Thursday, January 6, 2011

Greenback Finding Solid Bids on Stronger US Data As Correlations Break

http://www.dailyfx.com/forex/fundamental/daily_briefing/daily_pieces/opening_comment/2011/01/06/Greenback_Finding_Solid_Bids.html



Market participants are growing increasingly confident with the prospects for a legitimate recovery in the US economy, as economic data continues to show signs of impressive improvement. Wednesday’s blow-out ADP jobs report, and better than expected ISM non-manufacturing (4-year high) have helped to inspire the latest round of broad based USD buying, with correlations of better US data and a weaker US Dollar breaking down. It now seems as though the market is growing less confident in overseas markets and is finding comfort in a flow of funds not only into US equity markets but also into the Greenback.
Unfortunately for us, this has not helped our latest trade, with a long EUR/CAD position trading out of the money. The Canadian Dollar was actually even stronger than the US Dollar on Wednesday, with the arguably sounder economy benefiting from its proximity to the US and finding relative strength on its own merits. We still however believe that the Canadian Dollar should be exposed to future weakness at current levels on the basis of what appears to be a currency trading by longer-term cyclical highs that is also very much exposed to a potential pullback in global commodity prices as China slows in reaction to the latest tightening moves from the PBOC.
As we look at broader price action in the major currencies, EUR/USD is still locked in a multi-day consolidation, while GBP/USD also chops around. USD/JPY and USD/CHF on the other hand, have been on the move, with some major relative weakness seen across the board in both the Yen and Swiss Franc in recent trade. These currencies which had been star performers in 2010, have certainly stumbled in early 2011, and we contend that this early price action could very well set the tone for the coming months.
Looking ahead, Swiss foreign currency reserves are due at 8:00GMT, followed by Swiss CPI (-0.1% expected) at 8:15GMT. UK services PMI (52.8 expected) and official reserves are then out at 9:30GMT. A slew of Eurozone data then comes out at 10:00GMT in the form of consumer confidence (-10.2 expected), economic confidence (105.8 expected), industrial confidence (2.0 expected), retail sales (0.2% expected), business climate (1.00 expected) and services confidence (10.1 expected). Germany factory orders (1.0% expected) round things out at 11:00GMT. In North American trade, US initial jobless claims (408k expected) and continuing claims (4080k expected) are out at 13:30GMT, followed by Canada Ivey PMI (54.0 expected) at 15:00GMT. US equity futures and commodities prices trade flat thus far on the day.
Written by Joel Kruger, Technical Currency Strategist
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