The US dollar rally is running out of steam | Vantage FX Forex Market Wrap

Price action is very instructive and it appears that the US dollar is in need of a rest and consolidation after its recent strength. Markets have two types of consolidation – one is time and one is price.

During a time consolidation prices find a range trade sideways for a bit and then either move to the next level in the trend or reverse. Look at the Aussie in the 93-95 region recently.

The other sort of consolidation is a price consolidation where a move reverses when it runs into a wall of selling.

It is too early to tell which of the two the US dollar is about to have. But it seems clear, that for the moment at least, when it comes to USDJPY, EURUSD, AUSUSD and GBPUSD some reversal of recent fortune is upon us.

Indeed last night on currency markets the US dollar ran into a wall once again with the Yen up near 110 and the Aussie dollar down below 87 cents. Add to the rallies in these two currencies the strength in gold, Sterling and the Euro and we get a sense that the US dollar has run its course and is in consolidation mode.

How long or how far the rallies stretch is problematic but a consolidation appears likely.

This morning the levels of the big 4 are Euro at 1.2652, Yen at 108.75 – which is phenomenal all things considered – GBP at 1.6076 and the Aussie is back at 0.8761.

Indeed the truly remarkable thing about the US dollars fall overnight is that yesterday both the Japanese Finance Minister, Aso, and Prime Minister, Abe, seemed to imply that the Yen was not overly weak at the moment. At the same time German factory data tanked with the August release falling 5.7% – weaker than the already dismal prediction of a fall of 2.5% and a big shift from the 4.9% rise the previous month.

So, as silly as it seems fundamentally USDJPY shorts seem my favourite forex trade at the moment.

Turning directly to stocks overnight and it was an interesting response to the post-non farm payrolls spike with stocks unable to kick on.

So the Yen and Euro were stronger taking the Aussie dollar with them which suggests a lot of love and good news are already built into the US dollar. Positioning is as important as fundamentals in trader markets sometimes.

Turning to stocks overnight and at the end of trade in the US the Dow and S&P 500 were only off a little down 0.1% to 16,992 and -0.15% to 1,965 respectively. Early strength on the back of a solid lead from Europe gave way pretty quickly before the big indices recovered. The Nasdaq followed a similar path but was unable to claw closer to home with a fall of 0.46% to 4,455.

Europe’s stock market rally was a difficult one to fathom other than catch up to the US moves on Friday night which the price action of opening highs and then sell off over the day seems to confirm. At the close the FTSE 100 fell 0.55% to 6,564, the DAX dipped 0.16% to 9,210 and the CAC closed at 4,287. In Madrid stocks were 0.74% higher while in Milan stocks fell 0.4%.

Locally December SPI 200 futures rose 20 points to 5,296 but with copper up a few cents, iron ore back above $79 a tonne, gold up from the cycle lows of Friday and agricultural commodities stronger might help the market today.

In Asia the Nikkei just loves talk of a weaker yen and above 109 yesterday it shot 1.16% higher to 15,891. The Hang Seng, were the protests seem to be losing momentum, was up 1.09% to 23,315. Shanghai should open around 2,364 but without a major catalyst Chinese trade should be fairly quiet. In Japan however the the BoJ monetary policy decision announcement will be key to both the YEn and the Nikkei.

On commodities iron ore closed at $79.04 a tonne.Newcastle coal for December fell 15 cents to $65.55. Copper rose 3 cents to $3.03, Gold bounced back above $1,200 to $1,207 and silver was 3% higher at $17.34. On the Ags corn rallied 2.72%, wheat 1.36% and soybeans 3.18%.

Gold is up but a move through the recent lows would be catastrophic for the price.

On the data front today we have the BoJ and RBA interest rate decisions. Tonight sees the release of German industrial production tonight and then in the US the Redbook index is out.

Greg McKenna

NB: Please note all references to rates above are approximate

To learn more about Greg McKenna, read on here

Thank you very much for your comprehensive explanation of the current situation!

Gary Shilling had this to say on the strengtening dollar and also warns of Deflation.

“We believe that a ‘risk on’ investment climate still prevails, despite the many warning signs related to economic growth and financial markets here and abroad. So we continue our defensive stance towards equities and suggest Treasuries as a safe haven and beneficiary of possible deflation, especially in the Euro-zone, as well as the strengthening dollar.”

Great analysis , thank you Vantage