Dollar Weakness is Really Euro and Sterling Strength

Marc To Market's picture

The holiday-thinned activity may have distorted the price action, but the general theme that has emerged in recent weeks remains very much intact. The US dollar's weakness, which many observers and the media emphasize, is very narrow and largely confined to the euro and sterling (and a few currencies that move in their orbits).


Even in recent days, as the euro and sterling climbed to two-year high, the yen slumped to five-year lows, and Australian and Canadian dollars remain pinned near multi-year lows.  Eastern and central European currencies have been lifted against the dollar by the rising euro, but many of the larger accessible emerging market currencies, like the South African rand, the crisis-stricken Turkish lira, and Mexican peso have not performed well.   And over the past week, the Thai baht has lost almost as much as the Japanese yen.


It seems that the combination of the large current account surplus, aided by the re-balancing of the periphery, including Spain, portfolio capital inflows, and the ongoing de-leveraging of the financial sector is giving the euro greater legs than anticipated.  At the same time, despite the divergence in the trajectory of monetary policy, Dec Eurodollar-Euribor spread stands at an unimpressive 8 bp. Three-month Euribor was fixed higher than three-month Eurodollar (0.2735% vs 0.2466%).


The thin market conditions appear to have exacerbated the move that was already underway.  The move to almost $1.39 at the end of last week was exaggerated and some near-term backing and filling is likely.  Initial support is seen in the $1.3680-$1.3700 area and then $1.3600.   On the upside, there is increased focus on the trend line drawn off the record high in 2008 (~ $1.6040) and the May 2011 high (~$1.4940).   It comes in in January near $1.4050.


Sterling has convincingly violated a similar trend line.  It is drawn off the August 2009 high (~$1.7045) and the April 2011 high (~$1.6750).  It was approached several times since, including in January and July 2013.  Before the weekend, it recorded its highest close in 2 1/2 years.  Any backing and filling should be limited to the $1.6300-area.  Assuming that sterling pushed through the $1.66, the next important technical target is near $1.6750.


The losses in the Dollar Index have been mitigated by the dollar's strength against the yen and Canadian dollar.  It rebounded quickly from the drop below the month's previous lows, leaving it stuck between the uptrend drawn off the October 25 low (~79.00) and the December 18 low (~79.80) and the downtrend line drawn off the November 12 and 21 highs (~81.45 and 81.30) and the December 20 high (a little above 0.8080).  These converging trend lines are found near 80.00 and 80.65 at on January 3.


If the euro and sterling's strength are a theme so is the yen's weakness, making it difficult, as we have noted in talking about the dollar in general.    The dollar pushed through the JPY105 level after breaking JPY104 in the immediate response to the Fed's tapering decision on December 18. The next important technical target comes near JPY110.


The euro has not looked back since breaking above JPY140 on December 6.  The next target is JPY150. Sterling surpassed JPY170 on the Fed's tapering and this area was tested as support before bouncing higher in recent days.  There is potential, from a technical point of view toward JPY180 and possibly JPY184.


The broadly sideways price action in the Australian dollar failed to improve the technical picture.  Its bounce in the early part of the last week stalled just ahead of the lower end technical resistance we noted in the $0.8970 area.  It can be expected to test the $0.8800 in the days ahead. The next major objective is near $0.8550.


After the yen and Australian dollar, the Canadian dollar has been the third worst performer against the dollar over here in Q4.  Over the past week, the Canadian dollar was weaker than the Aussie. We look for the greenback to convincingly rise through the CAD1.07 level.  The next immediate technical target is around CAD1.08 and we look for a move toward CAD1.12-CAD1.14 in the coming months.


For seven consecutive sessions through the end of last week, the dollar recorded a higher low against the Mexican peso.  Nevertheless, the broad trading range of MXN12.80-MXN13.10, identified last week, has remained largely intact.  Technical indicators are not generating strong signals presently, but if this analysis is accurate and there is some backing and filling technical action in the near-term, we suspect the dollar is more likely to ease toward the lower end of this narrow range.


The CFTC's Commitment of Traders Report for the most recent reporting period is not available.  

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sufiy's picture

Gold: Fastest Japan Inflation Since ’08. US 10Y Yield Hits 3.019% - Highest Since July 2011

  Now we have some clues to the wild FOREX gyrations today and US dollar falling below 80.00. Bloomberg reports that Japan is happy to experience the Fastest Inflation from 2008. Can we start talking that money velocity will be finally moving up and pushing inflation in the system? Gold is ready and waiting for it for a long time. ZeroHedge reports that US 10Y Yield Hits 3.019% - Highest Since July 2011. Once the interest rates start moving confirming the end of 30 Year plus Bond Bull market things will change very fast. And Euro Jumps to Two-Year High on Rate Outlook. Gold and Silver are taking notice and are moving higher today. Reports from the commodity markets are suggesting that somebody knew something again and has cornered the copper market few days ago.

FredFlintstone's picture

Why does the Sterling rise against the USD? What does Britain or even the Continent have going for it?

SonOfSoros's picture

It is rising for the same reason as the Euro. Risk appetite and a gloomier outlook around the world. Especially in emerging markets. Remember, a currencys value is relative and cannot be properly valued. You can't value a currency swap, the best is to only attain a relative not absolute value.

Emerging markets who have enjoyed a good run during QE-infinity are having capital pulled back from their economy. These money need to constantly seek yield but then you can't dump it all into equities or the US due to the need for portfolio diversification. Hence, you will see the relative value of the cable and euro rise in the search for yield despite both being in a, I would say, bad environment.

Currently, buying developed markets are the way the big boys are going to play this year out but the EUR/USD cannot afford to maintain a level above 1.38/39 without crushing the EU "recovery" if there is any "recovery" at all.

Overdrawn's picture

We have the Romanian Gypsies and Hungarians coming in droves this week, according to MSM we can expect about 50 million of them landing on our shores on 1st January.  Under EEC laws they are free to travel across borders so they can claim free housing, health care and education in addition to generous cash handouts each week from UK taxpayers, US doesn't have that 'advantage'.


As I understand it, the leaflets and posters showing them how to use toilets, and politely asking them not to defecate in public has increased profits in the printing industry.  In addition they will spend all their benefits and profits from burglary, shoplifting, begging and mugging on local goods and services and that will unemployment in the UK.  Also, the Chancellor is going to raise interest rates so irresponsible borrowers will loose their homes, thus enabling more property to be aviailable for gypsies.  In return the homeless can shack up in the empty caravans vacated by the now fully housed gypsies.


So I can see the sterling going up to 9.99 against the dollar very quickly.

Welder's picture

There aren't 50 millions Gipsies in the entire world. Please do not mistake Romanians or Hungarians for Gipsies. They are a different people, different language (not latin , slavic, fino-ugric or any European family for that matter). A Soros funded NGO came up with the "roma" name a decade or so ago. The "tsigani" had no clue their name was "roma". It's pure fiction. But sounds very simmilar to Romanian and people mistakes Tsigani for Romanians and vice-versa. It serves the kabbal working insidiously at destroying the European nation-states, no longer needed in NWO. I was in Perugia 2 weeks ago and I saw gipsies begging (but it looked like harassement to me) and last night I went for a walk with my wife in my hometown in Romania, at 10 pm and there was no gipsy. Ten years ago one must have been crazy to do that.

compound interest's picture

Bulgarians =/= Hungarians. Hungarians are already in.

Rafferty's picture

Basically correct except that you've mixed up Hungarians with Bulgarians.

Here's what the burghers of Sheffield are looking forward to.

Winston Churchill's picture

A very good question.But remember its relative strength.

Both the GBP ,and the USD should be worthless..

Just another day in Wonderland, Alice.

realWhiteNight123129's picture

This is all relative.

A country which has a strong currency is a country which is:

Saying no more easy refinancing of bad credit.

Does not cheat on inflation numbers.

Gives real positive interest rates to depositors.

Has a balance trade or even a surpluys

That is China.

None of the above apply to US, so the USD weakness should not be surprising to anybody.


disabledvet's picture

If Japan post bubble is any example one of the hallmarks of any deflation it is a massively over-valued currency for a prolonged period of time. Obviously Europe has a horrific problem with unemployment that has been going on for many decades now. Not that the USA is any better of course. It would seem for now that Germany has "divined" the secret sauce for "social cohesion" both through their use of trade schools and their support for trade unions. If the USA didn't have an unprecedented energy boom underway I think we would be in deep doo-doo right now. Amazingly it's still not sufficient...even with QE which is now going to be wound down (amazingly) and in short order (hahaha, who's in charge again?) it would move the needle at all vis a vis growth in the economy at large. This also includes a collapse in pricing for cloud computing systems which will have a dramatic impact on the implementation of a far more secure and performance based computer operating experience, the mass deployment of "rapid prototyping" as a way to actually manufacture industrial parts if not goods at a local if not home based level and the scaled production of "graphene" which is a basic building block for the revolution now well underway in the materials space. I agree with those who are not happy with the results of the "budget" process. Having said that having a budget process (meaning at least they're talking to one another) is a lot better than the total chaos of the last six years. I think "healing" will be a slow process in this matter but I think they've seen the light of day and will...slowwwwwwly...move forward insofar as getting a handle on "this is a Government this is how things must happen in order for Government things to start working." don't even get me started on the "procurement process." unreal. "beware the Palm tree bonds" is the word on the street.

Fuh Querada's picture

"within a year or two the Euro will be at parity with the US dollar"

Joan Maudlin, 2009

orangegeek's picture


Dollar Weakness is Really Euro and Sterling Strength ..."


This is entirely true - and below is the arithmetic relationship:

disabledvet's picture

triumphs are nice. BMW motorcycles...and gear...are super expensive...but worth every penny in my view. That' about it though. Love Volvo trucks too...and Swiss watches...but Wal Mart doesn't import from Europe for a reason. With the Yen that weak I would be very wary of what are by far the best cars made in the world still. Obviously they make great motorcycles too. Those machines are definitely NOT overpriced either. If the USA is confronted with a Chinese and Indian production "invasion" look out below.

piker's picture

Would you be willing to explain to a newb why we should be wary of Japanese autos?

Freddie's picture

You might get some Fuku Cesium or Iodine or maybe even MOX in the glove box or trunk.