Overnight, the global equity markets traded in the red, lower on average by 0.5%, following negative Wall Street trading. The commodity markets staged a rebound of sorts, with oil and gold climbing by 0.6% and 1.5% respectively, and Treasury yields dropped close to four week lows. All of this is fundamentally USD negative, and would historically lead to a period of dollar based weakness.
That, however, is not happening at the moment. The reason seems to be the fact that the market cannot find any currency to buy if the dollar gets sold, with the simple analysis being that there is nothing out there right now that looks much better than the dollar. In periods of doubt, the easiest option is to consolidate, just sit tight and hold positions, and that is what the markets are doing with the dollar right now.
The one variable at the moment is the GBP. It looks as though a major player (central bank, market maker) is at work on the pound and there is a major distribution phase going on where prices are forced lower in sharp violent moves that have no real follow through and do not have the backing of the other major cross pairs. It is a pair that is very dangerous to be around right now, and following the Bank of England's inflation report that signaled no economic growth, unemployment increasing, recession looming, and inflation peaking at around 4.8%, it is understandable that the pound is out of favor.
Commentaries this week stated that this now was going to be a regional dollar strength or weakness story, that the greenback would not trade en-masse against the majors, but that the cross dollar pair valuations would come from business cycle comparisons and future growth forecasts. It seems that means that all of the price action is then contained to one or two days out of five and to one or two hours of movement split up over each twenty four hour period. The market moved currencies on Friday of last week by four times the daily average, and it seems that to compensate for that we are going to have four days now of going sideways.
The dollar is still in short mode when viewed on the weekly charts (and in dramatic short mode at that); however, the recent bout of buying is holding up well in this consolidation phase; the markets do not look to want to sell the dollar rally just yet. This week the markets will get to see U.S. CPI numbers that are likely to reveal inflation running at 5.1%, the highest read since 1991, and numbers that have allowed Fed Fund Futures contract traders to price in a 70% chance that the FOMC will raise rates by January 2009. The U.S. retail sales numbers are expected to decline, but the market seems to still be looking at growth coming from the U.S. in the next two quarters.
The fact that the Fed is the only central bank out of the majors with a chance of raising overnight interest rates this year clarifies why the dollar is shrugging off the fundamental negatives that would otherwise have the it getting weaker; there is no currency to sell it against right now with a much brighter looking future, in the near-term. The charts are telling us the dollar is overbought, and in this environment that is the way it may stay for a while.
Disclosure: No Positions.