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Howe St: Continued USD Weakness Makes Recent Rally Look Like a False Break

USD struggles continue

The general theme driving traders overnight was that of continued USD weakness as Asian equities struggled amid yesterday's shockingly poor U.S. consumer confidence report. As might be expected, the Dollar continued to shed value across the board, with the Pound Sterling being the only notable exception due to rather dovish comments from the Bank of England.

Tuesday's moderate bounce for commodities also continued overnight, with the cyclical currencies following suit. The CRB index is trading 0.31% higher this morning with gold trading over $944 and oil heading back over $102. The generally negative USD sentiment leading to higher commodity prices drove the CAD to test the 1.01 level before retracing while AUD has once again traded over 0.9200 and the kiwi unit looks to test the 0.8100 level.

Since hitting a fresh high early Monday morning of 73.15, the USD Index has shed more than 1.95% in a slow, steady grind to the current level of 71.72. Although sentiment has clearly shifted to a more positive tone for the Dollar with last week's substantive rally, there has been no follow through in terms of the price action. It is precisely that follow through which would confirm at least a temporary bottoming of the Dollar and its failure to materialize leaves the Greenback susceptible to further declines for the remainder of the week.

Todays durable goods order figures for February won't do anything to dissuade the Dollar bears either. Durable goods declined 1.7% following January's 4.7% fall while the market was looking for a figure in the range of a 0.8% advancement. Next on tap is new home sales from the month of February, due out at 10am EST and I'm certainly not betting that the market's consensus call of 580K new homes will be significantly exceeded. If the figure comes out soft, one would certainly expect to see another tough day for U.S. equities and the Dollar.

The Canadian data calendar is bare for the remainder of the week.

EMEA central banks take center stage

Mervyn King, the Governor of the Bank of England, was slightly more dovish in his comments this morning than the market expected, though he was quick to point out that the BOE will not be as aggressive as the Fed in terms of interest rate cuts. In testifying before a parliamentary committee, King went on to say that U.K. house prices should be "broadly stable" over the next 2 years and that although inflation will overshoot 3% in the near-term, the balance of risks to the economy lay to the downside in terms of economic growth. The market of course interpreted these comments to mean that more rate cuts are coming and traders promptly sold Cable to take Sterling down more than a cent-and-a-half.

In his testimony to the EU Commission, European Central Bank President Jean-Claude Trichet reaffirmed his commitment to combating increasing price pressures even though the downside risks to growth at present are unusually high. He testified that inflation would exceed the Bank's 2% target through 2008 due to rising food and energy prices, thereby forcing the ECB to be vigilant on price pressures. As for the recent appreciation of the Euro, Trichet stated flatly once again that the current level of volatility is simply "undesirable."

The Polish Central Bank did the expected and raised their benchmark interest rate 25 basis points to 5.75% this morning in order to contain increasing inflationary pressure in the domestic economy. Romania also delivered an interest rate increase to the market though their target rate was raised 50 basis points to 9.50%, unanimously in-line with economists' expectations. The Czech Central Bank however held the line on rates, leaving their benchmark target at 3.75% as the Bank attempts to contain a surging Koruna that has advanced more than 10% in the past year.

By Mark Frey, Head Trader


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