Bernanke to derail the EUR trend?

The mighty, somewhat subjective dollar, has managed to claw back some of its recent losses in the overnight session. Until now, the buck has been trading close to its weekly lows outright on speculation that the Fed Chair Ben Bernanke will reiterate today that a slow US recovery warrants near-zero interest rates. The market does not expect the Fed to change its recent rhetoric, policy members are going to still characterize the recovery as somewhat tepid. Bernanke is to deliver a speech at George Washington Business school later this morning and it’s here that we can expect the markets to be reacting to any hint that additional asset purchases remain possible.

The ‘reserve’ currency of choice has been the third worst performing currency amongst the ten most developed currencies in the past week. Unlike the EUR, which has managed to climb close to +0.7%. The dollar has gotten its lift on the back of Asian equities underperforming due to China raising gas and diesel prices by the most in two-years (+7%). This is the second hike in two-months, amid rising global crude prices. Yesterday, New York Fed Dudley stated that signs that the US economy improving “does not dispel risks that include rising gas prices and a weakened housing market.” Investors are beginning to question even more if a Chinese slowdown will happen and if it will be a hard landing or a soft landing? Earlier this month, Premier Wen Jiabao announced an economic growth target of +7.5% for this year, down from the ever present +8% that the market had come accustomed to over the past seven-years. With their economy beginning to shift focus more onto consumers and away from the large infrastructure projects may worry investors that the economy is slowing even further.

It seems that official Asian dollar buying has managed to test the optioned supported 1.32 ahead of the US open. Scattered stops in the upper high 1.31’s should allow the dollar to gain even more ground. However, the market is a buyer ahead of the 30-day moving average, keeping alive the bias to the topside. The technical short term target would be an eventual break above yesterday’s high of 1.3266 to this months high of 1.3291. Despite the upward bias, the market again seems happy selling into the these rallies at the moment.

Contributing to the EUR strength of late has been the German 10-year Bund yield, which are on the rise as safe haven buying stemming from Greek default fears tapers. It seems that German debt is “playing catch-up” after a lag last week, allowing the EUR to follow suit. A surprise to many is that money is beginning to flow out of German debt to other European countries. How long is this to last? Last week’s dollar gains, in large part on rising US rates and better economic data, may have left the “buck” overbought, both price wise and net spec IMM position wise and it’s now that EUR bears are paying the piper. Fed rhetoric continues to remind the market that they are no where close to raising interest rates. Helicopter Ben will not stray from the script either later this morning. US yield curve manipulation is unlikely to end quickly.

For now the market seems to want to continue, both fundamentally and technically, to unwind the “flight to quality” trade that was so much in vogue in Q4. The reasons for many of the EUR shorts are beginning to dissipate, which has the weak EUR short rather nervous. The spotlight is back on US housing data. This morning, housing starts and building permits will be the first out of three housing indicators on this week’s data calendar. Will stronger data prove supportive for the USD against the JPY and the EUR or are we to continue the EUR strength trend?

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