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US Dollar Recovery Economic Data Hopes

May 06, 2011 8:11 AM ET
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US Federal Reserve Open House Sale

The Greenback Recovery Hopes Hinge on Coming Economic Data David Frank, Chief Analyst , Ava FX

A dovish Federal Reserve and fresh multi year highs in the DJIA Average have sunk the US Dollar to new lows against the Euro and other key counterparts. This is leaving few hopes of any kind of sustained greenback recovery.

Traders show little interest with the current low yielding US Dollar positions, and indeed Commitment of Traders data showed non commercial traders at their most short greenback since the Euro traded towards 1.60 in 2007. Last week's rise with the Euro towards 1.500 helped confirm this. For more on the Euro, click here.

Currently, the greenback remains a speculator's favorite. Why? Record low interest rates and little risk of US Fed rate hikes through the foreseeable future. The next couple of weeks will be busy for US economic events and international central bank rate decisions which could shape market forecasts for future yield spreads and force major moves across key currency pairs.

US Dollar Index

US Dollar Index

Markets expect that this coming Friday's US Nonfarm Payrolls data will show the US added 200k jobs in April. This will be roughly in line with March figures and reflective of modest growth in employment. Still, a wide range of economist forecasts emphasizes that anything could happen. Further, any significant upward surprises could have similar effects on US FOMC rate expectations.

US Dollar risks arguably remain to the upside ahead of the release. It is difficult to envision a significant deterioration in Fed rate expectations on a disappointment, while above forecast results could boost lackluster monetary policy expectations. Earlier ISM Manufacturing, ISM Services, and ADP Employment data should shape sentiment heading into the potentially critical Nonfarm payrolls report.

We will likewise look to European Central Bank, Bank of England, and Reserve Bank of Australia interest rate decisions to potentially shift rate expectations and spark larger moves across global financial markets.

Overnight Index Swaps predict that the US Fed will raise interest rates by a meager 31 basis points in the coming 12 months. ECB predictions stand at a relatively robust 75bps, and the prospect of widening rate differentials has without a doubt boosted the Euro through recent trade. All three banks are expected to leave rates unchanged, but markets will monitor post announcement rhetoric from each the ECB, BoE, and RBA for clues on future decisions.

Sharp downward momentum and bearish market sentiment leave dollar risks to the downside through the coming week of price action. Yet steadily rising volatility expectations warn of tensions below the surface.

As the third lowest yielding world currency, the US Dollar has become a favorite funding currency for the Global FX Carry Trade. If the Dow Jones and other key 'risk' barometers continue their seemingly unstoppable rallies, we might expect the greenback to move lower.

Going forward, traders should keep a close eye on 'risk' in a potentially pivotal week of price action. Heavily one sided USD short positions suggest that the greenback could gain substantially on a deleveraging across the global financial markets.

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