Forex Blog

This morning markets are looking to take back some of yesterday’s losses as Dollar weakness is driving risk appetite.  But is this merely a technical bounce, or a continuation of recent trends driven by Dollar weakness.  The thesis I put forth yesterday was that the Dollar would continue to strengthen going into this weekend’s G-20 meeting, as US officials want to attempt to shed the label of currency manipulator.

In my opinion, this is a short-term bounce and we could see continued Dollar strength.  Today the market is waiting on the Fed beige book this afternoon, which will show the state of the economy.  So it looks like the market is expecting the QE2 talk to continue but they may back away ahead of the G-20 which could induce some Dollar strength.  Also, US corporate earnings have been strong, though on declining revenues.

In the UK, the BOE minutes came out and showed a slightly dovish stance, which should keep the Pound weak in the near-term.  Additionally, the UK budget cuts were revealed today with a plan to eliminate the budget deficit through job cuts and bank levies.  How this plays out is anyone’s guess.

Meanwhile in the EU, German PPI figures came in slightly higher than expected, showing signs that mild inflation is steady.

As a result, the market is starting the day in classic risk taking mode, with stocks and commodities higher and Dollar weaker.  However, the Fed’s beige book could change this sentiment later today.

In the forex market:

Aussie (AUD):   The Aussie is higher on risk appetite and it is being reported that the market thinks the RBA could raise rates next time around, though I didn’t get that feeling from the release of yesterday’s RBA minutes.  While the Australian economy is still strong, the global economy is still fragile.  (Click chart to enlarge)

Kiwi (NZD):   The Kiwi is also higher on risk-taking and will continue to trade on risk themes this week.

Loonie (CAD):   The Loonie is mixed as risk appetite and higher oil prices are pulling against the negative forces due to the pause in rate hikes and the reduced Canadian economic outlook.  However, Dollar weakness is driving the market at this point.

Euro (EUR):  The Euro is higher taking advantage of its “anti-dollar” status benefiting from greenback weakness.  German PPI figures came in slightly higher than expected which is seen as positive.

Pound (GBP):   The Pound is mostly lower although higher vs. USD as the BOE minutes showed a slightly dovish stance going forward, and the budget cuts announced could force the BOE to ease further if the economy slows too much toward the end of the year.  (Click chart to enlarge)

Dollar (USD):   The Dollar is weaker today as the market is expecting the Fed to continue the QE2 rhetoric in its release of the beige book report today.   However, my own belief is that recently the Dollar has fallen too far too fast and that if indeed they do want to ease further at the next FOMC meeting, they most likely won’t telegraph that today.  If they do continue the easing rhetoric, then I expect they may not actually ease going forward.

Yen (JPY):   The Yen is mixed today as Dollar and Pound weakness offset risk appetite in the market.  Should Dollar continue to weaken against the Yen going into the weekend, we could see some sort of intervention-type action take place early next week.

A dead cat bounce is a brief recovery from a major price decline and in my opinion yesterday may have been the start of a reversal in the Dollar weakness trend.  While Dollar weakness has been driving global markets, it cannot continue to weaken forever.

Already economies around the globe are crying foul, as emerging markets are seeing inflation (exported from the US naturally) and currency gains which could threaten their stability.  This comes ahead of the G-20 meeting this weekend, where currency movement is likely to dominate talks.

How can the US chastise other countries for currency manipulation, when the US Fed might be the biggest manipulator of them all?  Right now we are at a tipping point, where currencies have pulled back from recent highs against the Dollar, so the question must be asked if this is a temporary condition, or a short-term reversal?

Many are saying that the US wants to weak Dollars to encourage our exports; however I think the plan is to encourage inflation.  This is a dangerous proposition which could get completely out of hand as the global economic marketplace can now move in speeds unfathomable in Bernanke’s textbooks.  With a potential shift in the political landscape coming soon, I expect Bernanke to play it close to the vest.

This means we could see some Dollar strength and some range-bound trading at these levels.

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