Why Has The Dollar Rally Stalled?

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Market Drivers for October 8 2014

ABS says that AU employment data will not be seasonally adjusted

FOMC minutes only event driver today

Nikkei -1.19% Europe -0.06%

Oil $87/bbl

Gold $1217/oz.

Europe and Asia:

CNY HSBC Services 53.5 vs. 54.1

CHF Unemployment rate 3.2% vs. 3.1%

North America:

CAD Housing Starts 08:30

USD FOMC Minutes 14:00

It’s been a seesaw night of trade in the currency market with the dollar first gaining ground in early Asian session only to turn around and approach session lows by mid morning London dealing. On a day when news flow was extremely limited trading was dominated by technical factors as currencies continued to consolidate their recent moves.

USD/JPY made a perfect round turn first dropping to 107.75 then rallying to 108.50 only to drift below the 108 figure once again. The pair is now more than 200 points off its multi year highs of 110.00 set last week and is in many ways indicative of the correction in the dollar rally.

Despite relatively strong US data, the greenback rally has stalled over the past week as markets begin to question the prospect of a more tighter monetary stance by the Fed. Yesterday Minneapolis Fed President Narayana Kocherlakota noted that recent gains in US employment did not require any change of stance by the FOMC because job growth in and of itself has not pushed wages higher and therefore did not increase inflationary risks.

Mr. Kocherlakota’s comments likely represent the majority view of the Fed and today’s FOMC minutes could confirm that stance. If so the greenback may see more profit taking as traders temper their expectations.

The scepticism on rates is most clearly expressed in the fixed income market where the yield on the benchmark 10 year bond has been going down ever since the better than expected NFP report last Fridays. 10 year rates are now well below the 2.50% mark, sliding all the way down to 2.33%. If this trend persists the dollar will have a hard time resuming its rally as growth advantages fail to translate into higher yields. As we have stated before, the uptrend in the buck will not be confirmed until USD/JPY can take out 110.00 level with conviction.

The stall in the dollar rally has also had a positive impact on the Aussie which has been battered mercilessly for the past several months on liquidation of carry trade flows. However the unit appears to have found strong support at the 8650 level and is now churning its way above the 8800 figure. If tonight’s Australian employment data proves supportive, the unit could move through the 8850 level as carry trade flows return.

Boris Schlossberg
Managing Director

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