USD: Getting High with a Little Help from Its Friends

Summary

Bias to safety currencies in early Wednesday trading as stocks in Asia and Europe retreat, Greek debt uncertainty, early Monday on retreating stocks, risk appetite. Liquidity returns with open US markets. Here we focus on the EUR/USD, or FXE for ETF traders.

US Dollar Daily Outlook: Getting By With A Little Help From Its Friends

Higher vs. all major currencies except for the British pound on stronger economic data (TIC LT purchases) and the Republican win in Massachusetts. Ongoing euro weakness (discussed below) also helps a lot, as many dollar shorts appear to be getting stopped out and selling the EUR/USD pairs, further boosting the dollar.

Although it is widely known to forex traders that politics always trumps economics, it is rare that a Senate race would receive as much attention from the financial markets as yesterday’s election in Massachusetts. The reason why it is the primary event risk for the forex market this week is because if Democrats lose their 60th seat, it could delay or alter the passing of the over $1 Trillion health care bill and any other additional spending, which would reduce the US budget deficit and support the US dollar.

Not having to pay these outlays is perceived as dollar positive simply from the perspective of fiscal finances

Because the EUR/USD comprises about 30% of all forex trade, to know what’s going on with the dollar, one needs to be aware of what’s happening with the euro, and vice versa.

Euro Daily Outlook- Sliding on "Greeced" Rails

Down hard Tuesday vs. all majors as weak German PPI and ZEW data, PIIGS (Portugal, Italy, Ireland, Greece, Spain) debt concerns and a strong dollar combined to send the euro lower all day long, breaking strong support at 1.4270 after already falling through its 50 and 200 day SMA. With the 50 SMA looking to soon cross below the 200 SMA and form the "death cross" that suggests a longer term downtrend. Lots of EUR/USD short positions hitting stop losses also fed the trend.

In early Wednesday trade it hit a twenty week low, and is struggling to hold onto $1.4200 in afternoon Asian trade as combined concerns about Greece, tightening by China and massive stop running is sent the euro plunging over 100 points in a matter of minutes. The ratings agencies’ warnings that Greece must reduce its budget or risk further downgrade continue to pressure the euro.

The euro was also hurt by a new round of risk aversion after the Shanghai index dropped nearly -3%, on reports that China’s banking regulator told several banks to stop lending for the rest of the month, fueling fears that Chinese monetary authorities are becoming serious about tightening credit creation as inflation pressures begin to build in the economy. The PBOC has made several tightening moves over the past month raising the rate on it weekly funding bills.

Economic news also hit the euro, as German PPI data turned negative in December declining -0.1% versus estimates of a 0.2% rise, showing that price pressure is nonexistent in the region and suggesting that the ECB has no motivation to tighten its monetary policy for the foreseeable future.

The pair appears to have stabilized around the 1.4200 level for the time being, but sentiment against the euro remains negative and if data does not offer support for the euro soon, sellers may aim for the psychologically important 1.4000 level in the near future. As we’ve noted earlier, today’s EZ PMI data becomes even more important within the context of the current price action. Recent comments by Germany’s economics minister, that even the German economy was not yet in self sustaining recovery (i.e. still needs stimulus), add to the dour mood surrounding the euro

Trade Idea For Eur/USD (Or FXE For ETF Traders)

Long: Wait until it breaks the 1.4600 resistance level or retests the 1.4428 (50%) Fibonacci retracement level, with stop loss just below the recently broken resistance turned support.

Short: At or near a break below the 76.4%% Fib level around 1.4165. Those willing to take a little more risk can try entering on a break below the psychologically important 1.4200 level, since the above Fib levels has not been significant support, and we don’t see the factors weighing on the euro (noted in the above Forex section) going away. Again, note the forming "death cross" forming as the falling 50 day SMA in red approaches the rising but flattening 200 day SMA in teal. When that happens, it suggests a longer term downtrend.

Watch the S&P for overall risk appetite, and the EUR/USD for a quick gauge of the USD to judge if oil is ready to stabilize.

EURUSD DAILY CHART (01 Jan 20) AVAFX CHART

Disclosure: Author has no positions