The dollar was higher against major currencies last week with the exception of the yen. The greenback was initially supported by safe haven buying on the heels of rising sovereign debt yields from Italy and Spain. Also helping were U.S. CPI figures for October that were released at 0.1%. The lack of inflation caused commodity prices to fall (especially precious metals – more on that here) and led to nice USD gains against the so called “commodity currencies”; AUD, CAD, NZD, and NOK. Even better than expected U.S. Housing and Employment data last week failed to create much risk buying.
US is celebrating Thanksgiving this Thursday. As a result, U.S. economic reports are being pushed up a day with the FOMC Minutes released on Tuesday rather than usual Wednesday, and Initial Claims date on Wednesday. Looking ahead, we are watching the commodity currencies. The AUD/USD has fallen 8.0% since October 27th while the USD/CAD has risen 5.0%. Interestingly, the moves have occurred after the Bank of Japan intervened in the market and sent the USD/JPY jumping from 75.50 to 79.00. As a result, Forex traders appear to be factoring greater volatility in their positions and could be searching for better opportunities elsewhere. Alternatives are buying high dividend paying blue chip securities, or bargain hunting among beaten down European corporate bonds. If the above is what is driving the rotation out of riskier currencies and back to the dollar it could have legs to continue. It’s worth pointing out that even after trading over 11% below its 2011 highs, the AUD/USD is still comfortably above its 2009 low of 0.6200.
Rising borrowing costs for Spain and France along with 7.0% yields for Italy sent the EUR/USD lower to start last week. After failing to hold above 1.3500 support, it quickly fell to 1.3400. News that Italy’s new PM was able to form a wide reaching coalition with agreements on budget cuts also failed to attract much attention. Nonetheless, on Wednesday and Thursday, even as risk selling was hitting the overall markets, the EUR/USD managed to find buying interest and trade back above 1.3500. The growing demand eventually led to a move above 1.3600 on Friday. The EUR/USD failed to hold the 1.3600 figure but does appear to have solid support at 1.3500. Looking ahead we are watching the 1.3600 figure. If the pair can trade and close a day above this level it will signify a bullish technical accomplishment and could lead to further upside until 1.3760 resistance. Overall, fundamentals continue to be weak for the euro as the ECB doesn’t seem to have many choices other than printing more money, but over the short term we would be buyers of the EUR/USD as long as 1.3500 support holds.
Last week’s U.K. inflation data was as expected with CPI registering 5.0%. We mentioned last week that the key to trading the GBP/USD was to watch trader reaction to the CPI data. Unlike in previous weeks where the pound found buying support following weak data, last week the GBP/USD was hit with selling. Overall, once 1.5900 support failed, it triggered selling pressure to 1.5675. This week, Forex traders will be awaiting Wednesday’s MPC Minutes and whether any Bank of England members favored increasing to the bank’s Asset Purchase Program. SwiftTick is also watching the 1.5900 figure. After last week’s fall we would be sellers on any rally above 1.5865 with stops at the 1.5925 level.
The week began with Japanese Finance Minister talking up further intervention plans. The rhetoric caused the USD/JPY to briefly trade as high as 77.50 before returning to 77.00 and eventually falling to 76.70. The FM’s remarks follow the usual cycle of Japanese officials where they will try to weaken the Yen with statements before eventually intervening. As a result, trading the USD/JPY has become a game of hot potato. Everyone knows its heading lower, the only question is when intervention will occur and spike the pair higher.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.