Dollar - Can the Rally Last Through Jobs Report?

The US dollar staged a massive comeback last week as US economic data indicated that, while conditions remain dismal, they aren’t quite as bad as expected. First, the Richmond Fed index “only” fell to 0 from +6, versus expectations of a drop to -1, while existing home sales slipped 2.0 percent. Next, the headline reading of the Commerce Department's durable goods orders report contracted for the third consecutive month during March, due largely to declines in demand for transportation and defense goods. However, the markets took their cue from the durable goods orders excluding transportation reading, as the index surged 1.5 percent and helped to keep the US dollar rally alive.

How To Trade This Event Risk


The GBP/USD has remained in a trading range between 1.9600 to 2.000 for nearly a month. The upcoming first quarter growth numbers may provide the impetus to break it free and put it onto its next trend phase. The economic report is expected to show growth slowed for a consecutive quarter to 0.4%, bringing the annualized rate to 2.6%, and remaining below its recent growth trend average of 3%. The housing slump brought on by the recent credit crisis has started to weigh on consumer confidence leading to retail sales declining for the first time in three months. The BoE in an attempt to jump start the housing market recently infused 50 billion in liquidity into the market., when it traded treasuries for mortgage back securities. The move brought more fear than relief as speculation grew that there was more fallout ahead from the credit crunch. Inflation concerns on the back of record oil prices have provided support for the Pound as the BoE has been adamant that price stability remains a focus of theirs. However, growth prospects have grown dimmer as indicated by the recent CBI manufacturing survey. The forward looking indicator saw sharp declines in expectations for orders and output, with 13% more negative responses than positive. Therefore, the inflation argument may lose its influence on the cable, leaving it exposed to more downward pressure.

The negative expectations and recent softening fundamentals leaves the greatest chance for volatility with a rebound in growth. Although March’s retail sales declined, they managed to exceed expectations and were resilient throughout the first quarter. Therefore, the potential for an upside surprise exists, especially considering that unemployment has remained firm at 2.5%. With strong GDP readings from both the quarterly and annual figures, we will look for a five minute green candle to confirm entry on a long, two lot GBPUSD position. The stop for both lots will be set either at the nearby swing low or at a reasonable, fixed distance. The target on the first half of the trade will equal the distance to the stop, while the second lot’s objective should be taken on discretion. When the first lot takes profit, the stop on the second should be moved up to break even to conserve profit.

The most likely scenario, given the toll the housing slump, rising inflation and tight credit markets have exacted on the economy, is that growth slowed. If the GDP numbers cross the wires worse than expected, we will use the same criteria and strategy setup for a short as we would for the long, except in reverse.

Hedge Trade Will Protect Long Term AUDUSD Yield Seekers

The upward trajectory in the Australian Dollar has been guided by a trend line established in August of last year. The pair is driven higher by a widening yield differential between the two countries, with the RBA moving to contain inflation with record-high borrowing costs at 7.25% all the while the US Fed pushes on with rate cuts. The Australian economy has begun to slow under weight of hefty monetary tightening, but there are no signs that the RBA will pursue easing in the near term. This suggests the growth in yield spread between the two currencies is set to continue.

Having put in a top at 0.9500, AUDUSD tested there again shortly thereafter with a weaker, shallower run upward. A second rejection prompted a decline in price action to the trend line support level. From there, the pair’s ascent has been more measured, easing gently upward and working through various levels of intermediate resistance. Yesterday’s strong up move was stopped along a downward sloping resistance line formed by recent highs. We see AUDUSD retrace lower from here before the next up leg materializes.

Hedging Strategy

Currency Pair: AUDUSD

Long Term Bias: Bullish
Long Term Position: Holding Long (from 04/01 trend line test)

Short Term Bias: Bearish
Short Term Position: Short below 0.9380, Target 0.9140, Stop-Loss at 0.9480

Traders looking to protect their existing long AUDUSD position or enter long at a favorable price may consider a hedge short AUDUSD below 0.9380 with a target near trend line support at 0.9140. Once the profit target is hit, we expect the bullish trend to resume. We will maintain a stop-loss on our hedge position should AUDUSD break out to the upside prior to the limit being hit. We will set the stop-loss near 0.9480.

What a Trend Change Looks Like

Dollar Takes Heavy Blow From Drop in Consumer Confidence but Remains Standing

"The Conference Board issued today one of its most alarming reports on consumer confidence in 40 years of data, results certain to push stocks, the dollar and Treasury yields lower. The results will also complicate debate at the ongoing FOMC meeting, making it harder for policy makers to assure the nation that the economy will soon improve and that inflation pressures will cool.

The Conference Board's index fell nearly 4 points in April to 62.3 -- the worst reading since the early 90s. The present situation component, which makes up 40 percent of the headline index, fell more than 10 points to 80.7 for its worst reading since 2003 when the unemployment rate had peaked at 6.3 percent. The present situation index matches closely with the unemployment rate and today's reading points to an alarming shift higher in next week's employment report. The report's component for current job conditions also points to trouble next week, as more say jobs are hard to get (27.9 percent April vs. 24.5 percent March) and fewer say jobs are plentiful (16.6 percent vs. 19.2 percent). The jobs question for six months shows an incredibly low 8 percent seeing more jobs against an incredibly high 32.8 percent seeing fewer jobs.

But the worst news in the report is a true spike in inflation expectations, up 7 tenths in the month alone to 6.8 percent -- a record level matched only after Hurricane Katrina in 2005. CPI data may not being showing much pressure but consumers are saying clearly that inflation is on the rise. The results even include a 30-year low for vacation plans, no doubt reflecting the weak dollar, which raises the cost of foreign travel, and high gas prices which of course raise the cost domestic travel. Also, some consumers may be looking for work and can't spend the money or time on travel. Buying plans for homes fell 1 full point to 2.4 percent for the latest bad news on the housing sector." -Econoday

Despite this news the dollar gave way to Euro only briefly after the report and settled back to pre-announcement levels. Considering the past six months performance, the greenback's ability to shrug-off this very negative report (seemingly with ease) is reason for alarm in itself. At the time of this report EUR/USD is now testing 1.5550 and seems like it will have the momentum to do so. Dollar bears have been frustrated in the past few sessions, the question is whether the other shoe is about to fall. ProSticks readers have been rewarded very handsomely for the Euro short position from 1.60. Last night's ProSticks report suggested that profit-taking ahead of the 1.5450 is an option, but taking that out , swiftly drifts down to daily kumo lower band which coincides with weekly ichikumo slow line at 15150.