U.S. Session Buzz: Big Week, Big Dollar

Includes: DIA, GLD, SPY, UDN, USO, UUP
by: The LFB

The commodity markets are moving lower on Tuesday, with gold and oil off by 2.0%, (three times the average daily moves) and that is allowing the Usd to get stronger. Global equity markets are trading in the red by around 0.5% (the average daily move), and Wall Street futures numbers have just move above fair value, indicating a slightly positive equity start to the day.

Lender of Last Resort. Right now the market seems to be looking at the fact that the Federal Reserve is going to stand as the lender of last resort in their backing of the credit-crisis related debt, and as such are happy to buy U.S. denominated debt instruments as risk aversion takes a hold. It seems that the dollar may be the best of a bad bunch in regard to sentiment and forward momentum right now. Any new orders at this time to short the major pairs, and buy the dollar may need to be with half the regular number of lots; we need to be very aware that however solid the short chart signals are that sentiment has a way of reversing very quickly sometimes.

Big Economics.
This is a big week of U.S. economic data that has to get traded into Usd valuations, it includes the consumer confidence numbers, along with durable goods and gross domestic product numbers. The GDP numbers are the ones that may halt the dollar buying in the near-term; the value of all U.S. goods and services are expected to increase from 1.9% to 2.6%, a huge move higher that really may be very easy to miss in the current environment. Tuesday will provide a big day of economics for the markets to absorb; we have already seen Swiss consumption, U.K. mortgage approvals, and three sets of Euro-zone releases that have all painted a picture that reflects slowing regional economies. The real test today will be whether the U.S. can counter that with some robust news of its own, and that answer may come from the Housing stats at 10:00 EDT, followed at 14:00 EDT by the FOMC minutes of the last rate meeting. Neither U.S. release is expected to reveal economic strength.

More Fed Debt. The Federal Reserve has a huge auction of new 2 and 5 year debt on Thursday, and the increased flow of Treasury notes may decrease the yield paid on existing bonds. Right now 10 year yields from the Fed are paying out 3.78%, that is well below the U.K. (4.50%), Germany (4.11%), and French (4.30%) government bond rates, and a long way from Australia's yield of 5.77%. At some stage this week, with more U.S. notes being printed, the interest rate differentials may weigh on Usd buying, unless that is the Fed indicate that they are about to increase those interest rates. A rate increase by the Fed looks to be already priced in, but even if the other regions cut rates there is still a big difference between U.S. and global yields. That can only be ignored for so long, and as such we need to be very aware that the 'Buy the Rumor' part of the 'Buy the Rumor, Sell the U.S. rate increase News' may already be in place. Just a note that these moves may need to see some solid fundamentals if they are to make the next leg lower on the major pairs. 

Fed Rate Increase. The market is only pricing in a 10% chance that the FOMC will raise rates at their September meeting, and have reduced substantially their expectations for an increase anytime before 2009. Currency valuations are set from forward growth assumptions and interest rate outlooks, and right now no regions globally have excessive growth. The Usd is getting bought on the rumor that the Fed will raise rates as other regions are cutting, and at these dollar index valuations the Fed may need to keep talking of a robust economic outlook going into 2009. If the economics this week do not back the talk of growth and expansion the dollar buying may slow down.

The Trade Imbalance. The exporting regions, Euro-Zone, Japan, Australia, Canada, will be more than happy with a lower Usd as it reduces the cost of their exports to the U.S., it also however puts pressure on the U.S. trade imbalance that even with a recently weak dollar, is still running at historical deficit levels. That too may work its way into valuations over the course of the coming weeks. The technical signals have confirmed again today that the market is still buying dollars, and that will take a lot to reverse at the moment. This week could fundamentally reveal the ability to hold, reverse, or add to those signals.