Payrolls May Add to Dollar Woes
Fundamentals
The Dollar Index continues to feel pressure due to the better than expected initial claims data. Today's non-farm payrolls report may offer bears yet another reason to sell greenbacks if the report comes in better than expected and the stock market gains further traction. Aside from the jolt from Dubai, equities have not had a meaningful down day in some time. Profit taking seems to only be able to cause consolidation for stocks. The dollar does not seem to be able to find even a bit of good news these days. The current administration in Washington has not been able to stimulate job growth and continues to borrow at an unsustainable pace. The current jobless recovery would likely lead to an extended period of time before the Fed would be able to tighten. One of the only bright spots for the greenback seems to be the bank TARP repayments, which could bring down the size of treasury auctions. This is hardly the reassuring news that dollar bulls would like to see. Another is the fact that Japan would like to see the yen weaken to boost the nation's exports. What affect a weakening yen would have on the dollar remains to be seen, as traders may simply borrow yen as part of a carry trade versus higher yielding currencies. This could result in an only minimal impact on the Dollar Index.
Trading Ideas
Dollar Index fundamentals point to continued vulnerability, barring an extended shock to the equity market. Technicals have not shown any confirmation of a new downside breakout, but the chart shows the potential to start a new leg down if prices fall below the 74.00 level. Traders may wish to short the March future on a solid close below the 74.00 with a protective stop at 75.25 and a downside objective of 72.00. The trade risks roughly $1,250 for a potential profit of $2,000.
Technicals
The March Dollar Index chart shows that market consolidating between 74.00 and 75.00. The consolidation is forming a small pennant on the daily chart, suggesting the Dollar Index may see more downside ahead. To be able to gain some technical traction, the DXH10 would likely have to climb above the 77.50 level, which is no easy task. The oscillators for the March Dollar are very benign, with the RSI giving a neutral 42.28 reading and the momentum indicator in a holding pattern below the zero line.
Rob Kuzatkowski, Senior Commodity Analyst
