Dollar Rally Done For Now?

Daily Forex Fundamentals | Written by Global Forex Trading | Sep 12 08 12:17 GMT |

Top Stories

* Chinese may diversify away from dollar assets according to China Daily
* Lehman may be bought over the week-end WSJ and WaPo report
* Strong AUD employment data may keep RBA stationary in October - Alan Mitchell APR
* NZ Prime Minister Clark - new elections scheduled for November 8th
* Fed's Kohn - no housing bottom yet
* CB Trichet unabashedly hawkish - inflationary pressures remain enormous, will need to guarantee price stability
* Oil holds the $100 handle bounces to $102 as Ike spews fury
* Gold above $750 trying to find stability
* Carry all better bid in firmer equities

Overnight Eco

* NZD Retail Sales slip -0.8% vs. -0.3% forecast
* JPY Final GDP -0.7% vs. -0.9% eyed
* EUR Industrial Production slips -0.3% vs. -0.2% expected
* EUR employment steady at 0.2% vs. 0.2% past

Event Risk on Tap

* USD Retail Sales -0.2% expected
* USD U of M expected to rise to 64
* USD Business inventories looking for 0.5% rise

Price Action

* USD/JPY back above 107.50 as risk appetite returns on expected resolution of Lehman saga
* AUD/USD bounces hard above 8000 as late shorts forced to cover on possible rate hold in October
* GBP/USD rallies to 1.7700 on better sentiment toward yield
* EUR/USD: rises all the way to 1.4100 as China news, forces short covering

Dollar Rally Done For Now?

Can you stick a fork into the dollar? Is the massive greenback rally done for now? Today's early European price action appears to support that case as EURUSD staged a fast and furious comeback rising all the way to 1.4126 after making a multi month low of 1.3882 in early New York trade yesterday. Today's short covering rally was a product of two factors - rumors that a deal for Lehman may be in works as soon as this weekend and news out of China that the world's fifth largest holder of US FX reserves may begin to diversify its assets away from dollar holdings.

The Lehman news provided a modicum of calm for global equity markets and risk appetite returned as carry trades which have been hammered relentlessly finally bounced. Amongst the high yielders the Aussie drew the most interest from investors in light of yesterday's better than forecast employment data that suggested RBA may remain stationary in October rather than lower rates further.

The true focus of the night however was on the euro. Comments from Jean Claude Trichet reaffirmed the notion that the ECB will not be easing any time soon as European monetary authorities continue to be far more concerned with containing inflation rather than stimulating growth. Yet its was the theme of asset diversification - something that has not preoccupied the market for a very long time- that was the real spark behind the euro rally.

We have long argued that events over the past week were not a sign of strength but rather a sign of weakness for the US dollar as the increase in systemic risk and the further dilution of US Balance sheet to rescue non-performing assets will make the unit far less attractive to longer term investors. Today's article in China Daily is a testament to that idea, as a key global central bank noted that it may adjust its present investment strategy. Should the Chinese make good on their threat converting some of their reserves into higher yielding euros,, the dollars one way trip to the moon may quickly end. Still the burden of proof rests with the euro bulls. The pair must hold above the key 1.4000 level on the daily closing basis in order to establish any credible signs of a near term bottom. If it does, then the dollar rally may be over for now.
FX Upcoming

Currency GMT EST Release Expected Prior

USD 12:30 8:30 USD Retail Sales Less Autos (AUG) -0.2% 0.4%

USD 12:30 8:30 USD Producer Price Index (MoM) (AUG) -0.5% 1.2%

USD 14:00 10:00 USD U. of Michigan Confidence (SEP P) 63.9 63.0

USD 14:00 10:00 USD Business Inventories (JUL) 0.5% 0.7%

Boris Schlossberg
http://www.gftforex.com

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