The US dollar firmed for the first day in five, as a pullback in the Euro and Canadian dollar boosted the greenback on a trade-weighted basis. The Euro was initially able to set fresh record highs of $1.4161 on the overnight session, but a later retracement suggests further corrections may be necessary before a resumed rally. Traders allowed the US dollar to recover despite fairly disappointing domestic Durable Goods Orders data.
Increasingly overstretched speculative positioning will make it difficult for the Euro to press higher without short-term unwind of EUR/USD longs. The story in the Canadian dollar remains similar, but it serves to note that Loonie bulls have thus far been able to defend technical support of C$1.0100 against the US dollar. The British Pound has likewise declined against the greenback, but our own Technical Analyst Jamie Saettele believes that a short-term GBPUSD rally is likely. Risks to this outlook include a downturn in the US Dow Jones and S&P 500 Indices, with an afternoon drop allowing the Japanese Yen to retrace half of its daily losses.
Economic data out of the US economy was partly blamed for the late wave of stock market weakness, with Durable Goods Orders falling below consensus forecasts for the month of August. The headline figure showed its worst performance in 7 months, while the less-volatile Ex-Transportation figure reached similar depths. Clearly, much of the decline in orders came on a whopping 11.2 percent decline in Transportation. Yet other sectors were similarly weak, as Non-defense Ex-Aircraft capital goods expenditures fell 0.6 percent through August. This shows worrying signs of a broader drop business investment and paints a dour picture for the future of Industrial Production. Arguably the only highlight from the data came on external demand for Capital Goods. Orders for shipments in Non-Defense Ex-Aircraft Durable Goods rose 0.8 percent on a month-over-month pace. Given such a result, domestic industrial producers may hope that foreign demand will offset softer domestic capital expenditures.
US Equity Markets saw themselves slightly higher on the day, but a late-afternoon retracement left the Dow Jones Industrial Average a modest 68 points improved to 13,847. The S&P 500 Index likewise rallied strongly in the early-going, easing to 0.3 percent higher to 1,521. Tech stocks outperformed the broader market, as the NASDAQ Composite gained 0.4 percent to 2,693.
US Treasury Yields fell on increased economic uncertainty, with the key 2-Year Note losing 3 basis points to fall below the 4.00 percent marker. A drop in shorter-term government bond yields signals continued risk aversion and expectations that the US Federal Reserve will cut interest rates further through the medium term. Options traders have priced in an approximate 50 percent probability that the central bank will cut rates to 4.50 percent on October 31?an undoubtedly bearish sign for the US dollar.
Written by David Rodriguez, Currency Analyst for DailyFX.com