Brave New World

US Dollar Outlook for this week 30/03/2009

USD BULLISH

Trade: Short GBPUSD, short AUDUSD

Following last week’s impressive return of risk appetite, with rallies witnessed in equities, commodities and high yielding currencies, particularly the Aussie and the Kiwi, it was perhaps inevitable that this week would see a more cautious tone given the event risk surrounding it. The USD started the trading session in Asia, Sunday night UK time, higher against all G10 currencies bar the JPY, which gained 200 pips against the greenback. This signifies not only a flight to risk aversion but the return of the JPY as a safe haven currency. The Australian dollar, by contrast, dropped sharply against the USD, falling from 0.6925 to a low of 0.6769. iFlow data shows a strong turnaround in positioning; with new strong net buying of dollars. The EUR is now among the strongest net sold among G10 currencies. Ahead is an extremely busy remainder of the week, with three very important events; namely G20 on April 2, the ECB rate decision also on the same day, and the Non-Farm Payroll numbers out on Friday the 3rd. All three are potential game changers, although the G20 communique will have the furthest reaching implications. A draft communique obtained by the FT, and of course subject to revision, contains no statement about explicit global coordinated stimulus and no mention of an increase in the SDR- ie no change in the USD’s reserve currency status. These are both dollar positive.

The lack of stimulus:

1) Is seen by the market as a complacent move by policymakers in a world faced with serious deflationary pressures, increasing risk aversion and so buying US dollars

2) Shows a strong determination by European governments not to relent, in spite of records being broken daily in the eurozone for a collapse in confidence, output, exports and members states being downgraded- Ireland being the latest, losing its AAA status today.

The event risk  for the USD surrounding the G20 communique concerns the ECB’s decision on Thursday on cutting rates. If the ECB cuts, as many market participants expect, by 100bps there could be a sea change in attitudes towards European policy makers’ ability to be proactive, and could boost appetite. However, the eurozone will still behind the curve in terms of policy response and this could benefit the USD. However, the EURUSD is difficult to call for this reason

Sterling looks particularly weak, with Gordon Brown’s credibility severely damaged. More than other G-20 leaders he badly needs a successful summit. The forced sale of Scotland’s largest building society- Dunfermline- underlines quite how weak the financial sector remains, checking the belief that the worst in the financial services sector is over. The FT reported that another 15,000 jobs could be lost in the sector in the next quarter. GBPUSD is currently 1.4270. Sell. Stop 1.4350. Target 1.4054 (Feb low)

AUDUSD witnessed a sharp sell-off in the opening 24 hours of the trading week. The pair trading as a pure measure of risk appetite and outlook for world trade and demand. I am bearish about the prospects for positive sentiment returning. AUDUSD is currently trading at 0.6820, stop 0.6880. Target 0.6700, then 0.6630