Weekly Review and Outlook

Traders Back to Fundamentals, Has Dollar Bottomed?

After making a new 2009 low against most major currencies last week, dollar struck a strong comeback on the back of upside surprise in employment report in US and closed the week higher. While the employment markets were still weak, the non-farm payroll report did show significant improvements over the last few months, considering that the -247k job loss in July was one-third of that peak of -741k recorded in Jan. Another surprise was the drop in unemployment rate which was down from 9.5% to 9.4%. While the economists are viewing that as a "temporary dip" and unemployment rate is still generally expected to rise towards the end of the year, the expectation has now shift to an earlier and lower peak.

Dollar has responded positively in a broad sense to a piece of positive data finally, arguing that traders are possibly turning back to fundamentals. In particular, consider that dollar was initially sold off after NFP on risk appetite trades but those weakness was quickly overshadowed by massive dollar buying together with surge in bond yields. Markets are continuing to reinforce the expectation that Fed will begin to remove the ultra-loose monetary policy sooner than earlier expected. Indeed, Fed fund futures are pricing in over 60% chance that Fed will raise rate from the current 0-0.25% range by January meeting, up more than 10% chance from a month ago.

The question in everyone's mind now is whether the dollar has bottomed? While the rebound last Friday was strong, there is no clear confirmation of reversal yet. Note that dollar's strength was seen mainly against yen and European currencies. The recovery against Canadian dollar and Australian dollar was mild while there wasn't much strength seen against New Zealand dollar indeed. Also, note that if the notion of traders turning back to US fundamentals is correct, we'd continue to see the greenback correlate positively with stocks, like what it did on Friday. In other words, strong data from US will boost both stocks and the greenback. In turn, strength is stocks will lift commodities as well as commodity currencies. However, strength in greenback will likely pressure commodities. So, in case of strong US data, European currencies will likely be pressured. But the fate of commodity currencies and dollar in generally, will depend on the developments in commodity markets, including gold and crude oil. But in any case, yen will be pressured by improvements in investor sentiments.

Two other main events last week was BoE and ECB meetings. The Bank of England decided to keep interest rate unchanged at 0.5% but to extend the asset purchase program by 50B pounds to 175B pound. This was done as recession has been deeper than expected and after assessing the new set of economic forecasts, the existing stimulus plans and generation-low interest rate are not sufficient to overcome deflation. More in BOE Extends The Asset Purchase Program To 175B Pound

As anticipated, ECB kept its main refinancing rate unchanged at 1% in August. Moreover, there's nothing new in the press conference that we could get regarding economic outlook, monetary policies or exit strategies. More in ECB Meeting: Non-eventful As Expected

Technically, dollar index did draw strong support from mentioned 75.89/77.67 support zone and rebounded strongly last week. Bullish convergence condition in daily RSI argues that 77.43 might be a short term bottom at least. But there is no confirmation yet. Focus will be on 79.66 resistance initially this week and break there will solidify the case that dollar has already bottomed out and turn focus to 80.89/81.47 resistance zone for confirmation.

source: http://www.actionforex.com/

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