FRX: US Dollar Technically Constructive in Near-term
By Christopher Vecchio, Currency Analyst for DailyFX.com
The Japanese Yen has emerged as the top performer in a broad risk-off trading environment to end the first full week of August. The Australian Dollar trails as trade data out of China suggests that export growth is crumbling, a foreboding sign for global growth prospects. Accordingly, expectations for a reserve requirement ratio (RRR) cut by the People’s Bank of China are riding high, which should help stimulate the economy some six-months down the road (typically, rate cuts take around half of one year to cycle into the real economy).
Meanwhile, the Euro’s troubles have continued with a further deterioration against the US Dollar today, on the back of discouraging German data as well as rising bond yields in Italy and Spain. German inflation cooled unexpectedly last month, and at +1.7% year-over-year, it is at its slowest pace since December 2012. Stripping the energy component from the equation, consumer price pressures are a paltry +1.4%. Usually a leading indicator, falling price pressures necessarily suggest a slowing German economy.
Accordingly, with global growth concerns mounting again, and no new accommodative measures definitively on the horizon (though it is looking increasingly likely we will see new stimuli from the European Central Bank and the People’s Bank of China in the near-term, and from the Federal Reserve a few months out), the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) appears to be carving out a bottom. On shorter-term charts (hourly, 4-hour), we note that a Rounding Bottom is developing; and given the positive fundamental developments last week (the Federal Reserve holding back on more stimulus and July’s Nonfarm Payrolls report showing the labor market is adding jobs faster than anticipated), we believe the US Dollar is both fundamental and technically constructive in the short-term.
Moving on to credit, the Italian 2-year note yield has moved up to 3.304% (+9.3-bps) while the Spanish 2-year note yield has inched higher to 3.566% (+2.8-bps). Likewise, the Italian 10-year note yield has risen to 5.878% (+5.3-bps) while the Spanish 10-year note yield has increased to 6.806% (+1.9-bps); higher yields imply lower prices.
