For all of my ranting about how weak the US dollar has been, yesterday’s higher close after 4 days of losses showed that there is still a bit of life in the Dollar. This morning’s follow-thru on yesterday’s buying is a bit unconvincing as market correlations are a bit jumbled this morning and perhaps this highlights the breakdown of the oil vs. stocks correlation.This morning the Dollar is higher across the board as perhaps it is a tad oversold meaning that it came down too far, too fast. Oil is retreating from highs of $107, and stock index futures are higher to start the day. Perhaps, this will encourage risk-taking later this morning, which could flip the Dollar from positive to negative, or maybe stocks sell-off to fall more back in line.
Either way, it is a tad confusing to say the least as the market is unsure which extreme (Dollar down, oil up, or both) is most likely to revert to the mean.
The Euro is lower this morning as bond spreads are widening between German bunds and the mostly highly indebted Euro zone nations, as there is still relatively little the EU has done to come up with a plan should the crisis accelerate.
Oil is also pulling back from 2-year highs, though gold has remained steady. The unrest in Libya and a scheduled protest in Saudi Arabia later this week have kept markets on edge, and it is unlikely that price oil will pull back going into the weekend.
This morning is a bit of a mixed bag. As stocks are higher but the rest of the market, forex included, shows risk aversion.
In the forex market:
Aussie (AUD): Australian business confidence figures came in better than expected, yet the Aussie is pulling back on Dollar strength as oil prices retreat.
Kiwi (NZD): The Kiwi is surprisingly higher as reports are that the currency is “oversold”. While likely the case, it doesn’t change the fact that the RBNZ will most assuredly lower rates tomorrow, and the economic detriment to the economy as a result of the earthquakes is likely to shave 1.5% off of GDP. (Click chart to enlarge)
Loonie (CAD): The Loonie is mostly lower as oil prices are pulling back ahead of the housing starts figure that is due out later this morning. There is increased chatter about a housing bubble in Canada so this could be a harbinger of things to come.
Euro (EUR): The Euro is lower across the board as focus is returning to the debt crisis and the lack of clarity put forth by European leaders. Yesterday, Moody’s downgraded Greek debt yet again ahead of a bond offering. Things look better in Germany though, as factory orders increased 16% vs. an expectation of an increase of 15.6%. (Click chart to enlarge)
Pound (GBP): The Pound is mostly higher even though a gauge of retail sales came in worse than expected showing a decline of .4% vs. a gain of .7%. Conflicting reports on home prices and sales have canceled each other out as the market is waiting on the rate policy decision on Thursday.
Dollar (USD): No real news in the US today aside from the fact that Congress can’t agree on a budget and we are teetering very close to a government shut down. But other than that “minor” complication, the Dollar looks to be rebounding.
Yen (JPY): The Yen is lower against all but the Euro as perhaps safe haven money flows are re-adjusting from over-weight Yen to move back to the Dollar.
As bad as the Dollar is fundamentally, it still has some life as situations crop up around the globe. At the end of the day, if stuff hits the fan then you want to own Dollars. Even if the value continues to decline.
There is still high risk in the market place, with the Euro debt crisis beginning to rear its ugly head again, and the unrest taking place in the Arab nations affecting oil prices. Inflation is still on everyone’s mind and the psychology behind it may thwart Bernanke’s attempts to revive the economy to levels previously seen.
US debt will also be a major topic of concern and it will be interesting to see if politicians in Washington can get a budget hammered out so that the government doesn’t shut down. Though the last time this happened, the fiscal restraint imposed set the US economy up for one of the best economic runs in its history.
So I expect to see a lot of range-bound volatility over the next few sessions and will trade accordingly.
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