ForexTV Market Vision w/ Tim Kelly

Dollar Takes Heavy Blow From Drop in Consumer Confidence but Remains Standing

"The Conference Board issued today one of its most alarming reports on consumer confidence in 40 years of data, results certain to push stocks, the dollar and Treasury yields lower. The results will also complicate debate at the ongoing FOMC meeting, making it harder for policy makers to assure the nation that the economy will soon improve and that inflation pressures will cool.

The Conference Board's index fell nearly 4 points in April to 62.3 -- the worst reading since the early 90s. The present situation component, which makes up 40 percent of the headline index, fell more than 10 points to 80.7 for its worst reading since 2003 when the unemployment rate had peaked at 6.3 percent. The present situation index matches closely with the unemployment rate and today's reading points to an alarming shift higher in next week's employment report. The report's component for current job conditions also points to trouble next week, as more say jobs are hard to get (27.9 percent April vs. 24.5 percent March) and fewer say jobs are plentiful (16.6 percent vs. 19.2 percent). The jobs question for six months shows an incredibly low 8 percent seeing more jobs against an incredibly high 32.8 percent seeing fewer jobs.

But the worst news in the report is a true spike in inflation expectations, up 7 tenths in the month alone to 6.8 percent -- a record level matched only after Hurricane Katrina in 2005. CPI data may not being showing much pressure but consumers are saying clearly that inflation is on the rise. The results even include a 30-year low for vacation plans, no doubt reflecting the weak dollar, which raises the cost of foreign travel, and high gas prices which of course raise the cost domestic travel. Also, some consumers may be looking for work and can't spend the money or time on travel. Buying plans for homes fell 1 full point to 2.4 percent for the latest bad news on the housing sector." -Econoday

Despite this news the dollar gave way to Euro only briefly after the report and settled back to pre-announcement levels. Considering the past six months performance, the greenback's ability to shrug-off this very negative report (seemingly with ease) is reason for alarm in itself. At the time of this report EUR/USD is now testing 1.5550 and seems like it will have the momentum to do so. Dollar bears have been frustrated in the past few sessions, the question is whether the other shoe is about to fall. ProSticks readers have been rewarded very handsomely for the Euro short position from 1.60. Last night's ProSticks report suggested that profit-taking ahead of the 1.5450 is an option, but taking that out , swiftly drifts down to daily kumo lower band which coincides with weekly ichikumo slow line at 15150.

This week will be the true test for the dollar as a virtual minefield of US data is set to be released starting tomorrow.  Overnight German unemployment numbers are set to be released and while expected to remain unchanged will be closely watched, especially after the impact of the IFO survey last week. The dollar seems to be building a tolerance for negative US economic news while the Euro is experiencing growing sensitivity to poor EuroZone data.  The direction of the dollar is surely going to get more clarity by Friday afternoon.  Are we having fun yet?

Momentum Builds for USD in Volatile Market

As I have been writing about for the past three weeks, we are starting to see the USD turn the corner. The ProSticks technical analysis has correctly called the latest Euro downturn and has returned a staggering 150 pips. Unfortunately, the reversal was not exactly caused by the strength of the US economy as I have been talking about, but as a result of EuroZone weakness beginning with German IFO. In any case we cannot discount the possibility that the latest market turn in favor of USD strength could just be profit-taking and a retracement on the way back to higher levels. In fact, the fundamentals still support Euro strength. On the other hand the technicals point to a continuation of dollar strength; and in the wake of the ECB saber-rattling Euro bulls seem unwilling to step in front of the dollar train that seems to be rolling fast enough to retrace levels not seen in a few years. This is one of the most volatile times I have seen in a while. I suggest waiting for the Fed minutes to be released before entering new positions. Until then it's a crap-shoot.

A Record Day

A new all time high for Euro and Crude today sets the stage for a new trading landscape. As Euro hit the 1.60 level it was sling-shot back about 40 pips before it re-tested the highs above that psychological mark. At approximately the same time Crude was making its own all-time high above $119. I expect to see Euro sellers through the 1.6050 area as we have seen at other key levels.

USD/JPY has broken significant support of 102.70 and has now fallen back into the Ichimoku Cloud that would suggest a leg down to the Tankan-san line at 101.04…watch support as Yen has struggled to break above old support.

Price Action Brutal in Asian and Early European Session

As I left off my last post, "expect volatility" who could have imagined? USD/JPY broke strong resistance into the mid 103.50's and continues to strengthen into the North American session along with euro weakening on hopes that the credit debacle have reached its peak. Large European banks reversing positions in the Early European session pushing Euro well below recent highs and breaking below the 1.58 level. Expect the unexpected today.

Euro Likely to Consolodate in Range. Dollar Surging Against Yen

After making an overnight record high, Euro will likely trade in choppy ranges and most traders I spoke with said that they expect very choppy price action with some analysts suggesting that Euro could retrace several big figures down in the next few weeks. In ForexTV's AM Forex New York, Brown Brothers Harriman Senior Currency Strategist Meg Brown says that while momentum is still in Euro and will likely test 1.60 again within the session, a failure to break that mark within a week could trigger a sharp correction of "2-3 big figures." However, as reported in last night's ProSticks technical report, it suggested a 1.65 level within weeks.

Dollar continues to gain on Yen due to risk factors but rapidly approaching technical resistance at 102.60.

With no major news on the calendar tomorrow will be tricky to navigate but expect volatility.

Once Again, It’s All About the (ECB Interest Rate) Numbers

The dollar fell to a record low against the euro on European inflation numbers in March, reducing chances that the ECB will follow the Federal Reserve in cutting interest rates. The dollar had its biggest decline versus the euro in three weeks, dropping to the record of $1.5969. Meanwhile, crude oil rose to an all-time high of $114.53 a barrel, and U.S. housing starts dropped more than twice as much as forecast in March to a 17-year low.

If euro can hold these levels through the close today, the technicals could indicate a significant leg higher in the coming week. While there is a fundamental turn-around in progress that supports dollar in the intermediate and long-term, there is still very strong negative dollar momentum in the immediate term. Euro is likely to strengthen throughout the session today. I would recommend reading tonight's ProSticks report due out at 8:00pm (EDT).

US CPI was also released this morning showing US inflation also on the high side, but in line with expectations. This now casts some doubt on a rate cut by the Fed

 

A close at or above a record high for EUR/USD today would strongly signal a new leg up for Euro.

Inflation Woes Drive Market Direction

"Overall producer price inflation in March came in red hot although the core rate remained moderate in the latest monthly number. The overall PPI jumped a sharp 1.1 percent, following a 0.3 percent gain in February. The March increase was far above the market projection for a 0.5 surge in the overall PPI. The core PPI rate eased to 0.2 percent, following a 0.5 percent spike the month before and matched consensus expectations…The March PPI report shows that the Fed still needs to worry about inflation and will bump up interest rates. A stronger-than-expected Empire State survey will also firm rates. Equities will still likely wait on key earnings reports," according to Econoday.

Meanwhile, TIC data show that net long-term inflows were up in February to a robust $72 billion vs. 57.1 billion in January. This is surprising considering the weakening dollar and low yield interest-rate environment. The data is a positive for Dollar bulls and presages that smart money is hedging a swing in momentum that may lift the US economy in the intermediate term.

On the negative side the PPI data coupled with little or negative growth supports the stagflation camp and spells trouble for the already beleaguered dollar. As I indicated in my April 1 post, I think the US economy is starting to make a move towards recovery. "Lehman Brothers Holdings Inc. Chief Executive Dick Fuld said on Tuesday the current market environment should remain challenging, but added that the "worst is behind us,"" according to Reuters. With a serious of stimulus packages yet to be factored into the equation I believe that dollar will be poised to recover to the 1.45 level by mid-summer. The EuroZone is showing clear signs of stress as I have predicted and today's ZEW report show deep concern on behalf of German Economists. French inflation figures were not good and will likely deepen with food and energy cost spiraling out of control.

Short-term this is a very volatile situation with many of the fundamentals showing conflicting signals, and the technicals also showing no clear trends. The April 15, 2008 ProSticks report bears-out no real technical direction. Traders should be cautious and limit exposure.

It’s All About the (ECB Interest Rate) Numbers

Now that the world has had a full day to sample and digest the G-7 strong Dollar rhetoric it seems that talk is cheap…and not particularly satisfying. At the end of the day interest rate differentials still determine, or are the single most powerful determinate of global Forex rates. So those who are hoping…and trying to will the USD to strengthen are destined to be disappointed. While fundamentals in the US are still weak and the ECB is unmoved on cutting interest rates, EUR/USD is likely to test new all-time highs within the immediate future. The ECB is handcuffed by the threat of inflation and several ECB Officials have indicated that "there is no room for EuroZone rate cuts this year." In a sign that frustration may be taking over in the EuroZone, ECB Officials have begun to claim that Euro is unfairly carrying the burden of dollar depreciation, perhaps suggesting that Asian currencies should/could appreciate further. This is a clear shot at Yen, but again talk is cheap and the interest rate differential…and more importantly interest rate volatility is clearly leading the market sentiment.

In another change in the ECB stance indicated by the G-7 communiqué, German Chancellor Merkel said on Monday that Euro strength against the dollar was "difficult for exporters." There is no doubt that Euro strength is an uncomfortable and ironic consequence of EuroZone economic stability. Until the US economy stabilizes or the ECB eases credit with the rest of the G-7, Euro is likely to continue to appreciate.

Dollar Support Rhetoric Escalates at G-7

One thing that most pundits agree on is that any intervention aimed at supporting the dollar would have to be a coordinated effort of the G-7 Central Banks and Government Ministries. In what amounts to monetary policy saber-rattling, G-7 officials emerged from the Washington summit solidly united behind a strong dollar policy. In reality, no one is stepping-up to actually extend an arm to catch the falling knife that is the US Dollar. It is one thing to talk about it; it is a completely different and rare event to actually pull off a coordinated intervention.

The battle of words comes at a time when dollar is seeing almost monthly historic lows and flirting with some very significant technical levels. Dollar supporters have managed to help the greenback recover some lost ground in the past few days, but there is simply not enough fundamental support in the economic cycle to support the dollar in the immediate future.

As mentioned in the Prosticks April 14^th report, the EUR/USD trading range is narrowing and is very volatile. It is hard to believe that the G-7 would blow so much rhetoric without a back-up plan in the likely event that dollar resumes it's slide within a week. We are in uncharted territory. A close above 1.5870 is likely to start the next leg up significantly.

EURO Approaching Key 1.5870 Resistance as IMF Report Pressures Dollar

ProSticks key resistance level of 1.5870 on March 17 (upper extreme tail) is within intraday reach. The dollar continued to slide after the International Monetary Fund (IMF) said the US economy would fall into a "mild recession" this year, and that the outlook for growth remains downbeat. Further adding to dollar decline is a spike in crude as this week's EIA data showed less than expected crude inventories. If the 1.5870 resistance is breach the next stop according to ProSticks will be 1.63.

According to a Thomson Financial News report, "The IMF said the U.S. Federal Reserve is correct to cut interest rates despite risks of high inflation and the dollar was still "on the strong side" despite its recent depreciation." Meanwhile, a report from Bloomberg quotes a UBS report saying that Dollar will recover to 1.52 within two to four weeks and to 1.47 in three months. UBS is the world's second largest currency trader.

This is a mixed bag to be sure. So where does the smart money trade here? Until the 1.5870 level is breached traders should heed the mixed messages in the markets. My money has been on dollar recovery and a shallow recession. We seem to be at the top-end of the present EuroZone growth cycle…or at least approaching a slow-down. This portends lower rates and eventually a dollar recovery…I am with UBS for the short term.