The Week in Currency
Strong mid-week resistance at 1.4700 is preventing a further run-up for the Euro/U.S. Dollar pair, but traders continue to keep the uptrend intact. Monday presented some early buying opportunities for the Euro, as the market dipped below 1.4530 for the first time since November 6th. Traders nimble enough to get long saw bullish momentum expand, even in the face of technically overbought price levels. This is not new territory for the market, as the Euro/U.S. Dollar pair has a history of ignoring technical indicators and forging its own price path. Fundamentally, EU nations Germany, Norway, Spain and Italy all reported accelerated gross domestic product growth for the third quarter after poor second quarter showings.
French President Nicolas Sarkozy took the EU to task in the media recently for a lack of solid monetary policy compared to several other nations, and had critical words for the current European Central Bank policy limiting economic growth for his country as well. It appears the recently elected president is campaigning to have interest rates lowered to help foster economic expansion in France. However, it is important to note that the principal function of the ECB is to battle inflation, not necessarily to craft policy to control the strength or weakness of the Euro currency. The next ECB rate decision is scheduled for November 22nd, with expectations for a rate increase growing. Just how much influence Sarkozy has on the central bankers remains to be seen, however.
Volatility has seemingly touched every currency this week, with the sharp downside price movement in Crude Oil factoring into the gentle pullbacks in both the Canadian and Australian dollars. However, the most violent price swings battered the Dollar/Yen pair. The on again/off again attractiveness of the carry trade in this pair has caused significant high-low ranges, as savvy Japanese investors find ways to make their savings work harder. Though somewhat overlooked in terms of its ability to move the markets, the investing public tends to flex its muscle when it acts independently of large banks and government and institutional trading by moving away from the paltry half-percent interest offered by the Bank of Japan into higher-yielding currencies and investments abroad. The carry trade phenomenon can do some strange things in foreign exchange – the speed at which these trades are established and unwound caused an irrational boost to U.S. Dollar prices against the Yen, contradicting the Dollar's softness relative to every other currency.
Dollar-related data this morning includes the core consumer price index for October, a favorite inflation barometer used by the Fed. Median expectations call for an increase from 2.1% to 2.2% compared to 2006, and unchanged at .2% from last month. Sharp increases in CPI in short periods of time can be an indication of inflation on the horizon. CPI represents today's Dollar event risk, as the markets will likely react if the actual number deviates from the 2.2%.
Currently, Euro/U.S. Dollar trades
Dollar/Yen
Aussie/U.S. Dollar trades
and U.S. Dollar/Canada trades
Heather Mitchell, Currency Analyst
