IFXA

Dollar Takes Heavy Blow From Drop in Consumer Confidence but Remains Standing

“The Conference Board issued today one of its most alarming reports on consumer confidence in 40 years of data, results certain to push stocks, the dollar and Treasury yields lower. The results will also complicate debate at the ongoing FOMC meeting, making it harder for policy makers to assure the nation that the economy will soon improve and that inflation pressures will cool.

But the worst news in the report is a true spike in inflation expectations, up 7 tenths in the month alone to 6.8 percent — a record level matched only after Hurricane Katrina in 2005. CPI data may not being showing much pressure but consumers are saying clearly that inflation is on the rise. The results even include a 30-year low for vacation plans, no doubt reflecting the weak dollar, which raises the cost of foreign travel, and high gas prices which of course raise the cost domestic travel. Also, some consumers may be looking for work and can’t spend the money or time on travel. Buying plans for homes fell 1 full point to 2.4 percent for the latest bad news on the housing sector.” -Econoday

Despite this news the dollar gave way to Euro only briefly after the report and settled back to pre-announcement levels. Considering the past six months performance, the greenback’s ability to shrug-off this very negative report (seemingly with ease) is reason for alarm in itself. At the time of this report EUR/USD is now testing 1.5550 and seems like it will have the momentum to do so. Dollar bears have been frustrated in the past few sessions, the question is whether the other shoe is about to fall. ProSticks readers have been rewarded very handsomely for the Euro short position from 1.60. Last night’s ProSticks report suggested that profit-taking ahead of the 1.5450 is an option, but taking that out , swiftly drifts down to daily kumo lower band which coincides with weekly ichikumo slow line at 15150.

This week will be the true test for the dollar as a virtual minefield of US data is set to be released starting tomorrow.  Overnight German unemployment numbers are set to be released and while expected to remain unchanged will be closely watched, especially after the impact of the IFO survey last week. The dollar seems to be building a tolerance for negative US economic news while the Euro is experiencing growing sensitivity to poor EuroZone data.  The direction of the dollar is surely going to get more clarity by Friday afternoon.  Are we having fun yet?

Euro Likely to Consolodate in Range. Dollar Surging Against Yen

After making an overnight record high, Euro will likely trade in choppy ranges and most traders I spoke with said that they expect very choppy price action with some analysts suggesting that Euro could retrace several big figures down in the next few weeks. In ForexTV’s AM Forex New York, Brown Brothers Harriman Senior Currency Strategist Meg Brown says that while momentum is still in Euro and will likely test 1.60 again within the session, a failure to break that mark within a week could trigger a sharp correction of “2-3 big figures.” However, as reported in last night’s ProSticks technical report, it suggested a 1.65 level within weeks.

Dollar continues to gain on Yen due to risk factors but rapidly approaching technical resistance at 102.60.

Inflation Woes Drive Market Direction

“Overall producer price inflation in March came in red hot although the core rate remained moderate in the latest monthly number. The overall PPI jumped a sharp 1.1 percent, following a 0.3 percent gain in February. The March increase was far above the market projection for a 0.5 surge in the overall PPI. The core PPI rate eased to 0.2 percent, following a 0.5 percent spike the month before and matched consensus expectations…The March PPI report shows that the Fed still needs to worry about inflation and will bump up interest rates. A stronger-than-expected Empire State survey will also firm rates. Equities will still likely wait on key earnings reports,”

Meanwhile, TIC data show that net long-term inflows were up in February to a robust $72 billion vs. 57.1 billion in January. This is surprising considering the weakening dollar and low yield interest-rate environment. The data is a positive for Dollar bulls and presages that smart money is hedging a swing in momentum that may lift the US economy in the intermediate term.

On the negative side the PPI data coupled with little or negative growth supports the stagflation camp and spells trouble for the already beleaguered dollar. As I indicated in my April 1 post, I think the US economy is starting to make a move towards recovery. “Lehman Brothers Holdings Inc. Chief Executive Dick Fuld said on Tuesday the current market environment should remain challenging, but added that the “worst is behind us,”" according to Reuters. With a serious of stimulus packages yet to be factored into the equation I believe that dollar will be poised to recover to the 1.45 level by mid-summer. The EuroZone is showing clear signs of stress as I have predicted and today’s ZEW report show deep concern on behalf of German Economists. French inflation figures were not good and will likely deepen with food and energy cost spiraling out of control.

Short-term this is a very volatile situation with many of the fundamentals showing conflicting signals, and the technicals also showing no clear trends.

Price Action Brutal in Asian and Early European Session

As I left off my last post, “expect volatility” who could have imagined? USD/JPY broke strong resistance into the mid 103.50’s and continues to strengthen into the North American session along with euro weakening on hopes that the credit debacle have reached its peak. Large European banks reversing positions in the Early European session pushing Euro well below recent highs and breaking below the 1.58 level. Expect the unexpected today.

Dollar Support Rhetoric Escalates at G-7

One thing that most pundits agree on is that any intervention aimed at supporting the dollar would have to be a coordinated effort of the G-7 Central Banks and Government Ministries. In what amounts to monetary policy saber-rattling, G-7 officials emerged from the Washington summit solidly united behind a strong dollar policy. In reality, no one is stepping-up to actually extend an arm to catch the falling knife that is the US Dollar. It is one thing to talk about it; it is a completely different and rare event to actually pull off a coordinated intervention.

The battle of words comes at a time when dollar is seeing almost monthly historic lows and flirting with some very significant technical levels. Dollar supporters have managed to help the greenback recover some lost ground in the past few days, but there is simply not enough fundamental support in the economic cycle to support the dollar in the immediate future.

the EUR/USD trading range is narrowing and is very volatile. It is hard to believe that the G-7 would blow so much rhetoric without a back-up plan in the likely event that dollar resumes it’s slide within a week. We are in uncharted territory. A close above 1.5870 is likely to start the next leg up significantly.