Don’t let today’s volatility fool you: the US dollar remains in consolidation mode.
The US dollar’s strong open on Sunday was followed by weakness throughout the European and US trading sessions, but for what it’s worth, the Canadian dollar and British pound were really the only currencies to make headway against the greenback. Looking at the data on hand today, a surprising 1.3 percent surge in industrial production for the month of October was offset by a drop in the New York Fed's Empire Manufacturing index to a record low of -25.4 in November. Meanwhile, Citigroup announced that the bank will eliminate 52,000 jobs over the next year, representing roughly 15 percent of the firm’s workforce. This is a large amount by every measure, and with the US unemployment rate already at a 14-year high of 6.5 percent and climbing, it is clear that downside risks for economic growth loom large. That said, US fundamentals have had little bearing on US dollar price action given the solid correlation between EUR/USD and the Dow Jones Industrial Average. Indeed, in recent weeks it has been more useful to look at economic releases, watch for their impact on the stock markets, and subsequently trade the US dollar accordingly. The issue is that the market remains risk averse, as investor confidence remains low while banks remain concerned about counterparty risk. True, overnight interest rates have fallen significantly over the past few weeks, but conditions remain treacherous. In fact, Moody’s reported that the number of companies with low liquidity have reached the highest level since 2002 in October. This suggests that the lack of credit availability is taking a toll on everything ranging from banks to businesses to consumers, and until these conditions improve they will remain a burden on investor sentiment going forward. Looking ahead to Tuesday, the release of the US Producer Price Index shouldn’t have a huge impact on the greenback, as the markets are already well-aware that inflation pressures are cooling dramatically. As a result, traders may be better off keeping an eye on risk trends. It is also worth keeping in mind, though, that correlations have a tendency to fall apart once everyone catches wind of it. A quick search of wsj.com shows at least two articles discussing the link between stocks and EUR/USD, signaling that traders should stay on their toes as the correlation could easily break down. Related Article: US Dollar Weekly Forecast, US Dollar Trading Ranges Could Break Amidst US, UK, Canadian Event Risk Check out Daily Fundamentals in its entirety for analysis and outlooks on the US dollar, euro, British pound, Japanese yen, and the commodity dollars.