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US Dollar Sets Stage for Major Gains in April and Second Quarter

By , Quantitative Strategist
07 April 2012 00:45 GMT
US_Dollar_Sets_Stage_for_Major_Gains_in_April_and_Second_Quarter_body_Picture_5.png, US Dollar Sets Stage for Major Gains in April and Second QuarterUS_Dollar_Sets_Stage_for_Major_Gains_in_April_and_Second_Quarter_body_Picture_6.png, US Dollar Sets Stage for Major Gains in April and Second Quarter

Fundamental Forecast for the US Dollar: Bullish

The US Dollar (ticker: USDOLLAR) started the month of April and the second quarter with sharp gains against the Euro and other key counterparts, setting the stage for a major reversal through the coming weeks and months of trade. The Dow Jones FXCM Dollar Index would have finished near 8-month highs, but a considerably worse-than-expected US Nonfarm Payrolls sunk the high-flying Greenback. An important jump in forex market volatility expectations suggests the coming week could be similarly eventful.

Fundamental event risks drops significantly in the days ahead, but volatility may remain elevated all the same. Any especially large surprises in Friday’s US Consumer Price Index inflation figures could drive important US Dollar moves. Yet this past week showed that traders were more than willing to force big EURUSD moves even in the absence of event risk. Just this week we saw a surprisingly hawkish US Federal Reserve send the US Dollar sharply higher, but a disappointing Nonfarm Payrolls result brought the currency back to Earth. Ultimately, do either events represent a true “game-changing” piece of news? Not in this author’s opinion.

The Federal Open Market Committee (FOMC) Minutes from March’s rate decision showed no strong mention of further monetary policy easing, and traders immediately sent US yields and the domestic currency higher. Yet FOMC rhetoric is one matter and what voting members will ultimately decide is another. In other words: the FOMC minutes represent the opinion of a broad range of Regional Fed presidents and other officials. The voting committee is a much smaller group, and on the whole the voting members seem more dovish than the majority.

What of US Nonfarm Payrolls results? Domestic jobs growth literally halved in the month of March and the US Dollar tumbled on the data release. Yet the report wasn’t all bad: the unemployment rate dropped and Average Hourly Earnings grew by more than expected on a year-over-year basis. The result was definitely a disappointment in light of several strong months of data, but we would need to see a more consistent turn lower to claim that March data points to a significant deterioration in labor market conditions.

Markets clearly remain quite sensitive to economic data surprises, but we’re not convinced that the next big US Dollar move will come on any one data release. Instead we wait patiently for a USDOLLAR test of significant 8-month highs and multi-year trendline resistance at 10,134.

The Dow Jones FXCM Dollar Index looked as though it could break higher, and indeed we called for a major US Dollar turn higher against the Euro on a major shift in forex sentiment. If the Euro strengthens significantly and the USDOLLAR drops below important congestion support at 9,900 we would have been proven wrong in our forecasts. Yet the Greenback strengthened through the first week of the month and quarter. Nothing’s guaranteed, but price action in the beginning of a period often sets the pace for later moves. We like the US Dollar higher and would grow further bullish on a USDOLLAR break above 10,134. - DR

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07 April 2012 00:45 GMT