Foreign Exchange Traders were hard-pressed to explain the dollar rally

Foreign Exchange - Pounds Sterling and Euro Exchange Rate Outlook

The euro exchange rate rose yesterday in the US morning to a high of exactly 1.4002, breaking the magic round number but not able to hang on to it. The best euro rates then fell in the afternoon to 1.3868 before rising modestly into the close on the usual late-day short-covering. Market News reports that the afternoon euro selling was set off by a single name (a German bank) and then picked up by others on stop-loss selling. This suggests the market is not very deep these days, which is hardly surprising considering that everyone is licking wounds from very large losses.

Market News also notes that "Foreign Exchange Traders were hard-pressed to explain the dollar rally in afternoon dealings. Some pointed to the modest rise in US Treasury yields in afternoon dealings where the yield on the benchmark ten year Treasury lifted to 3.84% after beginning the day around 3.714%. Others pointed to simple weight of positions in euros to dollars, explaining that, earlier in the day, players built longs in the pair in anticipation that stop-loss buy euros orders would be triggered atop $1.4000. When those orders failed to trigger, longs were left holding the bag and quickly headed for the exit, chased out by the German bank sales." Well, that's instructive.

You can also look at the action as a function of data and other information. In the morning, risk appetite was spurred by good US data (see below) but then dragged back down by the LIBOR-fixing story (also below) and a rumor that a rogue North Korean ship with missile capability was possibly roaming around in the open seas. The story came from Fox News and lacked credibility. Finally at 6 pm, Reuters asked the Navy, which confirmed it is watching the ship, with Defense Secretary Gates saying the US can shoot down any N. Korean missile aimed at (say) Hawaii. The possibility of some kind of showdown with N. Korea is vaguely dollar-positive on the safe-haven theme, although everyone knows the N. Koreans are irrational and act in ways not consistent with any sane idea of self-interest. Let’s note again for the umpteenth time that anytime the US gets aggressive, the dollar goes up. We don’t know whether this is because Foreign Exchange traders are inordinately blood-thirsty, or what, but it’s a really reliable factor.

Pounds Sterling is coming back strongly this morning from what looked like the edge of the cliff late yesterday. From the low early yesterday at 1.6195, the pound rose to 1.6452 so far, nearing the high from the overnight session yesterday. Again, on the hourly chart we have a series of lower lows and lower highs, so today will be critical.

The dollar to japanese yen may have bottomed on Wednesday at 95.48. It has been rising in a straight line ever since to a high overnight of 97.18. Analysts try to torture the japanese yen’s moves into a risk appetite model, but that works only sometimes. The only explanation anyone has for the recent move is institutional - assuance of foreign currency denominated bonds and/or redemption/coupon payments.

Good luck trying to get hard data from the Investment Trusts Association (Toushin) website - click on a category and all the data is labeled in Japanese. You need a story from a trading desk and while these stories abound, they are by definition one-sided.

Yesterday the SNB said its intervention to manage the Euros to Swiss Francs exchange rate was a success and it would keep doing it as necessary. Foreign Exhcange Traders obediently took the Swiss francs down again.

Pounds to US Dollars = 1.5305
Pounds to Euros = 1.1752
Euro to Pounds = 0.8050
Pounds to Australian Dollars = 2.0600

Bye For Now
Barbara Rockefeller
Foreign Exchange Trading
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