Dollar Yields to a Slumping Market

 |  Includes: ERO, FMCC, FNMA, FXF, UDN, UUP
by: Grace Cheng

Tuesday has been a day of whipsaw moves in the forex markets. The US dollar initially gained against other major currencies like the Euro and Swiss franc, but then slipped with relative ease as trading progressed into the American afternoon on cue from the slumping US stocks, as well as traders attempting to drive a Euro short squeeze.

US July housing starts came as just as the market has expected, dropping 11% to an annual rate of 965,000, following a 1.084 million pace in June. So even though July’s housing figures stood at a 17-year low, they weren’t the catalyst for traders to short the dollar.

Another piece of US data released Tuesday was the US producer price index which came in at 1.2% in July, doubled the 0.6% increase expected. Core PPI increased 0.7%, also doubled the market’s expectations. Wholesale prices are thus evidently on the rise, largely as a result of surging commodity prices in July; after all, crude oil reached a record high of $147.27 on July 11. Under normal circumstances, the US dollar would have been delighted at this sharp rise in wholesale inflation since it points to the direction of rate hikes by the Fed, but since inflation is a bane to a struggling economy, traders now may not perceive the sharp rise in PPI as manna from the sky.

On the topic of rate hikes, Dallas Fed President Fisher spoke Tuesday and maintained his hawkish stance, saying that the Fed may have to raise interest rates sooner than some expect. He said that “policy makers must remain poised to act if slowing growth fails to contain inflationary pressures.” He also expects US economic growth to “decelerate to a snail’s pace, if not completely grind to a halt, in the second half of this year.”

nearest hurdle lies around 1.4770-1.4800 and 1.4820. Should more stops get triggered above, we could see a short EUR/USD squeeze in action since the latest Commitment of Traders report showed that the net number of Euro shorts by hedge funds and the like have increased to a level highest since May this year.

The Euro is also getting some prop from Tuesday’s German Zew survey which revealed that economic sentiment for August rose to -55.5 from July’s -63.9, better than the -61.8 expected. Will light shine over the Eurozone again?

USD/CHF’s nearest support is around 1.0890-1.0910. USD fall could accelerate towards 1.0820-30 if crude oil continues to rise, as it is currently doing  after Venezuela said it would will propose an OPEC oil output cut in September.

Meanwhile, stocks of Freddie Mac (FRE) and Fannie Mae (FNM) continued to fall Tuesday after Monday’s heavy decline. Heavy decline is an understatement of the pair’s 20+% drop Monday after Barron’s wrote that the US Treasury may have to rescue these two mortgage titans with taxpayers’ money and that shareholders might get peanuts from the deal.

Economic Calendar For Wednesday:

Bank of Japan monthly report 0500 GMT

Bank of England minutes 0830 GMT

Canada retail sales 1230 GMT

Japan merchandise trade balance 2350 GMT