The greenback was markedly higher at the close of trade on Monday with the Dow Jones FXCM Dollar Index (Ticker: USDollar) advancing 0.74% on the session. The advance comes amid ongoing concerns about the European debt crisis as borrowing costs for periphery nations continued to rise with doubts about Italy’s ability to implement strict austerity measures continuing to take root. US equities were weaker across the board as risk appetite went on the defensive with the Dow, the S&P, and the NASDAQ off by 0.61%, 0.95%, and 0.80% respectively. Also weighing on sentiment was news that German Chancellor Angela Merkel had passed a vote in the CDU (Christian Democrats Union) to allow EU member states to voluntarily exit the euro zone. The move suggests a lack of confidence in the ability of indebted periphery nations to put their fiscal house in order and bring down deficits. Accordingly broader market sentiment remained subdued as traders jettisoned risk with the greenback the chief beneficiary of haven flows.
The dollar rebounded off interim support at 9670 before breaking back above the 38.2% Fibonacci extension taken from the June 2010 and November 2010 crests at 9745. The index closed just below the 50-day moving average at 9773 with a breach here eyeing soft resistance at the 9833 level. Note that daily relative strength suggests the greenback may be poised of further gains after rebounding off RSI support at the 50-mark.
An hourly chart shows the index continuing to hold within the confines of an ascending channel dating back to October 31st with the greenback breaking back above the 38.2% Fibonacci extension taken from the August 1st and October 27th troughs at 9754. Interim support holds here with subsequent floor seen at the convergence of channel support and the 9690 support level. Topside resistance holds at 9800 backed by 9830 and the 50% extension at 9850.
The greenback advanced against three of the four component currencies highlighted by a 1.0% advance against the sterling. The GBP/USD pair remains under pressure ahead of key inflation data on tap overnight and amid ongoing concerns about interbank lending in the region. The Libor-OIS spread hit their highest levels since July of 2009 suggesting that lending (credit) may be drying up as banks continue to shore up capital on concerns over the economic environment. The dollar also made modest advances against the euro and the aussie as investors sought refuge in the safety of the reserve currency. The best performer of the lot was the yen with which held its ground with a fractional advance of just 0.05%. As noted in this morning’s Winners/Losers report, the yen has continued to drift higher as traders remain steadfast in fading the October 31st advance when the Japanese Finance Ministry surprised markets with a currency intervention to stem the yen’s rise. Look for the USD/JPY to continue to trend lower as investors test the resolve of Japanese officials, with risk-off flows likely to further fuel yen advances. However gains are likely to be tempered as traders remain on intervention watch.
Tuesday's economic docket highlighted by the October advanced retail sales and producer prices data. Sales are expected to grow at a monthly pace of 0.3%, down from a previous print of 1.1% m/m. The pace of growth in producer price are also expected to ease with estimates calling for a read of 6.3% y/y, down from 6.9% y/y. Broader market sentiment is likely to take cues from data overnight however with the RBA minutes, German and euro zone GDP, and UK inflation data on tap. Undermining this week’s data continues to be developments out of the EU with investors closely eye borrowing costs for the periphery nations as yields continue to test record highs. Note that the economic docket over the next 24 hours has the capacity to further fuel risk-off flows to the benefit of the US dollar.
Michael Boutros, Currency Analyst for DailyFX.com is a Technical/Fundamental Analyst specializing in the FX markets. E-mail: firstname.lastname@example.org.