Dollar Falls on Risk Aversion & Durable Goods

Dollar extends weakness in early US session after a shockingly poor durable goods reports.
Better than expected consumer confidence and existing home sales may give dollar a brief breathe but risk remains on the down side. Headline durable goods orders dropped -7.8% yoy in Jan, following a downwardly revised 2.8% rise in Dec. Ex-transport orders was down -3.1%, with core capital goods orders down -6.0%, the worse in this category since 2002. Feb Conference Board Consumer Confidence rose to 112.5, beating expectation of 110.0. Jan Existing home sales rose more than expected by 3.0% to $6.46M annualized rate.

Dollar has been pressured throughout the day, in particular against the Japanese yen which continues to rebound strongly across the board. Comments from IMF Managing Director Rodrigo de Rato on the risk of yen carry trade to global imbalances was one factor. However, we believe the risk aversion is the main driving force in the market. In particular, with Swiss Franc’s strength considered as displayed in EUR/CHF’s sharp decline. On the one hand, there are geopolitical risk due to Iran’s nuclear program and continued speculation that the UN will harden the sanctions for ignoring the calls by the Iran to halt its uranium enrichment. On the other hand, the sharp 9% crash in China’s Shanghai Composite index , largest one-day decline, should have triggered money flow back into the yen that fueled the strong rally too.

Released earlier, the M3 money supply aggregate targeted by the ECB increased 9.8% yoy in Jan, same as growth rate in Dec after upward revision from 9.7% to 9.8%, beating expectation of 9.5%. Three months average surged much higher from 8.2% to 9.7%. The M3 growth is still consistently above ECB’s target of 4.5% since Jun 01 showing no sign of moderation yet. Such development will underpins opinion that ECB will have two or more rate hikes in 2007.


Daily Pivots: (S1) 1.2279; (P) 1.2305; (R1) 1.2325; More.

USD/CHF’s fall from 1.2436 extends further to as low as 1.2204 so far, breaking through mentioned 1.2268 resistance turned support. At this point, intraday bias remains on the downside and further decline is expected to follow towards 61.8% retracement of 1.1878 to 1.2571 at 1.2143. Touching of 1.2258 minor resistance will turn intraday outlook consolidative first. But still, as long as recovery is limited below 1.2331 resistance, further decline is still in favor after brief consolidation.

In the bigger picture, previous break of 1.2374 support should have completed a head and shoulder top formation (with ls: 1.2547, h: 1.2571, rs: 1.2550) and should be an important indication of reversal. Firm break of 1.2268 resistance turned support confirms that the whole rally from 1.1878 has completed after failing to break through mentioned medium term falling trend line (1.3283 to 1.2760). Also, weekly MACD will still be kept negative with daily MACD staying below signal line. This suggest that whole down trend from 1.3283 is still in force. In such case, deeper decline should be seen towards 61.8% retracement of 1.1878 to 1.2571 at 1.2143. Break will encourage further fall to retest 1.1878 low.

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