Reply #37: dollar watch [View All]

[UpInArms]

http://quotes.ino.com/chart/?s=NYBOT_DX&v=i

Last trade 87.392 Change -0.356 (-0.46%)

Dollar Finds Firm Footing In Risk Aversion, Relative Rate Forecasts

http://www.dailyfx.com/story/topheadline/Dollar_Finds_Firm_Footing_In_1226535242687.html



The Economy And The Credit Market



After such an aggressive rally over the past three months, it is growing increasingly difficult for the US dollar to sustain its climb. Nonetheless, should the benchmark currency’s safe haven status gives way, there may still be strength to be had in interest rate expectations. This may seem counter-intuitive considering Fed Fund futures are pricing in a 90 percent probability that the December 16th meeting will end in another 50 basis point rate cut (and 10 percent that it will be 75bps) which would take the benchmark lending rate to its lowest level in over three decades. However, currencies move on relative speculation. While the FOMC may lower rates to levels plunged only by the BoJ in the last decade, there is no room for further cuts from there (whereas other central banks can still cut dramatically). What’s more, this aggressive policy puts the US well ahead of the financial crisis / recession curve.

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Euro, Pound Whipsaw After German GDP Figures Signal Recession

http://www.dailyfx.com/story/bio1/Euro__Pound_Whipsaw_After_German_1226573861741.html

The Euro would drop to as low as 1.2388 after the German GDP report showed that Europe’s largest economy had contracted 0.5% in the third quarter. The decline in growth followed a revised 0.4% in the second quarter verifying that the economy is in its worst recession in 12 years. The Euro’s slide was temporary as German corporate buying would send the single currency back above 1.2530 before finding resistance.

The ECB would follow the dour German growth report with a bleak monthly statement in which the MPC lowered its growth and inflation estimates increasing speculation that they will cut rates at their December 6th meeting. The growth estimate for 2009 was lowered to 0.3% from 1.3%, while the long-term inflation expectations are calling for prices to drop bellow the council’s 2% target. Indeed, French and Italian consumer prices eased in October by 0.11% and 0.6% respectively, validating the estimates. Credit Suisse overnight index swaps are pricing in 106 bps of cuts from the central bank over the next twelve months, which could lead to the Euro trading heavy throughout the remainder of the year.

The British pound saw similar price action to the Euro following the German GDP figures, dropping to as 77 month low of 1.4806. The Sterling would also bounce from support ending a 600 pip decline from yesterday. The freefall which started with the BoE’s dour quarterly inflation report where the MPC considerable lowered interest rate expectations and left the door open for a possible (ZIRP) zero interest rate policy. If the central bank continues to cut rates aggressively the Pound could sink below 1.3000 in early 2009.

The upcoming U.S. trade balance report is expected to show a narrowing of the deficit on the back of declining oil prices. Although the anticipated -$57.0 billion deficit would be the smallest in six months, the positive fundamental data doesn’t figure to have an impact on the dollar as risk winds continue to dominate its direction. Asian and European stocks continued the slide that started yesterday in the U.S. following Hank Paulson’s announcement that the focus of the TARP would change from buying toxic assets from banks balance sheets to relieving pressures in consumer credit in areas like credit card debt, auto loans and student loans. If the uncertainty of the impact of the new focus of the TARP continues to trouble investors then the dollar may continue to benefit from safe haven flows.

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