[B]One of the most important takeaways from this week’s activity is that arguably long overdue dollar correction is becoming convincing. [/B] What had begun as choppy consolidation has morphed into an outright correction. The euro is having its best week in nearly a year, gaining a bit more than 2% against the greenback over the past five days. There have been several factors that have pushed traders to alter their position, which had been widely recognized as overbought (with reference to the dollar). The news stream has generally improved for Europe and even when the news turned less favorable, the die had been cast, and momentum traders were being forced to the sidelines. During the week, Spain was able to successfully issue all the paper it wanted to release. Although Spain had to pay up for it, the fact that its long dated bonds were absorbed relatively smoothly by the market helped strengthen the euro’s recovery. At the same time, the economic news stream from the US has generally disappointed, beginning with the employment data and running through the retail sales and Philly Fed survey. Indications from the options market would also suggest the correction has more room to run. The 3-month implied volatility has slipped to 13.5%, the lowest since mid-May and also appears headed lower. At the same time, the premium investors are paying for euro puts over euro calls has fallen to its lowest level since early May and a further decline looks likely. The Swiss franc appeared to lead the euro and the SNB’s upwardly revised forecasts for growth and inflation, signaling the end to the deflation risks (and therefore QE) helped the franc gain 3.6% against the dollar.
[B]The equity markets displayed a strong performance this week with the S&P 500 Index climbing 26 points[/B] or 2.4% to close the week at 1117. The benchmark index easily moved through the 200-day moving average, which had acted as strong resistance until this week. The correction of the dollar was the impetuous for the strong returns, which could continue into next week.
Analysis provided by Exto Capital