Financial Markets Rebound From Dubai's Credit Shock
As mentioned in last week's review, at Go Forex we thought that this past week's trading would be impacted by Forex traders continued reaction to the Dubai financial news, and less effected by economic new events. As such, the dollar dropped as it appeared that Dubai World's restructuring would prevent triggering of a massive credit crunch in the financial markets. As traders bought back risk, the dollar returned near its 2009 lows and Gold setting record highs of above 1225. However, as the week went by, equities which seemed headed to finish off the year at their highs began to stumble. The old line of have we rallied too much too quickly, was back, and every rally seemed to be hit with a round of profit taking. Just like global central banks have been reiterating the need to use caution when raising interest rates and exiting stimulus, it appears that traders are also starting to become more about potential risks of the current nine month relief rally.
What was surprising about the week, was that Forex traders appeared to somewhat ignore the week's employment news. Forex traders appear to take it for granted that job losses are slowing, and the general economy is improving, and are more sensitive to the overall trend than individual specifics. With that said, we may see the dollar remain range bound until a specific timetable for the US, UK and Europe's exit from record rates, or until the next financial crisis rolls along. Looking ahead, this week is expected to be a light economic news week, with Friday's Retail Sales number, the highlight of the week.
The EURUSD briefly matched it 2009 high last week at 1.5140, following the ECB's Interest Rate Statement that left rates unchanged at 1.0%, but indicated rates will be increased soon. However, the euro than began to fall as ECB President Trichet, in his press conference, stated that a strong dollar is good for the US and the Eurozone. Also worrying Forex traders was the language used. The ECB stated that there was a consensus among members. This is a code word for a non-unanimous decision towards what policies the ECB should take. Variances of ECB members is nothing new, but it could become a hindrance if the ECB tries to become more hawkish if the Eurozone's economy continues to improve. With little important economic news from the Eurozone this week, at Go Forex we expect the euro to trade based on sentiment towards the ECB. Forex traders hate uncertainty, and if they begin to doubt the ECB, we could see weakness hit the Euro.
The pound was mostly unchanged versus major currencies this past week, as economic news releases came out mixed. PPI was less than expected, but a batch of housing numbers showed continued improvement in that sector. Like in the US, pound traders appear to be less concerned about day to day UK news and are more concerned about the overall improving trend. As long as no new adverse situations arise, traders are confident that the BoE won't increase their stimulus policies, and risk devaluing the pound. With that being said, this week, the BoE meets for their monthly MPC meeting. Rates are expected to remain unchanged, but traders will be listing carefully to the language of the BoE. The BoE has begun to list some of the positives of the UK economy in their last few meetings, and they have loosened up on their conservative language. Therefore, if they do waffle and return to the conservative wait and see attitude, it is possible that this will lead to the pound weakening.
After several months of quiet since the new government took power, the yen has returned to being one of the more volatile and talked about currencies. Yen strength has caused many government officials to want a change in policy that will weaken the yen and aid the struggling export sector. Therefore, this has caused pressure to build up on the BoJ, and for them to contmplate intervention. However, rumors of intervention have been enough to cause the yen to weaken and therefore remove some of the pressure on the BoJ. As such, the USDJPY which hit 14 year lows of 84.82 last week, has bounce back up to the 88.00 level. Looking ahead, Final GDP will be released on Tuesday night and forex traders will be watching to see if any revisions occur.