The U.S. Dollar staged a corrective rally last week after several weeks of declining against the other major currencies. The Greenback rose against all of the other majors, with the sole exception of the Japanese Yen against which it fell a mere three pips.
The U.S. Dollar Index gained + 0.43 points last week to close at 77.47, showing a modest net gain of 0.56 percent on the week. The Dollar Index is now showing a net loss of 0.39 points or 0.5 percent for the year to date.
The Pound Sterling was the weakest overall performer against the Greenback last week, declining by 1.9 percent last week. The Pound was followed by the Canadian Dollar, which declined by -1.5%, the New Zealand Dollar that fell by -1.0% and the Australian Dollar that lost -0.8%. The Euro declined by only -0.3%, while the Japanese Yen — the best performer overall last week — gained by just 0.1% versus the U.S. Dollar.
U.S. Dollar Stages Corrective Rally After Weeks of Declines
The U.S. Dollar’s rally last week seems to have been a corrective reaction to the extended rise in all the other major currencies against the Greenback seen over the last several weeks.
In addition to the continued fundamentally weak economic picture seen in the United States, the Greenback has been under pressure because of the tentative new round of quantitative easing measures the Federal Reserve is expected by the forex market to adopt at the FOMC’s upcoming November 3rd meeting.
Adding to the Greenback’s strength last week — especially against the commodity currencies — was the steep pull back in the price of gold and general softness in the commodity market in general.
The price of gold came off considerably last week — losing $41.48 per ounce or -3.1% — and the drop was accompanied with declines in all of the other precious metals, as well as other commodities like energy, grains and industrial metals. The softs — cocoa, coffee, cotton and sugar — were the exception in the commodity market since they rose considerably, with cotton gaining an impressive 9.89 percent on the week.
Economic data out of the United States last week continued showing an overall weakness in employment and the creation of new jobs, as well as mixed numbers in the housing sector and softer industrial production results.
Japanese Yen Makes Another 15 Year High Against the Greenback
The beginning of last week was marked by talk that further BOJ intervention would not take place during the week due to the Japanese not wanting to take any decisive action until after the conclusion of the G-20 meeting that was held in South Korea over the past weekend.
As a result, the U.S. Dollar traded to a 15 year low at 80.84 Yen last Wednesday, October 20th, before recovering somewhat and ending the week a bit higher at 81.35.
Nevertheless, USDJPY continued its slide in early overseas trading on Monday, with the rate hitting yet another 15 year low at 80.41.
Pound Sterling Weakest of the Majors After MPC Minutes
The British Pound Sterling was the worst performer against the Greenback last week, declining by a steep -1.9%. The sharp decline was attributed to the uncertainty regarding the Bank of England’s stimulus program and whether the BOE would add additional funds to the Asset Purchase Facility.
Last Wednesday, the BOE released minutes from the Monetary Policy Committee meeting of October 6th and 7th. The minutes indicated that seven MPC members had voted in favor of leaving rates unchanged.
Nevertheless, one MPC member — Adam Posen — voted to leave the Official Bank Rate at the 0.5% level while increasing the Asset Purchase Facility by 50B Pounds to 250B.
In addition, another dissenting member — Andrew Sentance — continued voting in favor of raising the central bank’s Official Bank Rate by 25 bps to 0.75% and continuing the amount of the  Asset Purchase Facility at 200B.
Canadian Dollar Softer as Growth Estimates Cut by BOC
After Cable, the commodity dollars were next in terms of the size of their percentage declines seen against the Greenback last week. The weakest of the three was the Canadian Dollar, which fell by -1.5% on the week after the Bank of Canada left its benchmark Overnight Rate unchanged at 1.00% last Tuesday.
In addition to leaving rates unchanged, the Canadian central bank made some notable changes to its economic forecasts. In particular, the BOC revised down Canada’s official economic growth estimates for the year 2010 from 3.5% to 3.0% and also revised its 2011 growth estimate down from 2.9% to 2.3%.
Furthermore, the BOC stated that, “the output gap is slightly larger and that the economy will return to full capacity by the end of 2012 rather than the beginning of that yearâ€, which further weakened the Canadian Dollar.
Also, the central bank stated that it would “carefully consider†further reductions in monetary policy stimulus measures in response to its downwardly revised economic outlook.
Kiwi Falls on Dovish Bollard Intervention Comments
After the Loonie, the New Zealand Dollar was next declining 1.0% last week, trading in sympathy with the price of gold and the Australian Dollar. NZDUSD made a weekly high of 0.7600 on Tuesday before declining sharply.
The decline was in part a reaction to comments by RBNZ’s Governor Alan Bollard, who expressed that the central bank’s options were limited in response to calls for the central bank to intervene in the currency markets to sell the Kiwi as a way of supporting New Zealand’s exporters.
In support of his refusal, Bollard also stated that,
“The times we feel we can be effective are when we are around the peak or trough of the cycle and also when the exchange rate setting may be fundamentally driven by domestic policy distortions.â€
Aussie Falls on Softer Gold Prices and RBA Minutes
The Australian Dollar was the best performer among the commodity currencies against the Greenback last week, declining by only -0.8% on the week despite a significant pullback in the price of gold.
Also, the RBA released its Monetary Policy Meeting Minutes on Monday where they stated that
“The case to wait before making a tightening move was that the economy was still expected to continue growing at trend in the near term, credit growth had softened somewhat and the rise in the exchange rate would, if it continued, effectively be tightening financial conditions at the margin.â€
The RBA left its Cash Rate unchanged at 4.5% at their last meeting and this took the market by surprise because the majority of economists had expected the central bank to raise its benchmark rate by 25 bps to 4.75%.
Forex Market Implications
After the primarily stronger corrective move in the U.S. Dollar last week, a number of upcoming events will give a clearer indication to the Greenback’s future direction. The most important being the November 2nd mid term elections in the United States, and the Federal Reserve’s November 3rd meeting.
In the near term, U.S. Durable Goods and New Home Sales are scheduled for release on Wednesday, while Advance GDP and the Advance GDP Price Index will be released on Friday.
The corrective move in the Greenback may still have some steam however. Accordingly, keeping an eye on other market factors including commodity prices and the debt situation in the Eurozone may also offer some guidance as to the U.S. Dollar’s near term direction.
Nevertheless, the long term outlook remains bearish on the U.S. Dollar, with the commodity dollars still being generally favored over both the Euro and the Pound Sterling.
Weekly Recap and Outlook for the U.S. Financial Markets and Dollar – 10/25/2010
The U.S. Dollar strengthened correctively last week against most of the other major currencies. The Greenback gained ground against all of them, with the sole exception of the Japanese Yen against which the Dollar fell slightly. Â Â Â Â Â Read full report
Weekly Recap and Outlook for EURUSD – 10/25/2010 During last week’s trading sessions, EURUSD trader somewhat softer after its previous extended rise that had persisted for five weeks straight. The rate started out the week with a soft tone after ECB President Trichet had made comments during the preceding weekend that responded to Bundesbank President Alex Weber’s proposal to cease the ECB’s program of bond purchases. Specifically, Trichet noted that, “This is not the position of the Governing Council, with an overwhelming majority.†Also, in reference to the controversial bond purchase program, Trichet said that, “This non-standard measure, like all other such measures, was designed to help restore a more normal functioning of our monetary policy transmission mechanism.† Adding to the weakness seen for EURUSD last Monday were U.S. data releases that included TIC Long Term Purchases, which printed at the 128.7B level that was significantly above the anticipated 47.5B number and more than double its former level of 61.2B. Also out last Monday in the United States was the Capacity Utilization Rate that came out in line with market expectations at the 74.7% level. Nevertheless, U.S. Industrial Production fell by -0.2% for the month — a result that was worse than the anticipated rise of +0.3%.   Read full report
Weekly Recap and Outlook for GBPUSD – 10/25/2010
During last week’s trading sessions, GBPUSD saw some volatile trading conditions, with the rate falling overall for the first time in a five week period. Cable started out the week by trading on a firm note as the rate made its weekly high print at the 1.6003 level on Monday. Nevertheless, GBPUSD soon traded quickly lower in the wake of comments made over the previous weekend by influential former MPC member David Blanchflower who stated that Great Britain was, “desperately in danger of a double dip.†Blanchflower also commented that, “the BOE unfortunately looks like the only ‘plan B’ the government has, but quantitative easing just doesn’t act fast enough.†  Read full report
Weekly Recap and Outlook for AUDUSD – 10/25/2010
During last week’s trading sessions, AUDUSD sold off a bit as the price of gold pulled back after its recent impressive gains had taken the precious metal to fresh all time high price levels over the preceding weeks. AUDUSD started out the week by trading on a softer note on Monday in spite of news that Australian New Motor Sales had increased by +0.9% for the month. This result was a considerable improvement over the former reading that was revised down from +0.3% to +0.2%. Also out last Monday were U.S. data releases that included TIC Long Term Purchases, which printed at the 128.7B level that was significantly above the anticipated 47.5B number and more than double its former level of 61.2B. In addition, the U.S. Capacity Utilization Rate that came out in line with market expectations at the 74.7% level, while U.S. Industrial Production fell by -0.2% for the month — a result that was worse than the anticipated rise of +0.3%.    Read full report
Weekly Recap and Outlook for NZDUSD – 10/25/2010
During last week’s trading sessions, NZDUSD experienced a pullback as the Kiwi came under pressure from the softening price of gold and the resulting weakness in the Australian Dollar. The week started off with the pair declining on Monday in spite of news that New Zealand CPI had increased by +1.1% for the quarter. This result was higher than the +1.0% increase anticipated by the market that was also the expected trigger point for the RBNZ to act on. The notable increase in consumer prices in New Zealand was attributed to an increase in energy and tobacco prices. Last Monday’s U.S. data releases included TIC Long Term Purchases, which printed at the 128.7B level that was significantly above the anticipated 47.5B number and more than double its former level of 61.2B. Also out last Monday in the United States was the Capacity Utilization Rate that came out in line with market expectations at the 74.7% level. Nevertheless, U.S. Industrial Production fell by -0.2% for the month — a result that was worse than the anticipated rise of +0.3%.   Read full report
Weekly Recap and Outlook for USDJPY –  10/25/2010
During last week’s trading sessions, USDJPY traded in a very narrow range as relatively few economic data releases came out in Japan. The rate started off the week by moving initially lower last Monday as the Yen firmed in the wake of news that the Japanese Tertiary Industry Activity indicator had fallen by just -0.2% for the month that compared favorably with the anticipated decline of -0.5% the market was looking for. Also adding to the drop seen in USDJPY last Monday was talk that the Bank of Japan would not be intervening in the forex market during the week to avoid any conflict ahead of the important G-20 meetings being held in South Korea the following weekend. Last Monday’s U.S. data releases included TIC Long Term Purchases, which printed at the 128.7B level that was significantly above the anticipated 47.5B number and more than double its former level of 61.2B. Also out last Monday in the United States was the Capacity Utilization Rate that came out in line with market expectations at the 74.7% level. Nevertheless, U.S. Industrial Production fell by -0.2% for the month — a result that was worse than the anticipated rise of +0.3%.   Read full report
Weekly Recap and Outlook for USDCAD – 10/25/2010
During last week’s trading sessions, USDCAD gained additional ground as the Greenback generally strengthened against the commodity currencies due to the price of gold falling correctively lower. The rate started the week out by trading down to its weekly low point at the 1.0117 level on Monday after Canadian Foreign Securities Purchases increased to the 11.09B level that was more than double both the previous month’s number of 5.51B and the market’s consensus of 5.62B. Also, the previous 5.51B result was revised upward from 5.48B. Last Monday’s U.S. data releases included TIC Long Term Purchases, which printed at the 128.7B level that was significantly above the anticipated 47.5B number and more than double its former level of 61.2B. Also out last Monday in the United States was the Capacity Utilization Rate that came out in line with market expectations at the 74.7% level. Nevertheless, U.S. Industrial Production fell by -0.2% for the month — a result that was worse than the anticipated rise of +0.3%.     Read full report
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