Could Dollar Find Its Footing This Week?

[DailyFx]

- Australian Dollar: Employment strong but housing contracts
- Japanese Yen: End of Golden week see no pick up trade
- Euro: German Factory Orders
- US Dollar: Consumer Credit on tap


Could Dollar Find Its Footing This Week?
A very quiet night of trade as London takes a holiday for Labor Day and Tokyo returns from week long hiatus of Golden Week. The yen saw a smattering of strength in Asia and early European trade as USDJPY traded below 120.00 level mainly on EURJPY selling. The minutes from the latest BOJ meeting contained no surprises, noting that adjustment would be "gradual". With Japanese economic data strictly 2nd tier all week long, yen bulls best hopes for a rally in the currency lie with the correction in global equity stock markets which would trigger another wave of risk aversion and force some liquidation in the carry trade. As the parabolic rise of the Shanghai index continues, PBOC Governor Zhou acknowledged on Sunday that a bubble in the country's stock market was a concern and said that the central bank was monitoring asset prices along with inflation. Therefore the probability of a pullback in Chinese equity index grows stronger this week as Asia returns to work.
Little wonder then, that Hiroshi Watannabe, Japan's Vice Finance Minister for International Affairs, known universally in the currency markets as "Mr. FX", tried to minimize any potential fallout from such a scenario by stating that "hasty unwinding of carry trade is unlikely." Japanese officials would like to orchestrate a slow appreciation of the yen, in order to control any negative impact on the country?s critical export sector. However, the history of carry trade unwinds almost always argues for sharp corrections that can shave 500- 1000 points from the exchange rate in a matter of days. Nevertheless, for now talk of carry trade unwind remains idle speculation as neither the Japanese economic data, nor the buoyant global stock markets have provided yen shorts with any reason to abandon their trade.
Meanwhile, the EURUSD hovered near the 1.3600 level after setting a record high last week. Despite the soft US NFP data on Friday, the pair continues to have trouble pushing higher as EZ data last week suggested that growth in the region may have already peaked while US data on the other hand shows no signs of an imminent recession. With positioning wildly skewed to the euro long side, the market may have overestimated the disparity between EZ and US economic prospects. If US data, most notably the Retail Sales report on Friday, shows moderate expansion, while this week?s EZ Industrial data falters as the result of the high exchange rate environment, the dollar could stage a rally correcting some of the overly bearish sentiment that has dogged the currency for the past month.