The dollar rallied across the board last week, as the continuation of the debt crisis in Europe as well as reports of slower Chinese economic growth sent the “safe haven” higher. This occurred even though U.S. data showed a huge downward revision on 3rd quarter U.S. GDP data from 2.5% to 2.0% growth, as well as the FOMC Minutes indicating that further dollar devaluating easing policies may occur. So why is the USD any “safer” than any other major currency? Being the world’s greatest funding source means the USD gains during times of deleveraging. Therefore, it's not that the USD is any “safer” than anywhere else as much as riskier trades are being closed and cash being increased. This has been especially seen in “carry trade” currencies such as the AUD where Forex traders were aggressively exiting their positions.
Regardless of the above, the USD will be vulnerable to selling pressure if the FED embarks on another round of aggressive quantitative easing. During QE2, the EURUSD rallied from 1.2900 to 1.4900 in a span of four months. As such, this week’s coming slate of important U.S. economic data will put the USD in focus. This week we get housing data on Monday and Wednesday, and Consumer Confidence numbers on Tuesday. Following record Black Friday sales, Forex traders will be interested in seeing how the Confidence levels were going into last week’s sales. The week ends with the always anticipated Non Farm Payrolls figures on Friday. With four straight sub 400,000 weeks of Initial Claims, Forex traders will be expecting a solid Non Farm Payrolls report.
The debt crisis officially hit Germany, as yields on 10 year debt rose above that of the UK. At 2.1%, yields continue to be amazingly low, but the lack of demand in last week’s German debt auction revealed that investors are becoming weary to any EU investments. The small decline on prices of German debt overshadowed Portugal’s debt being cut to junk by Fitch. Overall, the EURUSD fell throughout the week dropping from 1.3500 to just above 1.3200. The big question now for Forex traders is whether the ECB will take a bigger role in the debt crisis by purchasing sovereign debt on the open market. The idea has been hotly debated within the EU with France backing the initiative as a means to prompt bond price and assist the region's banks. Germany on the other hand has been against the proposal. For Forex traders, any news of asset purchases by the ECB could send them selling the Euro further down. As for technicals, the EURUSD has long term support at 1.3150, which could limit further losses. Nonetheless, if rising debt yields fail to stabilize, it could easily trigger a move to the 1.3000 figure.
There were no major surprises from last week’s MPC Minutes or Preliminary GDP figures. Nonetheless, the GBP still fell against the USD as it wasn’t immune to overall gains in the greenback, and fell over 200 pips on the week. However, we could see pound GBP demand rise if sovereign debt buyers begin to rotate funds that were earmarked towards German and French debt flow to U.K. Gilts. In order to avoid being exposed to further dollar strength, one possible way to take advantage of such GBP strength would be to short the EURGBP. At just below 0.8600, the pair has bounced off the 0.8500 levels since August. But, it looks vulnerable to a breakdown to the 0.8200 level if it can close below 0.8500.
The Yen fell against the dollar last week as the S&P warned that it may cut its rating on Japan’s debt (yields actually dropped on the news – Germany is probably wishing they could cook up a deal like that). As a result, the USDJPY closed above 77.50 last week. We mentioned on Friday that passing the 77.50 resistance could set the USDJPY rolling for a move above 78.00. Looking ahead the continuation of the move will probably lie in the fate of this week’s coming U.S. employment figures as a weak Non Farm Payrolls figure could send Forex traders back into the Yen.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.