Does Weaker GDP Mean Pricing in QE3 and A Weaker USD
Today’s US GDP data was interesting in that it came in weaker than expected and breaking down the report we see that personal consumption was pretty soft and much of the gain in the fourth quarter came from the restocking of inventories.
Therefore with a soft GDP report the usual response in the currency markets would be for risk aversion to take hold in which the US dollar and Japanese yen gain against the higher-yielding currencies – especially commodity bloc currencies as well as the EUR and GBP.
The question now however is with the Fed Chairman Bernanke and the Fed statement leaving the door open for more quantitative easing, the GDP report may further the case that more accommodative monetary policy is necessary. If so, that would have the opposite effect in that it would weaken the US dollar against its rivals.
The market reaction so far has seen stocks weaker and the Australian, New Zealand, and Canadian dollars pairing some of the gains they had against the dollar and the overnight trading session, but really trading withing the ranged established in the overnight session.
Which side will win? The risk aversion and safe haven play which favors the US Dollar or the increase in speculation of more printing and asset purchases by the Fed which should would weigh on the US dollar.
That is the fault line we find ourselves on as we head toward the end of this week and begin next weeks trading. In a look at the Dollar index we see that the strength in see in September and again in November and December may have run its course and is ready for a pullback. A break of an upward sloping support trendline and a push below important horizontal level of support (old resistance) are indications that from the technical side the USD may be ready for a further retracement of its recent rally.
Article source: http://feeds.actionforex.com/~r/ActionForexall/~3/dIGUyl7HTlE/
January Month-End Rebalancing
Often you may hear about ‘month end’ flows having a positive or negative effect on a currency during the last few days of the month. Thus, I’ve decided to take a look at asset market capitalizations in the major market economies to help us try to determine which direction these ‘flows’ may move. Typically, the largest impact is seen into the 11am ET fix as hedge fund and mutual fund portfolio managers scramble to rebalance their remaining currency exposure in order hedge their overall portfolio.
Market capitalizations for January have been positive across the board, however the largest gains are seen in the United States which saw a rise of nearly 800B on the month (as of 1/26 close). So how do we make sense of this? Well, the more severe a change of the principal assets (primarily equities and bonds), then the more likely portfolio managers are either under or over-exposed to certain currencies. Our model suggests they may be under hedged, consequently they may need to further diversify away from USD’s. Therefore, I believe much of the USD selling today (Friday) as well as potentially early next week (Mon Tues) could be attributed to these flows as we head into the fixings.
In the chart below I have outlined the expected directional movement broken down pair by pair based upon our proprietary month-end model. Customarily, a reading of +/- 400B on the month produces a stronger bullish or bearish signal. With that said, all of the pairs besides EUR/USD see signals which satisfy the aforementioned +/- 400B reading: USD/CHF, USD/CAD, USD/JPY (bearish) and AUD/USD, GBP/USD (bullish), while EUR/USD sees a slightly more moderate bullish signal.
Article source: http://feeds.actionforex.com/~r/ActionForexall/~3/2iwbTB8istc/
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