Is The Dollar’s Move A Stretch?

This week of forex pricing is going out in a whimper as both volume and volatility prefer to take a back seat ever since the softer US job numbers were announced. Currently it seems that investors and dealers require an “unscheduled” event to break the monotonous price action in FX. The mighty dollar is fixated on one direction – the trading strategy that requires “no love” against its major competitors. It seems that the various asset classes will now want to wait to take their cues from next week’s Fed meet after global equities traded lower overnight on the back of weaker-than-expected Japanese earning reports and China growth uncertainties. Do not be surprised to hear the squeals of pain from Europe get louder if the dollars downward trajectory continues – anything to grease the wheels in motion.

China money market pressure remains on display going into the weekend as short-rates continue to hit multi-month highs – this has lead to speculation that the PBoC may resume liquidity injections if rates move too high. Investors should expect this to begin next week and gather further momentum if China’s yields to not happen to back off.

Governor Carney at the Bank Of England has a tough job. Strong UK data calls into question his forward rate guidance methodology. Carney is now leading the charge on how to interpret UK metrics and how the readings can be best applied to make a change to monetary policy as the governor continues to practice his policy of transparency. UK data this morning showed that the economy grew at the fastest rate in three-years during Q3 (+0.8% vs. +0.7%). This suggests that the UK recovery is picking up speed.

The data is the strongest reported since Q2 2010 when the economy grew +1%. The release was in line with market expectations and allows Sterling to remain on the ‘up’ (£1.6202), but below the day’s previous highs versus the EUR and USD. On an annualized basis, UK GDP grew an estimated +3.2%. Despite the faster pace of growth, the UK economy still has some ways to go to recoup the output it lost during the financial crisis of five years ago. Currently output is -2.5% below its pre-crisis peak. Governor Carney work is far from being done – he will have to continue to do battle with the fallout of the governments austerity program, restrictive credit conditions and a fragile global economy. Too often nowadays the word “growth” is associated with “tentative” and like any good central banker Carney is required to break that association and make it everlasting.

Just when things looked to be on the up along comes a report that bursts a few bubbles. German business sentiment unexpectedly deteriorated this month as sales slipped in most sectors, including manufacturing. The Ifo business confidence dropped for the first time in six-months to 107.4. The concern is that when Germany catches a cold the rest of Europe catches the “flu.” However, analysts believe that overall business sentiment remains robust and the economic recovery intact. The German economy has a solid labor market and a recovering industrial activity base that bodes well for stable growth in the coming quarters. The naysayers will look towards the EUR’s rise as a potential future problem. This morning’s Ifo report follows in the footsteps of a positive ZEW index measuring sentiment amongst analysts.

The 17-member single currency has managed to appreciate +8% against the dollar since July, to a two-year high this week supported by a surprisingly soft, but delayed US jobs report on Tuesday. Chancellor Merkel and her team earlier this week forecasted that the German economy would expand +0.5% this year and +1.7% in 2014. The EUR is now approaching some significant resistance levels at 1.3836/1.4018. On the first go around investors should anticipate the “top” to be well defended – the risk is for a correction from the dollar current due course. Now that would be exciting!

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The Dollars Move Raises Few Flags

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell