Will The Dollar Rally Continue?

  • September 7, 2004
  • Dave Floyd

 

Will The Dollar Rally Continue?

Did Friday’s job’s number
finally provide a clear path for future FX movements?  At first blush the answer
is yes, and with most market participants coming back from holiday this week, we
should expect that positions will continue to be built in the direction of the
prevailing trend, i.e. dollar longs. 

So far Labor Day has left FX
markets quiet as there is no New York market to pick up where London has left
off.  Nonetheless, a solid rally in the Yen on the heels of the biggest rally in
the Nikkei in 3-months has bucked the overall dollar bullish scenario. 

IMM data shows that as of last
week EUR/USD speculative longs were still in abundance at 49K contracts, given
that data, further EUR/USD downside is still possible.  A break of 1.1988 will
be key to seek out lower level’s as this would be a break of a 3-month head &
shoulders formation. 

 























 

Additionally, Fed Chairman Alan
Greenspan will testify in front of the House Budget Committee on Wednesday, and
we believe his comments are likely to further convince the market of the Fed’s
intentions to continue pushing higher towards a neutral rate at a steady pace.
This may provide some further near term support for the USD, but I don’t see EUR/USD
being pushed lower out of its recent ranges. Underlying central bank demand for
the EUR around 1.1900-1.2000 remains good and with July’s US trade data out on
Friday, the market will be reminded of the extent of US external imbalances.

It is widely assumed the
Greenspan will continue the upbeat comments regarding the recovery and the
market expects nothing different.  However, while the market knows that the
trade data on Friday cannot possibly come out as “good”, it can only be better
than last month’s.  That being the case; look for some dollar selling after
Greenspan.

The AUD/USD and NZD/USD also
fell victim to the dollar rally on Friday and have yet to show a meaningful
bounce.  Rate differentials are contracting, adding little appeal to these
currencies.  The RBNZ will meet this week and the market has priced in a 25 bp
rate hike.  However, with comments last week from RBNZ Governor Bollard
regarding a softening of the property market, a further 25 bp hike by years end
seems unlikely despite the market pricing that in.  We will wait for comments
from the RBNZ this week in order to determine the best course of action. 
Depending on what is said, a long in AUD/NZD may be a good play.  Technically,
it is a very poor set-up, but a significant change in the rate and macro outlook
will begin to change that.

 



 

 






 

Technical Notes:

EUR/USD: 
if there can be one negative seen on the bearish EUR view it is that the move
lower from the break of the weekly bull trend line (1.2225) has not extended
substantially.  Weekly momentum is waning.  Given our current short in EUR/USD,
we must remain vigilant to short-term models as a way to trade a potential
trading range.

Dollar Index: 
Daily and weekly momentum remains bullish, but a break of 89.74 and 90.05 will
be needed to sustain further upside.

10-Year Notes:
Yields pushed much higher on Friday tightening spreads between high yielders
such as NZD and AUD.  Recent empirical data suggests a close inverse correlation
between 10-year yields and movements in AUD and NZD in particular.  4.35% will
be a key resistance level, but with weekly momentum turning higher, a test is
likely.

As always, feel free to send me
your comments and questions.


Dave

 

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