WILL THE DOLLAR CONTINUE TO RISE?
On the last trading day before Christmas week, when everyone goes into holiday mode, the dollar held onto its recent gains against all of the major currencies except for the comm dollars (AUD, NZD and CAD). Although many of the major currency pairs ended the day virtually unchanged, on an intraday basis, there was quite a bit of volatility in both currencies and equities. Considering that today is Quadruple Witching, when stock index futures, stock index options, stock options and single stock futures all expire, the volatility is not particularly unusual. Instead, the lack of economic data in U.S. and the flat price action in the EUR/USD has many traders wondering how much further if the dollar will rise.
Will the Dollar Continue to Rise?
In the foreign exchange market, we have long learned that trends can be longer and deeper than most people would normally expect. The latest downtrend in the U.S. dollar for example lasted for more than 8 months. Since the turn in the U.S. dollar is supported by a turn in fundamentals, there is a good chance that it could continue. However dollar bulls may have to wait until the New Year for the dollar to resume its rise since next week’s economic reports may hurt more than help the U.S. dollar. The key U.S. economic releases on the calendar include the final release of third quarter GDP, durable goods, existing and new home sales. No major revisions are expected to Q3 GDP but given the drop in builder confidence and the previous jump in existing and new home sales, the housing market numbers may retreat. Also, the volatility in the week of Christmas tends to be less than two thirds that of the typical volatility that we see in the EUR/USD and USD/JPY throughout the year. If the dollar gains traction however, pushing the EUR/USD lower, the sell-off could stall at 1.4150 region, where we have the 200-day SMA and the 38.2 percent Fibonacci retracement of this year’s rally coming in as support.
Is the Dollar’s Downtrend Over?
Despite the obvious rebound in the U.S. dollar, many investors and economists have a hard time believing that the long term trend in the dollar has really changed. They point to the aggressive spending by the U.S. government and the growing budget deficit as the primary reasons why structural demand favors dollar weakness and not strength. They also indicate that even though the U.S. economy is improving, growth in the first half of 2010 will be modest at best and the fears of the blowup in Greece spilling over to the larger members of the Eurozone are exaggerated. Although we also believe that the spending by the U.S. government will only increase in the coming year, in the near term, foreign central banks still have to buy dollars. Trading is also an expectations game. The dollar could resume its decline which means the rebound that we are seeing now could be temporary, but until the market has a reason to change its bias, it won’t. The next test of the U.S. economy will come from the December non-farm payrolls report, which is not due for release until January 8th.
Forex Traders Increase Long Dollar Positions, Short Euro Positions
Meanwhile, foreign exchange traders in the futures market increased their short euro, long dollar positions. Last week’s CFTC Commitment of Traders report revealed that futures traders turned net short EUR/USDs for the first time since March. On Monday, we talked about how this shift in positioning tends to foreshadow a sharp decline in the currency pair. As of December 15th, before the break of 1.45 level, EUR/USD net short positions were at 16,448 contracts, up sharply from 511 contracts a week earlier. From a sentiment and positioning perspective, this suggests that the dollar has more room to rise even though it just recorded its biggest one week rally against the euro since October. Although future traders are net long dollars against the euro and Japanese Yen, they remain net short dollars against all of the other major currencies which implies that they are not as bearish about the Australian or Canadian economies as they are the Eurozone and U.K. economies.
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