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FX daily Commentary

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Dollar Still Strong... But For How Long?

Mon, Sep 8 2008, 10:57 GMT
by Lena Manousarides

FXGreece

Market opening was once again a very interesting experience for all the currencies and especially carry trades, as most yen pairs opened above 300 pips form Friday close and EUR/USD above 1.43.
The reason for such abrupt moves was this weekend’s happenings, after US government took it upon themselves to help out Fannie Mae and Freddie Mac and once again tried to “save the day”. Treasury Paulson confirmed early Sunday that the decision was made to help the two big mortgage lenders after the big liquidity crisis that broke months ago. This event together with the new hurricane threat, were enough to put a dent in dollars exquisite Friday rally.

The Nonfarm payrolls proved to be a non event, after the very bad numbers showed what traders already feared: that US economy is heading to recession. The number was worse than expected at -84000, but what really surprised markets was the high percentage of unemployment at 6.1%. News was taken badly at first and therefore dollar was sold all across the board, but after an hour or so the familiar euro sellers emerged again and took the currency all the way down to 1.42.

It is now very clear how volatile and directionless the market is as we see choppy trading almost every day and a lot of fake breakouts at the same time. With all the problems that US economy and Euro zone is facing, it is natural that traders don’t really know in which currency to place their bets and that is why fundamentals and technical’s don’t seem to apply.

EUR/USD close at 1.4270 on Friday night, but the Sunday open found the pair all the way back above 1.43. The move found first resistance at 1.4380 and then this morning at 1.4430. Europe opening took it all the way down to 1.43 and at the time of writing the pair is visiting the gap at 1.4280. There are always euro bears ready to sell and if pair does not manage to close above 1.43 tonight then 1, 40 is still in the picture for the next few days. However a close above 1.4430 might start giving us the first signs that a euro reversal might be intact.

This week the economic calendar is almost empty from important economic releases, with US retail sales, pending home sales and PPI the only ones. These numbers will no doubt stir things up especially if retail sales print a very bad number. Other than that we have some important economic releases out of UK, with PPI, Trade balance and the Treasury committee hearing in front of the parliament. The hearing will be monitored closely by the markets for any signs as to how bad the economic conditions are in England and what the Bank of England is thinking regarding the next rate decision. Let’s not forget that the fact that BOE kept rates unchanged last week, shows that the bank still worries about the inflation but if CPI comes out very weak too then a rate cut might be the only solution.

EUR/USD is still trading below 1.43 and a clear break of 1.42 will probably put further pressure in the pair. Next support now lies at 1.4130 ahead of 1.41.

GBP/USD is trading lower too and reversed all last night’s gains from 1.79 all the way down to 1.7660. A clear break of 1.76 will open the way to 1.75 a good support level for the time being.

Today the two day OPEC meeting starts in Vienna and traders will follow any comments of the officials regarding the recent oil slide. At the end of the meeting there will be a press conference and the outcome will be crucial for oils direction. At the moment of writing oil is trading above 107 and it will be interesting to see if 100 level will be seen this week. Analysts believe that the price of oil might stabilize around 110-120 for the next coming months however the direction will be influenced from any political or geopolitical events.

Let's see how New York reacts after today's opening and most importantly if EUR/USD will finally find a good base for the long waited correction. Most likely the pair will continue to slide towards 1.40 until a correction happen, but first the pair needs to take out 1.42 and close today below that level...

Published on  Mon, Sep 8 2008, 10:58 GMT