Dollar off the ropes

In our opinion, US government and Fed officials are very aware of this and have stepped up their efforts to remind us of this fact. Bernanke continues to retain a balanced and cautious approach, only willing to implement additional easing measures “if necessary.” The markets have incorrectly chosen to focus on the other language which outlines such measures, and has for the most part ignored the “if necessary” language. But perhaps these latest remarks from Geithner highlight a coordinated effort to make it all the more apparent that just maybe, another round of quantitative easing is in fact not guaranteed, and even if we do see another round, it will not be anything like what the markets have been pricing in.

Geithner’s comments are sending a strong message to us and that message is to not be overly aggressive in selling the Dollar. No economy has ever flourished and prospered as a dominant global power with a weak currency, and we think that the US government is well aware of this fact and ultimately, will do what is necessary to ensure the stability and strength of the Greenback.

The technical evidence for a major USD rally is being confirmed on the fundamental front, and while we would not abandon the possibility for renewed USD selling at some point, for now, the risks are for the US dollar to continue to mount an across the board come back. Our target for the Euro over the coming days comes in by 1.3500-1.3600.

Elsewhere, the RBA released the minutes from the latest central bank decision which were rather balanced after the central bank failed to signal to investors that they would be looking to hike rates at the next meeting. The RBA said that they would need to continue to monitor data and developments before being able to make another decision. The central bank also conceded that the stronger currency helped to offset the need for additional rate rises. We believe that just as QE2 has been incorrectly priced in to the markets, so too has the strength in the Australian dollar. In our opinion the antipodean is at risk for a major depreciation over the medium and longer-term, with the currency at cyclical highs and the very hot economy at risk for a cooling off.

Meanwhile in the Eurozone, data was on the whole quite mixed, with the current account coming in weaker, while the ZEW was much stronger. However, any bids on the back of the stronger Eurozone ZEW, were easily offset by a weaker than expected German ZEW print. Overall, the data hardly factored into price action. Over in the UK, economic data failed to inspire any confidence in the Pound, with CBI business optimism and trends total orders coming in far worse than expected.

Looking ahead, United States building permits (575k expected) and housing starts (580k expected) are due at 12:30GMT, followed by the Bank of Canada rate decision (on hold at 1.00% expected) at 13:00GMT. The official circuit is stacked with speakers today, and the aggregated comments could very well influence price action. ECB President Trichet speaks on the topic of the economy at 12:30GMT, followed by Fed Evans, Dudley, Lockhart, Fisher, and Kocherlakota, all speaking on the topic of the economy as well, at 13:40GMT, 14:00GMT. 15:30GMT, 16:50GMT, and 17:20GMT respectively. Bank of England Mervyn King then takes his turn on the topic of the economy at 18:50GMT, followed by Fed Chair Bernanke at 20:00GMT. Fed Duke ends the run of speakers at 23:00GMT. US equity futures and commodity prices are tracking lower into the North American open.

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