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Chronology of a Dollar Bounce Foretold

Today's Forex market activity was a classic example of vindicating charts analysis over the news and the noise.

The US dollar rallied for about 10 minutes following the stronger than expected payrolls, dragging the EURUSD pair from 1.3270 to 1.3230 and the yen from 115.60 to 115.85.

But short-term trading ensued on the dollar rally as players quickly took profits at the top of the dollar's session highs, triggering about 100 pips worth of negative dollar retracement. This bout of profit taking was especially boosted by prolonged erosion in manufacturing and construction jobs, and an evident aberration in the 20K increase in retail jobs related to holiday sales-driven hiring.

The dollar decline was wholly reversed by US Treasury Paulson reiterating a strong dollar in the best interest of the US. While this overused mantra has lost its luster in boosting the currency when used by former Treasury Secretary John Snow, it is regaining credibility and effectiveness as it is uttered by a Treasury Secretary widely considered as most likely to convince Beijing to further undergo changes in its FX system-- a development which carries negative dollar implications in the long run.

When all is said and done, the dollar is higher on the day, thereby proving our charts analysis correct (our note from this morning 8:09 am and yesterday afternoon 3:54 pm) when we had cautioned clients that "we expect gold prices to fall in the short-term from their current $630.45 level towards the $626-24 level". Gold is now $626.30. We expect the next support at $620, backed by $613.

For sterling, we noted that "we expect further declines to attain a preliminary target of 1.9550. In the event of a breakdown below 1.95, a deterioration of sentiment should trigger an assault of the Nov 17th trend line support around 1.9440-20."

Similarly, we noted in yesterday's analysis for the 10-year Treasury-note that: "thisall up interim support at 108.83 in price (4.56% yield), before resuming the sell-off towards the 108.41 (4.61% yield)--38% retracement of the rally from the Oct 23 low to the Dec 1st low." The price is now at 108.6 with yields at 4.65%.

The effect of Mr. Paulson's strong dollar remarks is likely to weigh further against sterling, which is likely to test the $1.95 figure and onto $1.9480. The declines in the euro have been stabilized by comments ECB's Likannen and Chief EU Commissioner Baroso, with the fomer noting liquidity remains plentiful and the latter stating that markets should be left deciding the euro's FX rate and that a strong currency is a sign of confidence in the European Community. Indeed, with the Bank of England doubtful to raise rates next month and the ECB expected to tighten further next quarter, the EURGBP rate should maintain its upward tone.

 

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