halted. The absolute yields on Japanese bonds are still absurdly low – and 5-year yields (at 29 bps!) are still about 10 bps lower than the 2012 highs and 30 bps below the 2011 highs. With so much bond buying from the BoJ and the ability to manipulate markets – the pressure is more likely to be felt in the currency market rather than the bond market for now. Still, the relative speed of the move in bond markets is interesting and if yields get too high, it starts to become a question of when the Bank of Japan coordinates the “disappearance” of these bonds with the government. Japan’s finance ministry published a report showing that Japanese investors are buying foreign bonds and equities (). This is one of those key indicators that could drive the JPY sharply weaker – though one wonders if there could be sudden reversals of this development if equities decide they don’t like all of the volatility in bond markets or watching the US dollar move higher.

USDJPY moved as high as 101.20 in early trading as the 100.00 level has become the new line of support after the break of the descending line of that orderly consolidation.

Overnight, the RBA didn’t do anything to help the Aussie’s cause as the banks’ monthly report cut the country’s inflation forecasts and was downbeat on the prospects for growth. The move below 1.0100 in AUDUSD was critical, and now we have prospects for the first test of parity since early last summer.

Note the highlighs of today include the Canadian employment data for April (1.0100 looks like key upside pivot area) and the “lone dissenter” Esther George out speaking at 1800 GMT.

Technical observations
EURUSD – it’s all about whether 1.3000 gives way and we stay below – momentum impressive yesterday, so argument in favour of a break and “never” looking back are a bit stronger this time around. But if the last many weeks has taught us about 1.3000 - it's that seeing is believing...

USDJPY – we’re in unconstrained territory technically, with only psychological round figures out there like 102.50, etc… that 102.50 figure, by the way, is at the top of the second standard deviation line for the next couple of days, so anything beyond that starts to look parabolic. With the USD taking the lead, it appears that other JPY pairs have less potential and this will be the main pair on which to focus.

GBPUSD – turns out I should have cottoned on to the bearish broadening top formation on the intraday charts, which was did indeed prove bearish yesterday, even after very strong UK data. The 1.5400/20 areas is critical and a break could open up for a test of the lower edge of - and even destruction of – the local trend channel.

Chart: GBPUSD
Note three things – the flatline area at 1.5410, the overall channel, and the local broadening top that also fails around the 1.5410 area if broken. As for the channel – it’s impressive, but all formations eventually break…

<span class=
GBP/USD" title="GBP/USD" width="455" height="270" />

EURGBP – interesting for the pound we’re not getting better traction after yesterday’s strong UK data. Let’s see if there is some kind of “dam break” effect if the 1.3000 gives way in EURUSD with a pop and pulls this pair below 0.8400. Otherwise, I’m more uncertain than ever here – preferring to focus on GBPUSD at the moment.

AUDUSD – bear market is here – stay tuned. Overhead resistance is 1.0100. Very open to the downside. There’s a 61.8% Fibo at around 0.9980, but I think we’ve possibly set an eventual 0.9580 test in motion here.

USDCAD – finally waking up and smelling the coffee. Something tells me parity will not come into play for now – though still needs to zip well back into the 1.0100-1.0300+ range if it wants to erase the downside momentum that had built of late. Watch out for Canada’s employment report today (was very weak last time around, so risk perhaps of mean reversion back to strong side?)

USDCHF – explosive as CHF is on the barbie together with the JPY and EURCHF is ripping higher again. This may be the place to be. We’re poking at the 2013 highs of 0.9565 already this morning and dare I think that we might be gearing up for a test of the parity level eventually? The 2012 high was 0.9970.

EURCHF – 1.2500 may quickly come into view here in sympathy with JPY crosses – there is more volatility potential here than the last 12 months of trading suggest – stay tuned.

Economic Data Highlights
  • Japan Mar. Adjusted Current Account Total out at ¥342.4B vs. ¥480.8B expected and vs. -¥28.1B in Feb.
  • Germany Mar. Trade Balance out at +8.8B vs. +17.5B expected and +16.8B in Feb.
Upcoming Economic Calendar Highlights (all times GMT)
  • Italy Mar. Industrial Production (0800)
  • Norway Apr. CPI (0800)
  • UK Mar. Visible Trade Balance (0830)
  • Canada Apr. Unemployment Rate and Net Change in Employment (1230)
  • US Fed’s Evans to Speak (1325)
  • US Fed’s Bernanke to Speak (1330)
  • US Fed’s George to Speak (1800)
US Dollar Just Said Something – We Should Listen
 

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US Dollar Just Said Something – We Should Listen

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