Friday, February 11, 2011

Can the US Dollar Expand its Bullishness?

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The USD has come a long way in just a week's time. This week has shown the USD in a tentative recovery.

Still, we should have some serious doubts that this is a true bullish reversal. We saw a similar reversal broken up a couple of weeks back when a sharp rally for the dollar and the anticipated increase from the S&P 500 were reversed after the weekend.

What led the US Dollar to gain this past week? Strong fundamentals could have lent some support to the gain, but we did not see that, it appears that a true and technical bullish phase was in effect. With that said, without a solid foundation, the US currency could be looking at another swift fall in the coming weeks ahead.

Let's look at some fundamentals. A view of the consumer and business health offered a direct look into whether the US was on a fast track to surpass its global counterparts for growth and returns. We saw personal spending, manufacturing activity and service sector activity all carving out gains. However, a vigilant fundamental trader would really hone in on the extremely disappointing employment breakdown and the PCE inflation figures.

The net payrolls were a huge disappointment for missing their mark. We saw a jobless rate only improving with a record number of frustrated Americans leaving the labor force and the participation rate tumbling to its lowest level in 26 years. This puts growth or a lack of growth back into perspective. Without employment and wages improving, the economy will not expand, especially at its current clip. As for the FED's favored inflation indicator, a record low sets a very poor precedence for interest rate speculation.

Data, released two weeks ago, is not very encouraging. Going forward, it will be exceptionally difficult for the dollar to sustain its current rally if sentiment begins to deteriorate market wide.

There are just a few catalysts that can encourage the USD higher over the next couple of weeks. An ideal situation for the USD would be an aggressive and correlated fall of the equity markets, corporate debt along with a subsequent rally in gold. One or two of these could present some support.

As for the upcoming macro data next week, do not expect too much volatility to follow the releases. Consumer credit will indicate measure of lending conditions, the NFIB small business optimism will gauge hiring expectations for the largest employer group, the monthly budget will track the push to the deficit cap and the University of Michigan sentiment survey will gauge consumers' willingness to spend. None of this data traditionally alters the US's relative pace of growth, risk appetite trends or the timing for rate hikes.

Still the question begs. With the overall weekly macro data coming out of the US, will the dollar continue its current rise? Read Fx-Insights to keep up to date.

David Frank, Financial Analyst, Ava FX

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