Currency Contest

US Dollar Sell-Offs Continue to Be Very Well Absorbed

Joel Kruger,

We head into the new week with the USD consolidating its latest gains and perhaps under some mild pressure that is still classified as corrective and nothing more than some short-term profit taking.  Risks from here are for a fresh upside extension for the Greenback back towards and eventually through its key October highs against most major currencies. It seems as though the failure by US officials to reach a deal to reduce the massive US deficit is putting a bit of pressure on the buck early Monday, but the situation in the Eurozone is far graver at the moment and should continue to offset any US specific negative developments. Right now, the European Central Bank is holding out from a more active involvement in the EU debt crisis and it has become increasingly apparent that the EFSF will not be enough to get the job done. As such, the Euro and higher yielding currencies should remain exposed over the coming weeks withy risk liquidation themes still dominating headlines.

Geopolitical uncertainty is also factoring into price action on Monday, with things heating up in the Middle East over the weekend in Egypt, Syria and Yemen. While the Yen continues to benefit from the safe-haven flows, we do recommend proceeding with caution when buying the Yen, as in our opinion, we see this currency once again at risk for a major reversal on some official action to aggressively depreciate the local currency. The Yen trades just off record highs against the Buck and some other major currencies, and we simply do not feel that the Japanese government will tolerate additional appreciation in their currency that is brought on by external factors. The idea of having to absorb a good deal of the global risk liquidation flows should not sit well with locals and we continue to see the US Dollar as the primary beneficiary going forward, with the much bigger US economy in a better position to absorb the risk liquidation flows through the US Dollar.

Looking ahead, Canada wholesale sales, and US existing home sales are the key releases on the day. On the official circuit, Fed Lockhart is slated to speak later on. US equity futures and commodities are well offered, with even gold tracking a good deal lower despite the risk off trade. We speculate that some of the gold selling could be coming from government related action to help finance the current crisis. The Australian Dollar is the weakest currency thus far on the risk off trade, while Sterling is also under pressure on softer Rightmove house prices, a discouraging report from the BRC, and dovish comments from Bank of England’s Posen.