HAWKISH FED IS BEST HOPE FOR DOLLAR
BORIS SCHLOSSBERG
DIRECTOR OF CURRENCY RESEARCH, GFT
THIS Monday, during CNBC’s “Squawk Box” in the US, I remarked that these days it is easier to find a poor Goldman Sachs banker than to meet a dollar bull on Wall Street. But when everyone is so bearish on the currency and the trade becomes tremendously crowded, we are more likely to be coming to the end of the trend rather than being close to the beginning.
The buck’s problems are countless and well known. From massive fiscal deficits to huge current account gaps and the ultra low 25 basis point short-term US rates, the dollar seemingly holds little appeal for either investors or traders. However, even one-way markets need to take a pause and shake out the weak players. And this week the buck could see a rebound if US data shows further improvement.
Although the US economic calendar is relatively light, the key event this week is the US weekly jobless claims numbers. That report has been trending lower over the past few weeks, from 550,000 at the end of September to 514,000 last week.
If the jobless numbers can break the psychologically important 500,000-barrier, US interest rates could begin to creep upwards on the assumption that the contraction in the labour market is finished, and the recovery will now be sustained.
Since the buck’s biggest burden has been its ultra-low interest rates, any suggestion that this dynamic will change in 2010 could spark a short covering rally that could catch the late dollar shorts by surprise.
If the dollar does bounce this week it’s likely to gain the most traction against the yen. With US and Japan sporting some of the lowest interest rates in the G10, any steepening of the US yield curve would be highly supportive to US dollar-Japanese yen and could push the pair to 95.00 if the dollar rally takes off.
Furthermore, if US economic data provides additional upside surprises this week it could change the flow from dollar funded back to yen funded carry trades. I am well aware that picking turns in the currency market is often a sucker’s bet, but if the greenback does stage a counter-trend rally, then it is most likely to do so against the yen.
Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read daily commentary on currencies at www.GFTUK.com/commentary or e-mail them at BorisandKathy@gftuk.com.