Forexs Dollar Surging

The US dollar is higher across the board as better than expected economic data continues to come in, highlighting the fact that economic recovery in the US may be taking place. However, the market is sending mixed signals as commodities prices are lower again today, with falling demand being cited as the reason.

But wouldn’t an improving US economy increase demand? Well I guess that depends on your point of view. As I have been saying all week, the market correlations that so many have relied on in the past are beginning to break down a bit. However this morning appears to have started out as a classic risk aversion sort of day (with one notable exception), though that may be changing as better US economic data is released.

That notable exception is the Japanese yen, which seems to be weakening across the board regardless of sentiment or economic climate, despite no news this week out of Japan. Suspicious to say the least.

So far this morning, the ADP employment change figures showed a gain of almost 300K jobs, nearly 3 times the expectation of 100K. While this figure is not nearly as important as Friday’s NFP number, it could be a sign that the employment picture is improving.

Earlier across the pond, both the Euro and Pound weakened, as tepid economic data and lower equities and commodities helped encourage the slide.

In the forex market:

Aussie (AUD): The Aussie is mostly lower, trading in lock-step with commodities which have been lower all week. In addition, new home sales came in lower than expected as the effect of higher interest rates cools the economy.

Kiwi (NZD): The Kiwi is mostly weaker as well, also taking its cues from commodities.

Loonie (CAD): The Loonie is higher across the board despite lower oil prices as the raw materials price index and the industrial product price index came in much hotter than expected. This could be a sign that inflation is picking up in Canada which could mean an interest rate hike sooner than later. (Click chart to enlarge)

usdcad0105111.JPG

Euro (EUR): The Euro is lower this morning as the anti-dollar sentiment has increased dramatically. Better than expected Euro zone PMI data was offset by lower than expected Industrial New Orders. In addition, the Bank of Switzerland has refused Irish government bonds as collateral, which could be a sign of things to come.

Pound (GBP): The Pound is mixed this morning as PMI construction data came in lower than expected, showing a 49.1 reading vs. an expectation of 51. The jury is still out on the effects of the austerity measures which won’t likely show true economic conditions until later this quarter.

Dollar (USD): The Dollar is surging, particularly against its safe-haven counterparts (JPY & CHF) as the market has blown off the potential effects of QE2 and last year’s trade of “economy up, Dollar down”. This breaks from the risk trades that we speak about often despite the fact that today could be viewed as a risk aversion day.

Yen (JPY): The Yen continues to weaken on no news or economic data and is seemingly trading “risk agnostic” as its safe haven status has not been utilized despite weaker commodities prices and the currencies that follow them. This could simply be “allocation trades”—which means that investors are rebalancing portfolios and taking directional bets to start the New Year. Keep an eye on this as a reversion to mean scenario could take place with any heightened risk in the market. (Click chart to enlarge)

usdjpy0105.JPG

So far in 2011, it has been difficult to peg the type of trading day that is occurring. But that’s OK. As I mentioned yesterday, an understanding of the fundamentals can help you figure out who is strong and who is weak, but it really is the charts that tells us where the action is.

Old habits die hard on Wall St. so there is tremendous opportunity as the market comes to realize that paradigms may shift and that old plays may go away.
Are you comfortable in your understanding of how to read charts? In what moves the markets? If not, then contact us today!