Dollar Rally Stalls As Markets Ponder - What's Next?

[DailyFx]

EURUSD recovered some of its losses in overnight European trade after an article in Financial Times



Talking Points
• Japanese Yen: Breaks 105.00 as equity price bounce and financials soar
• Euro: Bounces back to 1.5850 as dollar fears return
• British Pound: Above 2.00 for most of the night
• US Dollar: Jobless claims, housing Philly Fed all on tap

Dollar Rally Stalls As Markets Ponder – What’s Next?


EURUSD recovered some of its losses in overnight European trade after an article in Financial Times indicated that Sovereign Wealth Funds in the Middle East were continuing to pare their dollar long exposure. Kenneth Shen, head of the strategic and private equity group at Qatar Investment Authority, noted that “the outlook for the US dollar is a significant issue for investors contemplating US-related investments.”

More troubling was the suggestion in the article that China’s State Administration of Foreign Exchange (SAFE) has been looking to strike deals with private equity firms in Europe as a part of a strategy to reduce its dollar holdings. Chinese have been key buyers of dollar denominated fixed income instruments including bonds from the Fannie and Freddie Mac. Should their appetite for US securities suddenly wane, the greenback could see further selling as fears over financing of US Current Account deficit will resurface once again.

On the positive side the drop in oil below the $135.00 level has been a huge boon for the dollar and US equities and should crude continue to slide towards the $130/bbl mark, the greenback is likely to see more gains in the North American session despite lingering concerns about the stability of the US financial system. With little meaningful news on the calendar, the currency markets continue to be driven by macro rather than micro themes, as oil and equities dominate trade in FX.

Nevertheless, the start of North American session promises to bring more interesting economic data for traders to consider as jobless claims, housing reports and Philly Fed all hit the screen. Jobless numbers are an important barometer of economic health as labor markets will be a critical factor in determining whether the Fed will be able to raise rates this year or not. Last week’s surprising drop to 346K was attributed to seasonal adjustments, so market participants will focus on this week’s data with particular attention. Any print above 400K will once again raise concerns about deteriorating labor markets, while anything close to 350K could provide the greenback with a much needed boost.
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