Reply #17: daily dollar watch [View All]

[UpInArms]

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Dollar Liquidity Dries Up On Holiday

http://www.dailyfx.com/story/dailyfx_financial_markets_headlines/Dollar_Liquidity_Dries_Up_On_1160412834649.html

Though US equities, futures and, of course, FX were open for the trading Monday, the Columbus day bank holiday was taking its toll on liquidity. After witnessing multiple breakouts in the majors on Friday, this momentum drain could sever a new bullish leg in the US dollar before it can even get off the ground. The lack of volatility was immediately apparent in price action through the three international sessions Monday.

Since mid-day Friday, the EURUSD has floundered in a 30 point range between 1.2617 and 1.2585 with few intra-day moves suggesting a bias to either side. Usually the mirror image of the euro pair, the Swiss franc was also in a 30-point band that is holding below 1.2620, which is in turn just below resistance set in place last month. Despite the lack of dollar interest, the unit has been able to find a bid against the British pound for an 80-point drop to 1.8634. Finally, the Japanese yen has seen some momentum in the Asian session on geo-political concerns, but the interest behind the USDJPY has topped out with a 50-point swing in the dollar’s favor to 119.30.

As traders at the big banks pass the day away from the desks, those international and smaller market participants were left with little from the economic calendar to draw from. However, when liquidity deepens tomorrow, there will likely be a substantial amount of interest in North Korea and oil. Making international headlines in the overnight, North Korean officials announced that it had successfully detonated a nuclear weapon. This detonation comes just a week after the communist state announced its intentions to do so and three months after test launching a number of missiles; including the Taepodong-2, which is said to have a range that could reach Alaska. Another interesting aspect of this test was its expedited nature in regards to the time line in which the international community had set out for its response. Last Wednesday, US Ambassador to the UN John Bolton said the US would draft a resolution that would likely include the threat of military action if North Korea proceeded with its tests. Moreover, just the day before the test, China and Japan had joined the UN Security Council in denouncing the plans. While the event risk associated with this episode has been quick and relatively painless for international markets, the currency markets may be feeling its effect for some time. The new capabilities of this long-isolationist country will heighten tensions in the regions; and some say may lead to an arms race. While global investors wait to see how the issue plays out, there will likely be an increase in the number of people seeking refuge for their capital. In the past year, this safe haven has increasingly turned to the dollar as the high yields on assets and deep liquidity have been increasingly buffered by the new issue of geographical distance from the hot spots in the world. Tomorrow, traders will be able to turn to wholesale inventories and sales numbers for the previous month, often a leading indicator for the retail equivalent posted later; but expect the North Korean issue to still draw attention from greenback bulls.

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Will North Korea Have a Lasting Effect on the Dollar and Yen?

http://www.dailyfx.com/story/dailyfx_reports/daily_fundamentals/Will_North_Korea_Have_a_1160428523364.html

US Dollar

When it comes to trading currencies, things are always changing, which keeps our job interesting. Last year, we were all amateur meteorologists trying to figure out weather patterns and the probability of another major hurricane happening after Katrina and this year, we have all turned into amateur military strategists. North Korea has stirred up the markets with news that they have conducted another nuclear test over the weekend. The dollar has rallied while the Japanese yen has sold off, but the movements in both of currencies been limited because the responses from the major powers around the world are unclear. This is not the first time that North Korea has tested a missile. They have done so on many occasions over the past few years and the responses have only been limited to some harsh words. The question this time around is whether the outcry that we have heard thus far is the extent of the reaction that we will hear from the major powers or whether we will actually see sanctions or military action. If nothing more is done, the markets may soon forget about North Korea’s tests, just like they did back in July after the two long range missiles failed within a minute. North Korea’s underground tests make it difficult to determine whether the test was large or small or whether it failed half way or was completely successful. Either way, for the time being, traders looking to fade the yen weakness should be very careful. Aside from North Korea’s test, the markets have been very quiet with the US, Canadian and Japanese markets closed for holidays. The Canadian dollar is stronger as OPEC members reach an informal agreement to cut oil production but they stopped short of calling an emergency meeting to formalize the agreement. A number of Fed speeches as well as the FOMC minutes from the September 20 meeting and Beige Book report are expected this week. FOMC voting member Janet Yellen was the first to speak. She reiterated the Fed’s overall concern for inflation but was slightly more dovish than the other members when she noted that interest rates “appears appropriate” and are now in a “moderately restrictive” range. She also feels that the decline in oil prices should reduce core prices, which will make a decline in inflation the “most likely outcome.” For the time being, despite all of the dollar bullishness that has come after the US payrolls report, the Federal Reserve is still more likely to reduce rates than raise them over the next six months.

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US Fed - Surprisingly Hawkish

http://www.dailyfx.com/story/special_report/special_reports/US_Fed___Surprisingly_Hawkish_1160476285617.html

Some central bankers have been sounding particularly tough on inflation:

Ben Bernanke, US Federal Reserve Bank Chairman

“I would estimate that slowing housing construction will probably take about a percentage point off growth in the second half of this year and probably something going into next year as well…The inflation rate is still above what we would consider price stability. We do believe inflation is going to be coming down gradually over time, but it's something we have to watch very carefully to make sure that it doesn't rise or even remain where it is.” – October 5, 2006

Donald Kohn, US Federal Reserve Vice Chairman

“Don't sell the Fed's concern about inflation short.” He noted that there are “a lot of uncertainties on both sides," of official growth and inflation forecasts, and highlights that he is “surprised" at how little market participants seemed to share this sense. – October 5, 2006

Charles Plosser, Philadelphia Federal Reserve President

“There remains some risk that policy is not yet firm enough to ensure a return to price stability over a reasonable time horizon. We need to remain vigilant and recognize that maintaining the current stance of policy, or even firming further, may be in the best interests of the economy's long-run performance.” – October 6, 2006

Sandra Pianalto, Cleveland Federal Reserve President

“The bottom line is that you cannot achieve long-run growth without price stability. In many, if not most, cases this is true in the short run as well.”– October 6, 2006

However, we also saw surprisingly dovish comments from a typical hawk:

William Poole, St. Louis Federal Reserve President

“The decline in long rates is working as a built-in stabilizer for the economy.” Mr. Poole also noted that the fall in bond market rates “will tend to bring down mortgage rates” as well. “If we get an upside surprise, the long rate clearly has a lot of room to rise without the FOMC doing anything.” – October 9, 2006

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