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The U.S. Dollar Is Oversold

The U.S economy is still trending, albeit at the moderate pace. The U.S. dollar is oversold against majors and might appreciate over the short-term.

Consumer confidence is still contained.

Real spending stays mild in the U.S., as consumer confidence is low and deleveraging is still ongoing. This week will be published the February Labour Market Report, which should provide a good idea on the state of the economy. Unemployment has been trending lower in the past months and the decline should continue over the medium-term as well. Since November, non-farm payrolls gained momentum supported by the private sector. Manufacturing and construction have been two big components of job creation. In two months, they added 134,000 new positions. It took nine months to produce the same numbers last year.

In reality, the economy might be increasing at the moderate pace. The volatile durable goods report showed a decline in new orders for non-defence capital goods excluding aircrafts. They fell 4.5% month-on-month, pushing the three months rate of growth to the lower level since 2009. The ISM manufacturing index fell instead 1.7 points to 52.4 in February, matching the average of the last quarter of 2011. Growth is expected to be 2.0%-2.5% in the first two quarters of the year, despite oil prices challenging last year highs. Capital spending and business investment should support the economy in the coming months as well.

E.C.B. holding rates steady again.

Last week, the E.C.B. has started another round of Long-term Refinancing Operation (LTRO). Euro 530 billion will be provided to European banks at a tiny rate. President Draghi hopes the money will go into lending to support the real economy. In fact, the credit sector has been under pressure lately, as banks have put the liquidity on hold. Recent data suggests total ECB deposit facility reached about euro 460 billion, way above euro 265 billion showed before the first LTRO deal in December. Nonetheless, over the medium-term, the massive liquidity should keep hope alive and support the financial markets.

The long-term consequences of this approach are not clear yet. European banks still own tons of securities bought prior to the crisis of 2008. The Bundesbank is concerned about smaller banks, from instable areas, using the money to buy more toxic assets. The debt crisis has not been solved yet. Greece has now enough money to cover ends meet, but the debt stays enormous and the austerity plan is very (too) ambitious. A default of the country is still in the cards, in case of a low private sector participation rate of euro 14.5 billion bond redemption on March, 20/12.

The E.C.B. should keep rates unchanged on Thursday and the euro could soften further from current levels. Technically, eur/usd failed to overcome both the higher Bollinger bands and the trendline of the past 12 months. It could decline to 1.31/1.28 over the short term, considering there is a divergence between current prices and the RSI indicator.

US Dollar


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