The US Dollar continued to set record lows against the Euro and its Canadian counterpart, but a later bounce left the greenback slightly firmer through Monday trade. Speculators showed little hesitation in bidding the Euro and the Canadian dollar higher through earlier Tokyo price action. Yet a slowdown in gains suggests that the dollar may be in for a short term bounce before further depreciation.
The euro surged to fresh record highs of $1.4129 through the Tokyo session close before easing to $1.4081 at time of writing. The Canadian dollar likewise saw a strong bid on the overnight, breaching parity with its American counterpart strong declines in oil prices pushed the Loonie lower. Later drops in the Dow Jones Industrial Average made the Japanese yen the largest net gainer on the day, with the greenback losing ¥0.50 to ¥114.87.
Limited economic event risk made it difficult for speculators to forge continued US dollar lows, but overall momentum clearly favors further euro strength. According to recent speculative positioning data, retail investors continue to sell the Euro against the US dollar?a contrarian signal favoring continued EUR/USD gains. Non-commercial futures traders are similarly positioned for further euro rallies, as a further addition in net EUR longs keeps the currency?s uptrend firmly intact. (For recent CFTC Commitment of Traders Data, see here) Yet trend-followers have reached significantly overbought territory on the Canadian dollar?leaving the Loonie susceptible to medium term retracement. We are reminded that positioning can remain in extreme territory for weeks at a time and do not preclude further CAD heights. Yet the extreme in Canadian Dollar bullishness signals that the majority of the Loonie appreciation is now over.
US equity markets eased further from recent heights, with the Dow Jones Industrial Average off 0.4 percent to 13,770. Stock market bulls sent corporate shares significantly higher on last week?s surprise Fed interest rate cut, but it remains to be seen whether rallies will continue through the short term. The moderation in prices suggests that investors do not believe that the credit market turmoil has completely subsided, leading to similar downward pressure on Japanese Yen-denominated currency pairs. The S&P 500 fell 0.5 percent to 1,518, and the NASDAQ Composite shed a relatively minor 0.3 percent to 2,664.
US Treasury Markets were largely unchanged on the day, as traders remained to the sidelines on uncertainty over the future of credit market conditions. The recently volatile 2-Year Note was almost exactly unchanged, adding 1 basis point in yield to 4.04 percent. Price action in longer-dated debt was similarly uneventful, with the 10-Year note flat at 4.62 percent.
Written by David Rodriguez, Currency Analyst for DailyFX.com