It's been a great run for the Dollar, and in actuality it's occurred as nothing has changed in the US. No changes from the FED, the US just passed a potentially debt adding Health Care program, and economic releases continue to be mixed. It all adds up to the old adage that No news is good news. So what has been causing the Dollar's recent strength?
Overall it is a combination of two factors. Firstly, worries from the EU and UK have caused institutional investors to rotate funds from Euro and Pound denominated accounts and Park it in the dollar. This is the reason why global equity indexes have continued to rally, as money leaving Europe has mostly been cash holdings rather than a rotation of stock holdings. Secondly, Forex traders don't appear to believe that the FED will continue to stay pat, and will ultimately be raising interest rates sooner than later. This is apparent in the yields of US Treasury bonds which continue to be moving higher on expectation of a higher FED rate.
This week though, US news will be back in the spotlight as Non Farms Payrolls figures will be released. Last month, with severe snowstorms hitting the US in many areas, the Dollar wasn't as affected by the release. This month though, Forex traders will be expecting to finally see employment growth taking place in the US. As such, if Wednesday's ADP Employment figures and Thursday's Initial Claims numbers are worse than expected, we could see the Dollar weaken before the Non Farms Payrolls are released. Also, important is that this week is Good Friday. Therefore, major exchanges will be closed, and low volumes are expected on Friday. This may lead to additional volatility taking place.
Will the EURUSD 1.3400? been there, 1.3300? did that too, 1.3000? looks likely, 1.2500? no one will be surprised. That is pretty much what everybody has been talking about last week as the Euro hit 10 month lows against the Dollar on continued credit related problems from the EU. Also being questioned is whether the EU will start kicking out members from the Euro zone. So, overall it was a tough week for the Euro.
Even the end of the week EU Economic Summit where agreements were made to assist Greece, were unable to cause the EURUSD to make back much of its prior losses.
Looking ahead, the Euro may get a little respite as few important economic releases are expected this week. Also credit ratings firms will most likely wait to see if how the results from last week's EU Summit play out before making any ratings changes.
The Pound has quickly become one of the hardest currencies to figure out. Last week, it sold off prior to new releases on some days, but rallied on others. And when the actual results were released, there were often initial spikes in one direction, followed by moves in the oppostie direction moments later.
Overall, Forex traders are debating whether the glass is half full or half empty in the UK. Case in point was last Wednesday's Annual Budget Release. The release called for a reduction in government borrowing in one hand, but forecasted slightly lower than expected GDP growth for 2010. For traders though, the moves have created a marvelous trading envirnoment, as the increased volatility has created numerous oppurtunities for gains.
This week, Forex traders will be keying in on Thursday's Maufacturing PMI numbers. Growth in themanufacturing sector has been one the pleasant surprises in the UK, therefore any weakness there may lead to losses for the Pound.
The biggest surprise of last week has been the weakness in the Yen. Everyone has been talking about the Euro and Pound falling, but in actuality, the Yen weakened so much last week that the EURJPY and GBPJPY have also rallied higher along with the USDJPY. The action is surprising as the Yen usually rallies during times of worry and fear, and last week's trading environment would definitely be classified as such.
Therefore, the Yen may be undervalued at this point and poised to rally, or the beginning of sentiment change towards the Yen could be taking place. If it is the latter, it could create a big boost to the Japanese export sector which would benefit from a weaker Yen.