Bounce in stocks halts dollar advance

The greenback was softer at the close or North American trade on Monday with the Dow Jones FXCM Dollar Index (Ticker:USDollar) sliding 0.63% on the session. Global equity markets saw a substantial rally on reports that EU officials are working on revealing aggressive measures to stem the threat of contagion and steer Italy away from a possible default. Also supporting the risk trade were robust retail sales over the Thanksgiving weekend which saw a 16.4% increase in sales from a year ago as black Friday sales lured in more shoppers ahead of the holidays. The result was a massive relief rally in stocks with the Dow, the S&P, and the NASDAQ surging 2.59%, 2.92%, and 3.52% respectively.

The dollar spent the majority of US trade Monday paring overnight losses as demand for safe haven assets subsided amid a sharp rally in risk. The index managed to close above the key psychological 10,000 level before briefly dipping below the 23.6% Fibonacci extension taken from the June 2010 and November 2010 crests at 9970. A hold above this level remains paramount for the greenback with a close below eyeing support at 9833. Longer-term topside targets are held at the October 4th high at 10,130. Look for RSI to find support at the 57-level with a rebound likely to support further topside moves in the index.

An hourly chart shows the index rebounding off the 61.8% Fibonacci extension taken from the August 1st and October 27th troughs at 9946 before finding solace around the 10,000 level. Interim topside resistance stands at 10,030 backed by the 76.4% Fibonacci extension at 10,064 and the October high at 10,130. A break below the convergence of the 61.8% extension and former channel resistance, now support, at 9946 risks substantial losses for the index with subsequent floors seen at 9900, the 50% extension at 9850, and 9800.

The greenback fell against three of the four component currencies highlighted by a 1.96% decline against the Australian dollar. The aussie which had fallen eight out of the past ten sessions soared as a relief rally marked by massive short covering saw the high yielder best all its major counterparts early in the week. The AUD/USD pair still remains 7.50% lower this month however as increased concerns over deteriorating conditions Europe saw investors jettison risk across asset classes in favor of lower yielding “haven” assets like the reserve currency. The worst performer of the lot was the Japanese yen which fell 0.30% against the dollar. Despite the loss, the yen continues to be the top performer against the greenback as risk aversion flows kept the yen supported, with the USD/JPY exchange rate holding within its recent for a month-to-date gain of 0.23%. The yen remains the only currency to best the dollar among the majors on a month-to-date basis.

Tuesday's economic docket is highlighted by the November consumer confidence and September house price index. Confidence is expected to improve with consensus estimates calling for a print of 44.0, up from a previous read of 39.80. House prices are also expected to show some improvement with estimates calling for a print of 0.10%m/m, up from a previous contraction of 0.10% m/m. Investors will continue to eye developments out of Europe as officials struggle to more aggressively tackle the debt crisis which has continued to threaten stability in the region for well over a year now. Look for the dollar to go back on the offensive should broader market sentiment once again turn on European headlines.

Upcoming Events

Date

GMT

Importance

Release

Expected

Prior

11/29

14:00

LOW

USD S&P/CS 20 City s.a. (MoM)

0.00%

-0.10%

11/29

14:00

LOW

USD S&P/Case-Shiller Composite-20 (YoY)

-3.00%

-3.80%

11/29

14:00

LOW

USD S&P/Case-Shiller Home Price Index

-

142.84

11/29

14:00

LOW

USD S&P/Case-Shiller US Home Price Index (YoY)

-

-5.90%

11/29

14:00

LOW

USD S&P/Case-Shiller US Home Price Index

-

130.12

11/29

15:00

HIGH

USD Consumer Confidence

44.00

39.80

11/29

15:00

MEDIUM

USD House Price Index (MoM)

0.10%

-0.10%

11/29

15:00

MEDIUM

USD House Price Purchase Index (QoQ)

-

-0.60%

Michael Boutros, Currency Analyst for DailyFX.com is a Technical/Fundamental Analyst specializing in the FX markets. E-mail: mboutros@fxcm.com.

Twitter: @MBForex
WEB:
www.DailyFX.com

About the Author
Michael Boutros Michael Boutros, Currency Analyst for DailyFX.com is a Technical/Fundamental Analyst specializing in the FX markets. E-mail: mboutros@fxcm.com.
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