DailyFX
Forex: Dollar Rally May Soon Run Out of Steam, Stranding AUD/USD
John Kicklighter

  • Dollar Rally May Soon Run Out of Steam, Stranding AUD/USD

  • Euro: Beware the Relief Rally and 200-Day Moving Average

  • Japanese Yen Likely to Sustain its Tumble Regardless of Risk

  • Swiss Franc: SNB Officials Still Silent, EURCHF May Not Need Warnings

  • Australian Dollar Finally Showing Capitulation

  • Gold Extends Decline as Dollar Advance Outweighs Fiscal Cliff Fear

New to FX? Watch thisVideo; For live market updates, visitDailyFX’s Real Time News Feed

Dollar Rally May Soon Run Out of Steam, Stranding AUD/USD

Since peaking back on November 5, the Dow Jones Industrial Average has dropped almost 800 points or 6 percent. That level of move from one of the benchmarks for investor sentiment is a strong reading of risk aversion for the financial markets. And yet, though that same period, the Dow Jones FXCM Dollar (ticker = USDollar) – a liquidity asset on the extreme opposite of the risk spectrum – has only recently made bullish progress of its own for a net 90 points or 1 percent . The contrast reflects the escalation of risk deleveraging and the point at which the effort finally made its shift to a market-wide influence. Given the ‘rich’ pricing of the US equities market under the belief that Fed participation would absorb investors’ risk, it is most sensitive of the asset classes to a correction. Currency exposure, on the other hand, didn’t have that direct prop.

So, now risk aversion is heavy enough that it has finally engaged selling in stubborn FX holdouts like favored carry trade pair AUDUSD. Just as the Dollar Index has just recently cleared resistance at 10,000 to make its way to three-month highs, this pair just recently broke its rising trend and 20-day moving average to move back towards 1.0300. Bears have an eye towards a more prominent 1.0150, but it may take longer to reach that big figure than they had anticipated. The dollar’s late start (or more appropriately, the late escalation of risk aversion to market-wide levels) may ultimately sabotage a lasting trend – or at least stall it for a while. Next week, is the Thanksgiving holiday for the US markets. Markets are closed on Thursday and activity on the following Friday to the holiday is historically extremely low. Furthermore, in the lead up to the break, investors often throttle back on their trading. This is something of a firebreak for a risk drive that is still trying to find its legs. If the Eurozone crisis, Fiscal Cliff, Middle Eastern tension and other worries abate; the dollar may be out of steam.

In the meantime, another fundamental theme that works against the greenback started to pop up again: stimulus. Wednesday, the conversation went to the FOMC minutes, which suggested a number of its membership wanted to increase stimulus after Operation Twist ended. That was already baked in as the program’s expiration - and its $45 billion in long-term Treasury purchases - would be a defacto tightening. San Francisco Fed President Williams echoed these sentiments when he predicted an increase in QE3 purchases to $85 billion per month. On the same topic, the New York Fed released a survey of its primary dealers (market makers for Treasuries) which showed expectations for the current stimulus regime to hold through the first quarter of 2014 and the first rate hike in the third quarter of 2015. That sets the market’s benchmark forecast. Any changes to that will shift the fundamental tone behind the dollar and stimulus-supported risk trends.

Terms and Privacy Policy
Your Privacy Choices
Utah Privacy Notice
More Info

Recommended Stories