What Drove The US Dollar To A 6 Month High?

Daily Forex Fundamentals | Written by Global Forex Trading | Aug 27 08 01:40 GMT |

Today's Biggest Percentage Movers

• AUD/CAD ( -100 pips or 1.19%)
• NZD/USD ( -95 pips or 1.00%)
• AUD/USD ( -93 pips or 1.00%)

The Stories in the Currency Market

What Drove the US Dollar to a 6 Month High?

The troubles in the US financial sector continue to be the biggest stories of the day, driving the US dollar to a 6 month high against the Euro. The parallel moves in both the greenback and the Japanese Yen indicate that we are seeing another bout of risk aversion. Yesterday, the story was about a Kansas Bank being shut down by regulators and today, a mortgage broker, which once originated $4 billion in loans, announced plans to close in a few weeks. This follows news from the FDIC (Federal Deposit Corp) that the number of banks on their watch list has increased 30 percent to 117. As this list grows, so does the probability of a major blow up in the financial sector. Therefore it is no wonder that risk aversion continues to drive the markets, especially as gold prices increase $4 a barrel. Although US economic data and the minutes from the latest FOMC meeting were also dollar positive, most of the action happened in Europe. Both consumer confidence and new home sales beat expectations, but traders remain skeptical about the recovery in the US economy. The recent drop in oil prices has helped to stave off a more serious downturn, but with Hurricane Season still underway, a major storm could easily reverse that trend. As for the FOMC minutes, the Fed lowered their GDP forecasts for the second half of 2008 and 2009 and continued to warn about inflation risks. An interest rate hike will definitely be the next move that the Fed makes but the timing is still unclear. According to Fed Fund futures, the Federal Reserve will remain on hold for the remainder of the year. Looking ahead, durable goods orders are due for release on Wednesday. Slowing growth in the month of July is expected to drag on the sales of items to made last for more than 3 years. Overall, we still believe that the US economy is headed for slower growth, but for the near term, the path of the dollar will be less dependent upon US data and more dependent upon the trend of oil prices and the market's appetite for risk.

Euro: Headed for a Break of 1.45

The Eurozone economy and the Euro could be in for more trouble. In yesterday's report, we warned our readers against being overly optimistic about German business confidence. Even though exports have recovered and analyst sentiment has improved, the recent drop in retail sales have kept German companies nervous. Looking ahead, we continue to expect further misses in Eurozone economic data. When an economy begins to slow, it will be reflected in more than one piece of economic data and for more than one or two months. This in turn will weigh on the Euro, which could possibly drive the currency below 1.45 against the US dollar. Although there is no major Eurozone economic data due for release tomorrow, the next big release that we are waiting for from the region is the German unemployment report on Thursday. Since consumer spending has been the primary drag on second quarter GDP and consumer confidence, a weaker labor market would spell more trouble for the region's economy. Meanwhile, the Swiss franc has also been hit by weak economic data - the UBS Consumption Indicator dropped from 2.24 to 1.84.

British Pound: Becoming Oversold?

The British pound has been one of the most underperforming currencies in the foreign exchange market. Since the middle of July, it has fallen more than 1500 pips against the US dollar. In fact, the currency has weakened against all of its major counterparts including the Japanese Yen, Euro and Swiss Franc. With an economy that is deteriorating by the day, there is good reason for the currency's recent downtrend. However one way moves with virtually no retracements (we have seen a pause but not a recovery) is rare and for that reason we suspect that there could be a reversal in British pound even though we are long term bearish on the currency. Nationwide house prices was the only piece of economic released from the UK today. According to the report, house prices dropped by the most since 1991. There is a growing belief in the financial markets that the Bank of England may be the next central bank to cut interest rates.

Australian, Canadian and New Zealand Dollars Shrug Off Gains in Commodities

Despite the rise in gold and oil prices, the Australian, New Zealand and Canadian dollars continued to slide on rising risk aversion. The New Zealand trade balance came out worse than expected which added fuel to the kiwi's slide. Like the UK economy, the New Zealand economy has been deteriorating significantly with many economists calling for a possible recession and rising commodity prices is the primary reason why imports and exports are both higher. There has also been talk of a possible rate cut by the Reserve Bank of New Zealand. Meanwhile, even though there was no economic data from Australia or Canada, the intraday comments from Bank of Canada Deputy Governor Longworth were perceived as dovish - he said that inflation and growth might actually be slower than they had projected in July. Looking ahead, risk appetite and weather patterns will continue to drive the price action of the 3 commodity producing currencies.

Japanese Yen Crosses Continue to Sell Off

The biggest story in the currency market today continues to be the liquidation out of carry trades. As we mentioned yesterday, carry trades never do well in an environment of uncertainty and the continued concerns about the health of the US banking sector has traders limiting any high risk positions. In order for carry trades to work, we need to be in an environment where central banks are raising interest rates and volatility is low. Unfortunately the threat of a potential bank blowup is keeping volatility high and the next move by any major central bank will most likely be a rate cut and not a rate hike.

EUR/USD: Currency Pair in Play Over the Next 24 Hours

The most potentially market moving piece of economic data due on Wednesday is the US Durable Goods Report (12:30 AM GMT)

The currency pair that we are keeping an eye on continues to be the EUR/USD. The sell-off today has the currency pair trading back within our sell zone, which is established using Bollinger Bands. Technically, we are bearish EUR/USD and expect a move to 1.45. If durable goods is stronger than expected, that could be the catalyst that drives the pair lower. However be careful with this pair because a move above 1.4750 is all that is needed to negate the downtrend.

Kathy Lien
Global Forex Trading
http://www.gftforex.com