Dollar Strength Fizzles Out

Daily Analysis - 12/03/2015

After Surging to the Highest Levels in Over a Decade Dollar Momentum Reverses Lower

A dollar shortage coupled with weakening fundamentals across Europe and Asia have seen the dollar at the strongest levels in years before overnight strength turned to weakness. Major currencies reversed higher against the dollar as a near-term technical correction lower in the dollar occurs.

Dollar Soars to Highest Since March 2003

Dollar momentum yesterday saw the dollar index surge to the highest level since March 2003 as fears about slowing global growth and a global dollar funding shortage see demand soar. The EURUSD pair briefly fell below 1.0500 overnight before rebounding sharply higher as concerns about Greece reverberate through the Eurozone economy. After peaking, the dollar has since pulled back from strength against major peers, losing ground across the board. This morning’s weaker dollar is fueling gains in dollar-denominated commodities as evidenced by the latest moves in precious metals and energy. This has caused gold prices to spike back to the upside, trending back above $1160 per troy ounce with silver mirroring the move higher. Oil prices are also strengthening despite another Department of Energy inventory figure that showed greater than expected expansion in crude oil stocks.

New Zealand Dollar Soars

New Zealand keeps benchmark overnight lending rate on hold at 3.50% as was widely expected by market participants. The New Zealand dollar has climbed over 200 pips since the announcement and subsequent statement from Reserve Bank of New Zealand Governor Graeme Wheeler. In his remarks, Wheeler highlighted the strength in the economy which comes on the heels of a trade surplus in January after 7 straight months of deficits. The drop in energy prices is providing stimulus to the economy in the form of higher purchasing power and lower input costs for businesses however, the persistently strong New Zealand dollar is one of several issues exerting downward pressure on the economy. This factor along with the drop in inflation might be the reasons he chooses to drop rates in subsequent policy meetings.

Australian Economy at Risk

Slowing Chinese growth coupled with the strong possibility the nation will engage in its own quantitative easing program are gradually increasing the risks for Australia. This morning, comments emerging from the People’s Bank of China are further confirmation this very action is in the pipeline despite remarks from the Ministry of Finance stating the contrary. The PBOC requested banks cut deposit rates from maximum to spur greater consumption and lending. With domestic consumption tumbling, fixed asset investment growth at the slowest pace since 2002, and crashing home prices the Chinese Central Planners will have a difficult time achieving their ambitious 7.00% growth target in 2015. This will also lead to problems down the road for Australia which supplies much of China’s raw commodities.

Copper Equidistant Channel Technical Setup

After bouncing from multi-year lows, copper prices are again resuming the slide as expanded production capacity and lacking demand keep the market largely oversupplied. The pullback in Chinese growth expectations coupled with anemic global trade flows are weighing further on copper prices at present. The massive overinvestment boom of the last several years has forced prices ever lower with no imminent expectations for a reversal to slumping demand. The drops in consumer spending will exacerbate the price tumble even further. The downward trending equidistant channel formation has a bearish bias with short positions to be initiated at the upper channel line and closed at the bottom of the channel. Fighting the downtrend with long positions exhibits worsening reward characteristics.