Dollar Stability Choppy & Temporary

by Ashraf Laidi
Jul 6, 2009 14:55 | 61 Comments

Sterling leads the list of currencies losing against the dollar and yen amid widespread expectations the Bank of England will exercise its quantitative easing expansion option by purchasing an additional 25 bln in assets without seeking govt approval. Concerted selling in emerging market bourses further elevates the risk-aversion lustre of USD and JPY. Oils $10 decline from last weeks $73.30 highs is partly provoked by the discovery of inappropriate trades being behind the buying. Reduced risk appetite & latest forecasts reports of falling global oil demand are further enforcing the positive correlation between equities and oil, thereby, weighing on commodity currencies. Chief among them is the CAD and NOK, with USDCAD firmly in its 4-week up-trend, targeting 1.1770, followed by 1.1810. USDNOK faces more substantial obstacles at 6.7.

But any dollar advances could intensify in the event that a deleveraging ensues on the commodities front as well as in commodities currencies (via renewed cenbank dovishness and currency jawboning). We cautioned 4-weeks ago that eroding risk aversion was key for any recovery in the greenback. In charting medium term for the risk appetite, the dollar and its most popular government bond, the chart below shows the 2-year progression of the interaction between US crude and US10-year yields. The latest upleg for both yields and oil is expected to sustain a retreat amid a lack of follow-through in recent data improvement as well as the pullback in equities. We could see oil to reach as low as $51-52 before end of summer, while 10-year yields could test the 3.15-20% territory before a gradual consolidation and renewed rebound emerges in Q4. Concerns with escalating Treasury borrowing will remain, but these will be temporarily outweighed by falling equities and weak data, which (temporarily) will play to the favour of bond prices at the expense of yields.

Dollar Stability Choppy & Temporary - Oilbonds Jul 3 (Chart 1)

Dollar Stability Choppy & Temporary - STOCKS OIL Jul 6 (Chart 2)

We stick with our bearish stance on USDJPY, reiterating the call for a break of 94.90 and onto 93.80. The lose-lose scenario for the pair has been especially highlighted by the yens broad strength during risk aversion and the dollars vulnerability at each bout of neutral-positive risk positioning. EURJPY faces relatively higher level of support at 133 yen, backed by 132, while GBPJPY clears the way for a break towards 150.20.

Dollar Stability Choppy & Temporary - USDJPY Jul 6 (Chart 3)

Euro fares more robustly amid the ECB's reluctance to expand its credit easing operations and its renewed calls for commercial banks to pass on lower rates. Any break below $1.3730s requires further escalation in risk aversion and greater sell-off in oil prices. Euros relative strength has propped EURGBP past the 0.8630 resistance, calling for 0.88 as the next focal point. GBPUSD is now vulnerable to the $1.5940, below which emerges support at $1.5770.

Vocal reminders by Chinese officials are expected to broaden (ranging from bureaucrats, central bankers and academics), which will limit any concerted dollar buying. Such remarks go beyond just political posturing. China has started the building blocks of boosting its currency via improving its invoice currency status, after which it will move towards garnering world liquidity for its currency and eventually liberalizing capital flows. China may not have the economic bargaining power to pullout of US treasuries, but it is increasingly accumulating short-term term maturities--already a vocal sign of aversion to the currency. Just as some Washington insiders shrugged my warnings from 3 years ago about Japan reducing its holdings of US treasuries, these are now well below those of China's. The same voices are now stating that China has nowhere to go. Let's pay attention to maturities and not just quantity.

Comments (Showing latest 10 of 61) View All Comments
Ashraf Laidi
London, UK
Posts: 0
10 years ago
Jul 15, 2009 21:26
Rob, we would have to see further CAD gains ie. near 1.10 for Canadians to talk about CAD strength. actually it was the Min of Fin also that spoke of CAD strength. Also, CAN CPI due out this week. CHF also had a good day (not sure why) so watch out from fresh SNB intervention soon. Short AUDCAD still a good trade.

Ashraf
Rob
New York, United States
Posts: 305
10 years ago
Jul 15, 2009 19:04
Hi Ashraf,

I remember several weeks ago that the Canadian Central Bank said it didn't like strength of it's currency against the USD, and also said it could begin quantitative easing because the economy wasn't as strong as they'd expected. With the interest rate decision next week - do you feel those events will happen? But more importantly, if the dollar continues to fall across the board, do you think talk out the central bank will be enough to cause people to sell CAD (again, assuming the dollar is still falling hard)? Thanks for your opinion.
Carlco
bristol, UK
Posts: 151
10 years ago
Jul 15, 2009 16:39
Chimerica debate very enjoyable http://www.newmediamanager2.net/node/269
rajesh68
Singapore
Posts: 60
10 years ago
Jul 15, 2009 16:29
Please see this video on dollar index. For your comments please.
http://broadcast.ino.com/education/dollarindex714/
14raj
Kolkata, India
Posts: 210
10 years ago
Jul 13, 2009 16:44
FOREXTRADER,
I think its bit tough for EUROUSD to show the target of 1.3500.If it break 1.4070 then the work will be even tougher for the market.
Regards,
Rajib.
forextrader
vologda, Russia
Posts: 127
10 years ago
Jul 13, 2009 14:40
Hey Ali
If you want to make money in the next few weeks then you have to buy Yen and USD on dips,
GBP/USD target around 1.55. Euro/USD 1.35, AUS/USD 0.73

Dema
Ali
Australia
Posted Anonymously
10 years ago
Jul 13, 2009 12:11
Hi All,

Why do I feel so pessimistic about the US dollar strength? Although I was one to call a short as well for AUD/USd..I am just not convinced about its strength against the Aussie and Euro.

Really interested to hear what the other traders are thinking?

It just seems like it may be a choppy, short lived move as there is so much uncertainty with the US currency itself..particularlly with the comments made in recent times.

Open to discussion

Ali
Ashraf Laidi
London, UK
Posts: 0
10 years ago
Jul 9, 2009 20:56
Pipples, GBPAUD could extend gains as Aussie becomes the bigger loser from any more selling like yesterday. Channel top at 2.08, also coinciding w/ Jan 26 low. it will likely break and go towards 2.11-12.

Ashraf
speculator
Posted Anonymously
10 years ago
Jul 9, 2009 20:20
the trader is often vert accurate based on his predictions i have seen
rajesh68
Singapore
Posts: 60
10 years ago
Jul 9, 2009 18:35
Pl. see this video. It gives how low oil can go.
http://broadcast.ino.com/education/crudeoil78/?campaignid=3