As the week winds down and ahead of the weekend G7 meeting, the dollar is consolidating Thursday's gains by trading in relatively narrow ranges near the day's best levels. The dollar's gains against the euro this week, which Bloomberg figures suggest is the best week in 2.5 years, have been impressive given the simply dreadful string of U.S. economic news. While I recognize several ways in which ECB President Trichet's comments yesterday were less hawkish than previously, I suspect that the market used the comments to raise confidence in what was already assumed and extends, rather than changes, trends in the euro and Euribor that were already in place.
I have been looking for the ECB to cut rates toward the end of the first half of 2008 and see no reason to alter that view. One of the implications is that Trichet's efforts to prepare the market will likely be a drama that plays out over the next several months, rather than be brought to a quick climax. European economic data clearly shows a slowing of activity but it has not, for the most part, shown a major break or discontinuity that some U.S. reports, like the employment data and service sector ISM. Neither the data nor the temperament of the ECB suggests that an aggressive volte-face is a likely scenario.
The U.S. dollar's resiliency is really the story of the week. Not only has the greenback appreciated despite poor fundamental news, which is often an important market signal, but the technical tone has improved. While I have recognized that the 5- and 20-day moving average cross over have been whipsawed in the broadly sideways market lately, I note that the moving averages have crossed again in a dollar positive direction.
The euro itself has neared the lower end of a trading range that has persisted for the better part of four months. Of particular note, the euro finished Thursday's North American session below its 100-day moving average for the first time since August. That average comes in near $1.4531 today. A close below there on a weekly basis would add to the significance. Investors who believe that the euro is still in a bull market should see this pullback toward the 100-day moving average as a low-risk buying opportunity. On the other hand, if one suspects that the dollar's multi-year downtrend is coming to a close, then a sustained break of the 100-day moving average should prompt a strategy shift form buying euro dips to selling euro rallies.
I am in the
latter camp .
Sterling, which often appears to lead the euro, fell below its 100-day moving average against the dollar in mid-December and has not looked back. The other major currency that I believe has already peaked against the U.S. dollar is the Canadian dollar. The greenback has remained above the 100-day moving average against the Loonie since early January. Many clients watch the USD Index for an overall sense of how the dollar is doing. Yesterday the dollar index closed above its 100-day moving average for the first time since last summer.
The USD Index, the euro and Swiss franc posted key reversals last Friday, and that technical signal has been validated by the follow through this week. That said, discipline requires more follow through dollar gains to boost confidence that it is doing more than going from the lower end of its trading range to the upper end. This requires the euro to break through the mid-December lows near $1.4300.
Finally, there have been a couple of developments in terms of investment flows that are noteworthy.
First, despite the poor reception to the U.S. Treasury 30-year bond auction yesterday, the increased size of
share offering in the face of strong demand may be more significant. The yield on the 30-year bond was reportedly the lowest on since the bond was regularly issued back in the late 1970s. Moreover central banks continue to pour money into US Treasuries. Even if it is not picked up in the TIC data, which only covers activity through the U.S. banking system, those banks that use the Fed's custody services bought another $10.6 billion worth in the latest reporting period, bring the total amount to near $60 billion in the past four weeks.
Second, Emerging Portfolio Fund Research reports that $7 billion was withdrawn last month in US-based equity funds that invest internationally, and diversified U.S. equity funds reportedly saw $19 billion of withdrawals last month. Of note, funds, including ETFs, that concentrate in financial services companies took in $2.8 billion, which represents about a 20% increase.
Marc Chandler has been covering the global capital markets in one fashion or another for nearly 20 years, working at economic consulting firms and global investment banks. Currently, he is the chief foreign exchange strategist at Brown Brothers Harriman. Recently, Chandler was the chief currency strategist for HSBC Bank USA. He is a prolific writer and speaker and appears regularly on CNBC. In addition to being quoted in the financial press, Chandler is often a guest writer for the Financial Times. He also teaches at New York University, where he is an associate professor in the School of Continuing and Professional Studies. While Chandler cannot provide investment advice or recommendations, he appreciates your feedback;
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